The Cyprus taxation system was thoroughly overhauled in 2002 in preparation for EU membership. As a result, Cyprus benefits from a simple, modern tax system that is fully compliant with the requirements of the Organisation for Economic Cooperation and Development (OECD) and the EU. In a recent survey of tax professionals, Cyprus emerged as the most attractive tax regime in Europe on account of its combination of consistency in interpreting tax legislation, stability in resisting frequent changes to tax laws and comparatively low tax rate.
Basis of taxation
The tax year for individuals and companies is the calendar year. Liability to Cyprus tax in any year of assessment is based on residence. For individuals, residence is determined by physical presence; for companies, it is determined by the locus of management and control.
Income tax
Individuals
Liability for tax
Cyprus residents are taxed on the basis of worldwide income, irrespective of whether the income is remitted to Cyprus. Spouses are taxed separately.
Persons who are not resident in Cyprus are subject to income tax on income accruing or arising from sources in Cyprus in respect of:
- profits or other benefits from a permanent establishment situated in Cyprus or from any office or employment exercised in Cyprus;
- pensions in respect of past employment exercised in Cyprus;
- rent from property situated in Cyprus;
- consideration in respect of goodwill of a trade in Cyprus reduced by the cost of such goodwill; and
- the gross income derived by an individual from the exercise in Cyprus of any profession or vocation, the remuneration of public entertainers and the gross receipts of any theatrical, musical or other group of public entertainers.
Individuals are considered to be resident if they are present in Cyprus for more than 183 days in the relevant year. Days of departure and arrival are treated as follows:
- The day of departure from Cyprus counts as a day of residence outside Cyprus.
- The day of arrival in Cyprus counts as a day of residence in Cyprus.
- Arrival in and departure from Cyprus in the same day counts as one day's residence in Cyprus.
- Departure from and return to Cyprus in the same day counts as one day of residence outside Cyprus.
Rates of tax
Personal income tax rates are set out in the following table:
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Allowances and reliefs
Relief is given for donations to approved charities, professional and trade union subscriptions, life insurance premiums and contributions to pension, social insurance and welfare funds. Relief may also be available under a double tax treaty.
For the first three calendar years following the start of their employment, individuals taking up residence and employment in Cyprus will be entitled to an annual allowance of the lower of €8,550 or 20% of their remuneration. Alternatively, if income from employment exceeds €100,000 per annum, a 50% deduction is allowed for the first five years of employment.
A 20% deduction is allowed from rental income received to cover expenses. The full amount of interest paid on loans for the acquisition of the let property is also allowed as a deduction.
Subject to certain conditions, expenditure on maintaining buildings that are subject to a preservation order may also be deductible.
Annual writing-down allowances are available against plant, machinery and other assets used in a trade or profession.
Expenditure disallowed for tax purposes
The following are not tax deductible:
- contributions to the Social Cohesion Fund;
- private motor vehicle expenses;
- immovable property tax;
- interest paid in respect of the acquisition of non-business assets or of private motor vehicles (even if used for business purposes); and
- business entertainment costs in excess of the lower of €17,086 or 1% of gross income.
Relief for losses
Losses incurred in a trade or profession may be offset against other income and any unrelieved balance may be carried forward for relief against income of future years for a maximum of five years. If the business is subsequently converted into a limited liability company, any unrelieved losses may be used by the company.
Exemptions and special cases
The following exemptions are available:
- interest and dividends;
- lump sums received on retirement or commutation of pension or as a result of bodily injury or death;
- capital sums from approved life assurance policies and provident or pension funds;
- income from employment services provided abroad to a non-resident employer or an overseas permanent establishment of a resident employer for a period exceeding 90 days in the tax year;
- profit from the sale of shares (if the shares are of an unlisted company owning real estate in Cyprus, the gain may be subject to capital gains tax);
- certain pensions, such as widow's pension; l salaries of officers and crew of ships owned by a Cyprus shipping company that sail under the Cyprus flag and operate in international waters; and
- income from a qualifying scholarship, exhibition, bursary or similar educational endowment.
There is a separate, highly favourable tonnage tax system for international shipping and ship management activities.
Foreign pensions may be taxed either on the normal basis described above or on an alternative basis, under which the first €3,420 per annum of the foreign pension is free of tax and the excess over that amount is taxed at 5%. At current rates, the alternative basis results in a reduced tax liability on pensions above €24,860. The taxpayer may choose which basis to adopt in any particular year. Income from interest, dividends and rents is subject to a special defence contribution (SDC) which is described below.
Payment of tax
A self-assessment system is in place. Individuals must submit a provisional tax return for the year, accompanied by a remittance for half the estimated tax liability, by no later than July 31 each year. The taxpayer may amend the provisional return at any time during the tax year. The remaining balance must be paid by December 31. Taxpayers whose gross income from a trade or profession is less than €70,000 and who are consequently exempt from the requirement to submit audited financial statements to support their tax return must submit their final tax return, accompanied by a remittance for any tax due, within six months of the end of the tax year. Taxpayers whose gross income from a trade or profession exceeds €70,000 must submit audited financial statements to support their tax return. They must pay their final tax liability no later than August 1 following the end of the tax year and submit a final tax return no later than the following December 31.
Relief or credit may be available under a double tax treaty for tax paid abroad. Where no double tax treaty is in place, the Cyprus tax authorities normally allow unilateral relief for foreign tax paid.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
