Cyprus: 2015 Tax Regime Overview

Last Updated: 24 February 2015
Article by Elias Neocleous

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 Co-operation 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; and
  • 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:

Income Band

Tax Rate

Below EUR19,500 0%
EUR19,500 to EUR28,000 20%
EUR28,000 to EUR36,300 25%
EUR36,300 to EUR60,000 30%
Above EUR60,000 35%

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 EUR8,550 or 20 percent of their remuneration. Alternatively, if income from employment exceeds EUR100,000 per annum, a 50 percent deduction is allowed for the first five years of employment.

A 20 percent 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 EUR17,086 or 1 percent of gross income.

Relief For Losses

Losses incurred in a trade or profession may be off - set 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;
  • 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 favorable tonnage tax system for international shipping and ship management activities (see below).

Foreign pensions may be taxed either on the normal basis described above or on an alternative basis, under which the first EUR3,420 per annum of the foreign pension is free of tax and the excess over that amount is taxed at 5 percent. At current rates, the alternative basis results in a reduced tax liability on pensions above EUR24,860. The taxpayer may choose which basis to adopt in any particular year.

Income from interest, dividends and rents is subject to a special defense 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 EUR70,000 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 EUR70,000 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.

Income Tax – Companies

The Income Tax Law of 2002 completely changed the system of company taxation and abolished the separate taxation system that had previously been available to international business companies ( i.e. , companies incorporated in Cyprus owned by non- Cypriots and trading exclusively outside Cyprus). There is now:

  • A single corporation tax rate of 12.5 percent for all companies resident in Cyprus;
  • No geographical limitation on the exercise of a company's activities – income may be derived from any source, including Cyprus; and
  • No restriction on the ownership of a company's shares.

Liability For Tax

Liability to corporate income tax is based on residence. Cyprus-resident companies are liable to tax on worldwide income and non-resident companies are liable to tax on any Cyprus-source income.

For companies, the test for residence is the locus of management and control. A company is regarded as resident in Cyprus if it is managed and controlled in Cyprus. Mere registration or incorporation in Cyprus is not enough to render a company liable to tax in Cyprus. A majority of resident directors on the board establishes a prima facie rebuttable presumption of management and control being exercised in Cyprus.

The criteria for management and control have not been formally defined, but the following are generally accepted as the key factors determining whether the management and control of a company are exercised in Cyprus:

  • Are a majority of the directors resident in Cyprus?
  • Are all strategic decisions affecting the company demonstrably made in Cyprus by the board of directors?
  • Does the company maintain its headquarters in Cyprus?
  • Does the company operate an account with a bank in Cyprus?

A company should have economic substance in terms of staff , premises and equipment, and sufficient competence in Cyprus to make necessary business decisions. Finally, it should provide a service that is genuinely required by the group and not be devoid of an economic purpose. Otherwise, payment for such services could be viewed as an artificial transfer of profits from one company to another.

Cyprus branches of foreign companies are subject to tax on worldwide income if the locus of management and control of the branch is in Cyprus. If the locus of management and control is overseas, the branch is liable to corporation tax on profits accruing or arising in Cyprus.

Cyprus legislation defines a "permanent establishment" in the same way as the OECD Model Tax Convention.

To read this article in full, please click here.

This article was originally published by the International Law Office on January 23, 2015

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.

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