As an EU member state, Cyprus offers a pleasant climate, adequate infrastructure and a convenient geographical location. There are two main airports which provide frequent flights to most European cities as well as several international destinations. Cyprus has positioned itself well as a country of choice for both individuals and corporations, through the various tax incentives and benefits.
The numerous tax incentives offered has seen a steady flow of EU and non-EU nationals establishing their business operations in Cyprus. In addition, individuals find Cyprus a tax efficient location to structure their personal tax positions by taking advantage of flexible tax resident rules and the Non-domicile tax regime.
Cyprus is a common law jurisdiction and its justice system is based on the adversarial model. Cypriot law has been modelled on English common law.
Cyprus also has access to all EU directives as well as an extensive network of double tax treaties.
Corporate Tax Benefits
EU and non-EU nationals have the option to either establish a new company in Cyprus or migrate an existing business to Cyprus. English is widely spoken in Cyprus and staff can be easily sourced on the island. Most professionals have obtained their degrees from a UK university.
Once a company is established it can then access the tax incentives that are available.
The corporate tax rate in Cyprus is currently 12.5%, which is one of the lowest corporate tax rates in Europe. In addition, companies can apply the Notional Interest Deduction (NID) which can further reduce the overall corporate tax rate. NID was introduced in 2015, to reduce discrepancies in the tax treatment of equity financing compared to debt financing, and to promote an incentive for capital investment in Cyprus. NID is deductible, in the same manner as interest expenses, but it does not trigger any accounting entries as it is a 'notional' deduction.
Companies can also distribute dividends free of withholding tax. Dividends are, however, subject to contributions to the General Health System (GHS) at the rate of 2.65%, although there is a maximum cap of €180,000.
Summary of Corporate Tax in Cyprus
The following sources of income are exempt from corporate income tax:
- Dividend income;
- Interest income, excluding income arising in the ordinary course of business, which is subject to corporation tax;
- Foreign exchange gains (FX), with the exception of FX gains arising from trading in foreign currencies and related derivatives;
- Gains arising from the disposal of securities.
- Tax Residence in 183 days
If an individual becomes tax resident in Cyprus by spending more than 183 days in Cyprus in any one calendar year, they will be taxed on income arising in Cyprus and also on foreign source income. Any foreign taxes paid can be credited against the personal income tax liability in Cyprus.
- Tax Residence under the 60 Day Tax Rule
An additional scheme has been implemented whereby individuals can become tax resident in Cyprus by spending a minimum of 60 days in Cyprus, provided that certain criteria are met.
- Non-Domicile Tax Regime
Individuals who were not previously tax resident can also apply for non-domicile status. Individuals who qualify under the non-Domicile Regime are exempt from tax on; interest*, dividends*, capital gains* (apart from capital gains derived from the sale of immovable property in Cyprus), and capital sums received from pension, provident and insurance funds. In addition, there is no wealth and no inheritance tax in Cyprus.
*subject to contributions to the General Health System at the rate of 2.65%.
Salary Income in Cyprus
An exemption of 50% of employment remuneration is available to an individual employed in Cyprus who was resident outside Cyprus before he/she commenced employment in Cyprus. The exemption applies for a period of 10 years starting from the first year of employment in Cyprus, provided that the income from such employment exceeds €100,000 per year.
The Cyprus Action Plan for the year 2022, provides for the tax exemptions that currently apply to foreign highly skilled employees in the Republic, to be extended up to a maximum of 17 years.
The existing 50% tax exemption is also being extended to cover new resident employees, with an annual employment salary of €55,000 or more.
As of February 2022, the relevant legislation for the extended tax exemption is in the process of being submitted and approved.
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.