THE CYPRIOT TAXATION SYSTEM

1. Introduction

Although Cyprus provides for taxation in several different circumstances, the taxation system in Cyprus can be divided into three notable categories: personal income tax, corporation tax and VAT. 

All individuals who are tax residents of Cyprus are subject to taxation on their total taxable income, including specific employment benefits, earned from both Cypriot and international sources. However, non-residents of Cyprus are taxed only on income earned or sourced within Cyprus.

A company is a tax resident of Cyprus if it is managed and controlled there. From 2023, Cyprus-incorporated companies are automatically considered tax residents unless they are tax residents elsewhere. Tax resident companies are taxed on income from both Cyprus and abroad, while non-resident companies are taxed on income from activities within Cyprus.

Cyprus VAT is required for businesses and applies to goods and services provided within Cyprus and imports from other EU countries. VAT is charged on supplies (output tax) and paid on received goods or services (input tax). If output tax exceeds input tax, the difference is paid to the tax authorities, while any excess input tax is carried forward as a credit for future VAT.

2. Tax Residency Criteria

For personal income tax purposes, an individual is considered a tax resident in Cyprus if they reside in Cyprus for more than 183 days per year. 

However, since 1 January 2017, the “60 days rule” has come into effect. The rule applies to individuals who:

• Spend at least 60 days in Cyprus, 
• Are not a tax residents in another country,
• Do not spend more than 183 days in another country, 
• Have ties in Cyprus, for example, are employed, have a business in Cyprus, hold an office position at a company registered in Cyprus and maintain a permanent residential property in Cyprus either via rent or ownership.

Regarding corporate tax, any company that is established in Cyprus is taxed on its income, and a non-Cypriot registered company that however has business activity in Cyprus is taxed on income that was accrued from its business in Cyprus. The taxation for all companies is at the rate of 12.5%.

Regarding VAT, any person must register if they conduct commercial activities in Cyprus and the value of the transactions subject to VAT has reached €15.600.

A 19% taxation is imposed on any supply of goods or provision of services or importation of goods other than to exemptions that can be found at the Cypriot Tax Department’s website https://www.mof.gov.cy/mof/tax/taxdep.nsf/All/A0559F53CE375AC7C2258251002BA874

3. Key legislation that governs taxation in Cyprus

Personal Income and Corporate tax are subject to the Income Tax Law of 2002 (118(I)/2002) that was last amended in 2024 by law 52(I)/2024, (the complete text is found at https://www.cylaw.org/nomoi/enop/non-ind/2002_1_118/full.html). The work of the tax department is regulated by the Tax Department Law of 2014 (70(I)/2014) which was last amended in 2022 through Law 25(I)/2022 (the complete text is found at https://www.cylaw.org/nomoi/enop/non-ind/2014_1_70/full.html). 

EU legislation also affects the Cypriot tax system since Cyprus must comply with the relevant EU legislation. Relevant EU regulations are:

• The commission recommendation 2012/772/EU of 6 December 2012 on aggressive tax planning.
• Directive 2003/49/EC — a common system of taxation on interest and royalty payments made between associated companies of different EU countries.
• Directive (EU) 2017/1852 — EU tax dispute resolution system.
• Directive (EU) 2016/1164 — preventing tax avoidance by companies.
• Mandatory Disclosure Rules for cross-border tax arrangements (DAC6).
• Mandatory Disclosure Rules for digital platform operators (DAC7)

 

4. Recent Legal Developments

• On 31 December 2023, the EU’s new taxation framework came into effect, modernizing tax regulations to align with globalization and technological advancements. The key change is a 15% minimum tax rate for multinational corporations and large domestic groups in EU Member States with annual revenues over €750 million. The framework combats profit-shifting to low-tax jurisdictions by introducing a “top-up tax.” If a subsidiary in a low-tax country pays less than 15%, the parent company will pay the difference. This applies even if the parent company is outside the EU. The goal is to ensure fair, sustainable taxation across all EU Member States.
• As of January 2023, businesses that meet specific criteria can submit their financial statements for a limited assurance review instead of undergoing a full audit. The criteria include companies with a net turnover of up to €200,000 and a total balance sheet of no more than €500,000 for at least two consecutive years and individuals whose annual turnover and income based on the Income Tax Law exceed €70,000 but do not surpass €200,000, along with a total balance sheet of no more than € 500,000, also for at least two consecutive years.
• The “Law on Administrative Cooperation in the field of taxation of 2023” is the equivalent DAC7 in Cyprus and, therefore, follows the directive closely. Platform operators are now required to report to their Member States the rental of immovable property, the provision of personal services, the sale of goods, and the rental of any mode of transport. Member States must then share the information with other Member States. Penalties are imposed for non-compliance.
• The temporary application of the 0% VAT rate for essential items, and VAT objection submissions through the TFA portal is now terminated as per Law N 231/2024 which disallows the zero VAT rate for essential items and VAT objection submissions through the TFA portal on 30 September 2024.
• 31 December 2024 is the deadline for filing the Country-by-Country report. CbC reporting is mandatory for large multinational enterprise (MNE) groups with annual consolidated revenues of €750 million or more from the previous fiscal year. In Cyprus, constituent entities of such MNE groups must submit CbC notifications, and specific entities may also need to file CbC reports if they are the ultimate parent entity (UPE), surrogate parent entity (SPE), or if a local secondary filing obligation arises. A Cypriot constituent entity may face a penalty of €10,000 for failing to submit a CbC report and €5,000 for not providing a notification. In specific situations, each of these penalties could be raised to as much as €20,000.
• Steps are also being taken to establish a green taxation reform in Cyprus. The proposed tax reforms aim to minimise the usage of expensive electricity and offer tax incentives to businesses to make green choices. This project is still in the making. 

5. Corporate Tax

As mentioned above the corporation tax for all companies is at the rate of 12.5%. Moreover, with the application of Controlled Foreign Companies rules even companies that are not established in Cyprus but carry business in the country are subject to the taxation of their activities in Cyprus.

However, there are some notable exemptions from corporate tax:

• Except specific circumstances the whole amount of dividends.
• The whole amount of profits of a foreign establishment.
• The whole amount of gains from foreign exchange differences except from those raised from trading.
• The lower 35% profits from the production of audiovisual programs such as films and 50% of the income that derives from those are exempted.
• For any interest apart from the interest of ordinary or closely related to ordinary business activities of an individual the whole amount is exempted. 
• The whole amount of profit from the sales of securities.

The company can also carry losses forward. These are the losses that are incurred in a tax year that is not set off against other income. These losses can be carried for the next five years. 

There is also a list of expenses that are deductible from corporate tax. These are:

• 80% of the net profit of royalty income;
• Tax amortisation for expenses incurred in acquiring an IP;
• From 2015, up to 80% of the equity in the form of paid-up share capital or share premium;
• Interest expenses incurred for the acquisition of 100% of the share capital of a subsidiary company;
• A specific amount dependent on the square meter for expenses incurred for the maintenance of a building
• Tax amortisation on any expenses incurred for scientific research and for Research and Development;
• Expenses for scientific research and for Research and Development
• Employer’s contribution to social insurance, GHS and approved funds for employees;
• 80% of the net profit of embedded income;
• 1% on the employee’s remuneration for the employer’s contribution to medical funds;
• 10% on the employee’s remuneration for the employer’s contribution to pensions;
• Donations to Charities;
• 1% of the gross income and up to € 17.086 for entertainment expenses;
• 20% for small and 10% for medium-sized enterprises for infrastructure related to the audiovisual industry.
• A percentage is also deducted for investments made from 14 February 2022 and onwards to small and medium-sized enterprises;

In addition, there are certain types of companies that are subject to different taxation rules. For example:

• For insurance companies, if the corporation tax on the taxable profits from life insurance is less than 1.5% of the gross premiums, the difference must be paid as additional corporation tax.
• Funds that have compartments go through an assessment of each compartment separately for tax purposes. There are different regulations and taxation rules for the sale of funds, the stamp duty, the management services and the creation of permanent establishment.
• AIFs and UCITs allow their employees to choose a different mode for personal taxation. Under certain conditions, variable employment remuneration linked to the carried interest of a fund managing entity can, by making an annual election, be taxed separately in Cyprus at a flat rate of 8%, with a minimum annual tax liability of €10,000. This special tax arrangement is available for a period of 10 years.
• Shipmanagers that maintain a fully-fledged office in Cyprus, 51% of their employees are community citizens and at least 2/3 of the total tonnage is managed by the community, are allowed the exemptions of profits from technical and/or crew management, dividends from those profits, interest on working capital.
• Regarding Shipowners, the exemption covers profits from the use or chartering of ships, interest on working capital, profits from the ship chartering, dividends from these profits, and profits from the disposal of shipowning companies. This also applies to bareboat charterers of Cyprus-flagged ships. 
• Regarding Charterers, exemptions include profits from operating chartered ships, interest on working capital, and dividends from these profits. To qualify, all vessels must register for Tonnage Tax, and at least 25% of net tonnage (or 10% under conditions) must be owned or bareboat chartered.

Filing regulations in Cyprus are strict and penalties are applied for omitting to dully report and submit the necessary tax reports. Firstly, within 60 days of the establishment of the Company in Cyprus, the company must register with the Tax Department and obtain a tax number. At the same time if the company has provided taxable supplies or services that amount to more than €15.600 in a year the company has 30 days to register for VAT. Both employers and employees are required to participate in the national social insurance scheme. Apart from businesses included in point 4.2 above, all businesses must have their annual financial statements audited by a licensed audit firm. The auditor’s report is submitted with the company’s annual financial statements and annual return information, to the Cyprus Registrar of Companies.

 

6. Personal Income Tax 

A person who is considered a tax resident in Cyprus is taxed as per the table below:

Annual Income	Tax Rate
€ 19.500	Nil
€19.501 – € 28.000	20%
€ 28.001 – € 36.300	25%
€ 36.301 – € 60.000	30%
Over € 60.000	35%

 

Foreign income of more than € 3.420 is taxed at 5%.

There are types of Income that are exempted from the tax rates mentioned above as follows:

• For any interest apart from the interest of ordinary or closely related to ordinary business activities of an individual the whole amount is exempted. 
• The whole amount of profits from a foreign establishment is exempted this applies to employment that began before 26 July 2022.
• The whole amount of an individual’s retiring gratuity is exempted.
• The whole amount of commutation of pension is exempted.
• The whole amount of compensation for death or injuries is exempted.
• The whole amount of sums accrued from payments to approved funds is exempted.
• The whole amount of profits from the sale of securities.
• The lower 35%  profits from the production of audiovisual programs such as films and 50% of the income that derives from those are exempted.
• The whole amount of income received in the form of dividends is exempted.
• 50% of the remuneration for the following is exempted: Remuneration for “first employment” in Cyprus, starting from January 1, 2022, is eligible for exemption if the individual’s salary exceeds € 55,000 and they were not Cyprus residents for 15 consecutive tax years prior to the start of their employment. An employee qualifies as having “first employment” in Cyprus if they did not perform any salaried work (including occasional employment) in Cyprus for either a local or foreign employer during the previous 15 consecutive years. This exemption can be claimed once in an individual’s lifetime and is valid for 17 years. Under certain conditions, individuals whose employment began before January 1, 2022, may also be eligible for this exemption.
• For employment commencing after 26 July 2022 for individuals that were not residents of Cyprus for at least 3 consecutive years 20% of the remuneration capped at € 8.550. This exemption applies for 7 years.
• The whole amount is exempted regarding the remuneration from salaried services provided outside Cyprus for over 90 days. The services must be provided to a non-Cypriot or to a foreign establishment of a Cypriot resident. 

A percentage or the whole amount of certain expenditures are also deducted from taxation. These include:

• Contributions to trade unions or professional bodies;
• The losses of five years prior;
• 20% of the gross rental income;
• Donations to approved charities;
• 20% for infrastructure and technological equipment related to the audiovisual industry
• The whole amount of expenditure incurred for scientific research and Research and Development;
•  A specific amount dependent on the square meter for expenses incurred for the maintenance of a building;
• A percentage is also deducted for investments made in 2017 and onwards to small and medium-sized  enterprises;
•  A specific amount for social insurance, health funds, pensions, life insurance and provident fund contributions.

7.Practical Compliance Tips

A natural or legal person can adopt certain practices to compliant with Cyprus tax regulations, including record-keeping, reporting, and working with tax advisors.

7.1 Accurate and Timely Record-Keeping

• Best Practice: Maintain detailed and organized records of all financial transactions, including invoices, receipts, and bank statements. Keep a clear record of income, expenses, and deductions.
• Compliance Tip: Keep records for at least six years, as Cyprus tax authorities may require documentation for audits or reviews.
• Tools: Use cloud-based accounting software to automatically manage financial transactions and ensure compliance with VAT and income tax requirements.

7.2  Monitor Tax Residency Rules

• Best Practice: Ensure you understand the 183-day rule and the 60-day rule for individual tax residency. This is particularly important for individuals and businesses with cross-border activities.
• Compliance Tip: Track travel days and business ties carefully to determine if you or your employees qualify as Cyprus tax residents.
• Tools: Use travel tracking apps or systems to keep a log of physical presence in Cyprus, which will help verify residency status for tax purposes.

7.3  Meet Reporting Deadlines

• Best Practice: Familiarize yourself with all reporting and filing deadlines for corporate tax, VAT, and personal income tax.
• Key Deadlines: Submit annual financial statements and tax returns by the required due dates (e.g., 31 December for Country-by-Country (CbC) reporting for large multinational enterprises).
• Tools: Use tax calendar apps or set reminders with your tax advisor to stay ahead of deadlines.

7.4 Use Professional Tax Advisors

• Best Practice: Work closely with a licensed tax advisor or audit firm to navigate complex regulations.
• Compliance Tip: Ensure your tax advisor is up-to-date with the latest Cyprus tax laws, EU directives, and local tax incentives.
• Resources: The Cypriot Tax Department’s website provides access to the most current legislation, including VAT regulations and guidance for specific sectors.

7.5 Audit Readiness

• Best Practice: Ensure that your financial records, including annual reports and tax filings, are audit-ready and comply with Cyprus’ stringent filing regulations.
• Compliance Tip: Conduct internal audits or hire external auditors to review your tax and financial reporting processes.
• Tools: Use compliance management software to store and manage audit trails and financial documents, making it easier to respond to any audit requests.

 

8.Key takeaways

Cyprus, amongst others, taxes personal income, corporate income, and VAT. While residents are taxed on a scale, corporate tax is at a fixed rate of 12.5%, with few exemptions. Moreover, tax residency is based on the 183-day or 60-day rule for individuals, while companies incorporated in Cyprus are automatically considered liable to tax obligations. Registration to the VAT registrar is required for businesses with taxable supplies over €15,600, with a standard VAT rate of 19%, with some exemptions.

For corporate tax, exemptions include dividends, foreign establishments, and securities and losses can be carried forward for five years, with various deductions allowed. At the same time, for personal tax exemptions include foreign income, retirement gratuities, and first-time employment in Cyprus.

In order to ensure compliance with the regulations it is better to consult tax professionals for compliance and tax-saving opportunities, stay updated on new regulations, including EU directives, and prepare for audits through regular internal and external reviews.

To conclude, Cyprus offers a structured yet complex tax system for individuals and corporations, with various exemptions and deductions to optimize tax liabilities. Due to ongoing changes in national and EU tax regulations, working closely with tax professionals is essential to ensure compliance, benefit from available incentives, and avoid potential penalties.