Cyprus has one of the lowest corporate tax rates in the EU – companies are taxed with a rate of 12.5% on their profits while enjoying generous tax exemptions.
Corporate Tax rate of 12.5% one of the lowest in EU
Extensive Network of Double Tax Treaties
Cyprus has signed and ratified Double Tax Treaties (DTT) with more than 65 countries. The treaties are based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention for the Avoidance of Double Taxation.
The existence of an extensive and increasing network of DTT is an important factor that contributed to the promotion of Cyprus as a tax efficient jurisdiction. The DTT are very useful, legal, tax-planning instruments which protect legal persons and individuals against the double taxation of income earned in other countries. As a result, international businesses operate with stability and minimise uncertainty.
Dividend Income Exemption
Cyprus offers one of the most attractive participation exemption regimes in respect to dividends. There is no withholding tax on dividends paid from one Cyprus company to another while dividends received from abroad are, on certain conditions, tax exempt.
Foreign PE profits are tax exempt
Profits from a foreign permanent establishment are entirely exempt from tax in Cyprus.
Favourable tax treatment of losses
Tax losses are carried forward and set off against profits of the next 5 years.
Group relief is allowed provided the claimant companies are tax resident and members of the same group for the whole tax year. In addition, new group relief incentives were introduced with the Income Tax Law amendments in December 2015.
Tax relief on foreign tax paid
Relief is given for taxes paid abroad, irrespective of whether a DTT exists.
No Withholding Tax on dividends, interest and royalties paid to non-residents
There is no withholding tax on dividends, interest and royalties paid to non-Cyprus tax residents.
No immovable property taxes
There is no immovable property tax in owning a property in Cyprus (the tax has been abolished completely since 1 January 2017).
No inheritance or succession taxes
There is no inheritance tax in Cyprus for people who passed away after 1 January 2000.
Capital Gains Tax exemptions
There is no Capital Gains Tax (CGT) from the disposal of immovable property situated outside Cyprus.
Tax exemption on the sales of shares and other securities
Gains arising from the disposal of securities are exempt from taxes – the term Securities includes, amongst others, shares, bonds, debentures, options, futures, swaps, mutual funds, International Collective Investment Schemes (ICIS), UCITS, and so forth.
Notional Interest Deduction on new equity
Notional Interest Deduction (NID) was introduced with the Income Tax Law amendments in July 2015. NID is granted in the form of tax allowable deduction on the new equity introduced after 1 January 2015. Such tax deduction cannot exceed 80% of the company’s taxable profits.
The NID is calculated by multiplying the new qualifying equity by the reference rate.
New qualifying equity for NID purposes includes paid up share capital or share premium and can be contributed in cash or in kind, provided the amount of new equity does not exceed the market value of the asset contributed.
The reference rate for the tax years 2015-2019 is equal to the 10-year Government bond yield of the country in which the qualifying capital is invested plus 3% premium, with the minimum being the 10-year Cyprus Government bond yield plus 3%.
The reference rate for 2020 and subsequent tax years is equal to the 10-year Government bond yield of the country in which the qualifying capital is invested plus a 5% premium.
As a result, the effective tax rate can be significantly reduced below the corporate rate of 12.5% to as low as 2.5%.
This enhances Cyprus attractiveness as an efficient tax jurisdiction with the promotion of capital investments in the country.
Attractive Intellectual Property (IP) regime with 80% tax exemptions
Cyprus’ IP Tax Box Regime, which is in line and fully compliant with the latest international developments on the taxation of IP income, OECD guidance and compatible with EU standards, offers a very useful tool for tax planning and IP protection.
As per Cyprus’ IP Tax Box Regime, 80% tax exemption is offered on the qualifying profits generated from qualifying assets, resulting therefore in an effective tax rate of as low as 2.5%.
The use of Notional Interest Deduction (NID) on assets introduced into the company in the form of equity may further reduce the effective rate of tax.
The so-called “nexus approach” is applied in calculating the amount of profits on which the 80% tax exemption is calculated (i.e., the qualifying profits).
Qualifying assets under the new regime include patents, copyrighted software programs and other intangible assets that are non-obvious, useful and novel but do not include trademarks and copyrights.
Qualifying profits are calculated in accordance with the nexus fraction, where the higher the R&D expenditure incurred to develop the qualifying asset the higher the amount of profits qualifying for the 80% tax exemption.
Capital gains arising from the disposal of a qualifying asset under the new IP regime are not included in the qualifying profits and are fully exempt from income tax.
Qualifying taxpayers that are eligible for the above-mentioned tax benefits include Cyprus tax resident persons, permanent establishments (PEs) of non-tax resident persons as well as foreign PEs which are subject to tax in Cyprus.
Non-Domicile status to individuals with full exemption of Special Defence Contribution
According to this tax incentive, which was introduced in July 2015, the Non-Dom status can now be given to individuals who may be tax residents in Cyprus and thereby enjoying full exemption from Special Defence Contribution (SDC) tax on dividends, interest and rental income.
It should be noted that interest and dividends received by an individual are not taxed under the Income Tax Law irrespective of whether such income is derived from sources within or outside Cyprus.
In addition, based on the Cypriot Wills and Succession Law, an individual has either a domicile of origin (received at his birth) or a domicile of choice (acquired by his own act). An individual who has domicile of origin in Cyprus is considered to be domiciled in Cyprus, unless:
- the person was not a Cyprus tax resident for at least 20 consecutive years before the introduction of the law (i.e., on 16th July 2015), or
- the person has obtained and maintains a domicile of choice outside Cyprus in accordance with the Wills and Succession Law, provided he/she has not been a tax resident of Cyprus for a period of 20 consecutive years preceding the tax year.
Irrespective of the above, an individual who has been a Cyprus tax resident for at least 17 out of the last 20 years prior to the relevant tax year will be considered to be domiciled in Cyprus, even though such person has no domicile of origin in Cyprus.
The aim of the amendment of the law is to attract high net worth individuals and investors to reside in Cyprus and benefit from the tax exemption on the holding of investments in dividend and/or interest earning assets both in Cyprus and worldwide.
First employment exemptions
An individual who is a tax resident in the Republic of Cyprus is taxed on income accruing or arising from sources both within and outside Cyprus.
Tax rates range from 20%-35% depending on the level of taxable income with a tax-free amount of €19,500 and certain exemptions.
As per article 8(21A) of the law that came into effect on 26 July 2022, 20% of remuneration of employees (up to a maximum of €8.550 per annum), whose first employment in Cyprus commenced on or after the above date, is exempt from income tax for a total duration of 7 years. The exemption is granted to individuals who, immediately before the commencement of their employment in Cyprus:
- were not residents of the Republic for a period of more than 3 consecutive tax years, and
- were employed outside of the Republic by a non-resident employer.
The exemption is granted in the tax years following the tax year of commencement of employment. Individuals granted the 50% exemption below are not eligible for this exemption.
As per article 8(23A) of the law, with effect from 1 January 2022, 50% of the remuneration of employees, whose first employment in Cyprus commenced on or after 1 January 2022, is exempt from income tax for a total duration of 17 years, provided their remuneration exceeds the amount of €55,000 per annum and the individuals were not residents of Cyprus for at least 10 consecutive years immediately before the commencement of their employment in Republic. The period of 17 years counts from the month of employment in the Republic.
Employees whose employment started before 1 January 2022 are also eligible for the 50% exemption as per the rules below:
- Individuals commenced their first employment in Cyprus between the years 2016 and 2021 and whose remuneration at commencement of their first employment in Cyprus exceeded €55.000 p.a., or not exceeded €55.000 p.a. but within 6 months from 26 July 2022 their remuneration exceeds €55.000 p.a.
- Existing beneficiaries of the 50% exemption, as per the scheme in force before 26 July 2022, who have continuous employment in Cyprus up to and including the year 2021.
Exemption from tax for Mergers and Reorganisations
Cyprus offers an attractive regime for both local and cross-border mergers and reorganisations with tax exemptions. These may include mergers, demergers, partial divisions, exchange of shares, transfer of assets, transfer of registered office of a European company (SE) or a European cooperative company (SCE).
Transfers of assets and liabilities between companies, on satisfying certain conditions, may be effected in a tax neutral manner within the framework of a qualified reorganisation, and tax losses may be carried forward by the receiving entity.
Access to EU Tax Directives
The Republic of Cyprus acceded to the European Union (EU) as a full member on 1 May 2004.
In addition, on 1 January 2008 the Republic of Cyprus joined the European Monetary Unit (EMU) with a robust economic performance.
During the country’s procedure of acceding to the EU, the Cypriot law (largely based on English Common Law) had to be amended to meet the EU’s requirements.
Cyprus’ legal and regulatory framework is fully compliant with the EU, the Financial Action Task Force on Money Laundering (FATF), the OECD and the Financial Stability Forum.
Competitive Tonnage Tax System and Approved EU Open Registry for shipping companies
The qualifying owners of Cypriot and foreign flag ships, charterers and ship managers can benefit from the competitive Tonnage Tax System (TTS) calculated on the net tonnage of the qualifying ships engaged in a qualifying shipping activity.
The TTS has been approved by the European Commission as compatible with the Guidelines on State Aid to Maritime Transport.
The TTS promotes the ship registration in Europe and contributes to the growth and competitiveness of the EU’s maritime industry.