Cyprus – highlights of the tax regime

This article focuses on taxation in Cyprus, however, first we may glance through the tax rates prevailing in the member countries of EU. While each individual case could bear the tax to a different extent due to specific conditions, the average tax incidence is worth comparing. Here is an extract from the World Economic Forum website (https://bit.ly/2m0lr8M) :

European countries are known for their high tax rates.

Cyprus ranked at the bottom of the EU’s 28 member states, with a real tax rate of 23.85%—less than half of France’s. Workers in the 28 nations that are (currently) part of the EU saw their average real tax rate decrease slightly for the second time in the six years—from 45.19% to 44.96%.

A more detailed table of individual and corporate taxes applicable in European countries can be found in Wikipedia (https://en.wikipedia.org/wiki/Tax_rates_in_Europe).

Now let us unpack the tax structure and understand the rules applicable in Cyprus.

Let’s look at the applicable taxes in Cyprus and important definitions first.

TAX RATE FOR COMPANIES (CORPORATE TAX)

FLAT @ 12.5%

TAX RATE FOR INDIVIDUALS – SLAB WISE
Taxable Income	Tax	Tax	Tax
€	%	Amount	Cumulative Amount
0-19.500	0	0	0
19.501-28.000	20	1.700	1.700
28.001-36.300	25	2.075	3.775
36.301-60.000	30	7.110	10.885
Over 60.000	35
For widows’ pensions which exceed the amount of €19.500, taxpayers may elect for these to be taxed at the rate of 20% or added to other sources of the individual’s income and taxed under standard Personal Income Tax rates applicable for individuals.

As both individuals and businesses can avail of tax exemptions, the effective tax payable drops.

Definitions and Exemptions to eligible individuals and businesses
Income Tax	Definition of taxable income	Taxable Income includes benefits or profits from business, employment, pensions, interest & dividend earnings on investments, discounts, rental income, net earnings of royalties or goodwill and benefit in kind equal to 9% per annum on the monthly balance of loans or other financial facilities granted to an individual, director or shareholder (including the spouse and relatives up to the second degree of kindred).
	Exemptions allowed on individual’s or business income	Notable tax breaks (exemptions) Cyprus tax regime allows: 100% exemption on – Lump sum payment on retirement or commutation of pension, or a gratuity on death – Capital sums from life insurance policies, provident funds, medical schemes or an approved pension – Scholarship or another educational endowment – income of any religious, charitable or educational institution of a public character – Income of any co-operative society in respect of transactions between its members – Emoluments of foreign officers of an institution exercising an educational, cultural or scientific function – Emoluments of foreign diplomatic and consular representatives if not citizens of Cyprus – Income of any local authority – Income of any approved pension scheme or provident fund or any insurance fund – Income of any company formed exclusively for the purpose of promoting art, science or sport – Pensions and special grants under special legislation – Foreign exchange gains (realized and unrealized), unless they result from trading in currencies and/or currency derivatives – Interest income (Interest accruing to any person from the ordinary carrying on of any business, including any interest closely connected with the ordinary carrying on of the business, is not exempt but included in the calculation of taxable profit – Dividend income is generally exempt from income tax unless the relevant dividend is allowed as a tax deduction in the jurisdiction of the dividend-paying company – Profit from the sale of securities – Profits from a permanent establishment situated outside Cyprus, unless the permanent establishment directly or indirectly engages in more than 50% in activities that lead to investment income, and the foreign tax burden is substantially lower than the tax burden in Cyprus – Remuneration for the rendering of salaried services outside Cyprus to an employer not resident in Cyprus for a total aggregate period of more than 90 days in the year of assessment 50% exemption on Remuneration exceeding €100.000 per annum from any office or employment exercised in Cyprus by an individual who was a tax resident outside Cyprus prior to the commencement of employment. This exemption applies for the first 10 years of employment. The 50% exemption is not available to individuals whose employment commenced on or after 1 January 2015 if such individuals were: • tax residents of Cyprus for a period of 3 out of 5 years preceding the year of employment • tax residents of Cyprus in the year preceding the year of commencement of employment 50% Exemption of 20% or €8.550 (lower of) Remuneration from any office or employment exercised in Cyprus by an individual who was residing outside Cyprus before the commencement of his employment. This exemption applies for a period of five years commencing from 1 January of the year following commencement of employment (provided the employment started during or after 2012). This exemption applies for tax years up to 2020. In case the 50% exemption (see below) is claimed, the 20% exemption does not apply
	Tax Resident (one who has stayed in Cyprus for over 183 days in a year)	Global income is subject to income-tax
	Non-Resident	Only Local income (what is earned within Cyprus by the individual directly or through companies registered in Cyprus only) is subject to income-tax.

DTA (Double Taxation Avoidance) treaties

Cyprus has signed DTA (Double Taxation Avoidance) treaties with 60 Countries so, entities having income in one or more of these countries besides Cyprus, need to pay tax only once.

Armenia	Malta
Austria	Mauritius
Bahrain	Moldova
Belarus	Montenegro
Belgium	Norway
Bulgaria	Poland
Canada	Portugal
China (PRC)	Qatar
Czech Republic	Romania
Denmark	Russia
Egypt	San Marino
Estonia	Serbia
Finland	Seychelles
France	Singapore
Georgia	Slovakia
Germany	Slovenia
Greece	South Africa
Guernsey	Spain
Hungary	Sweden
Iceland	Switzerland
India	Syria
Iran	Tajikistan
Ireland	Thailand
Italy	Ukraine
Kuwait	United Arab Emirates
Kyrgyzstan	United Kingdom
Latvia	United States of America
Lebanon	Uzbekistan
Lithuania
Source: https://www.lowtax.net/information/cyprus/cyprus-double-tax-treaties.html

CAPTIAL ALLOWANCES that businesses are entitled to claim as expenses while computing taxable income
Item Description (Asset)	Annual wear & tear allowance %
Industrial buildings	4²
Hotel buildings	4²
Agricultural buildings	4⁴
Commercial buildings	3
Machinery, plant and furniture	10³
Machinery and equipment used by an agricultural or animal husbandry business	15
Computer hardware and software 20	20
Application software
Up to €1.709	100
Over €1.709	33 1/3
Tools	33 1/3
Tractors, excavators, trenches, cranes, bulldozers	25
Motor vehicles (except saloons) and motorcycles	20
New cargo ships, new airplanes and new helicopters	8
New passenger ships and motor yachts	6
Armoured vehicles used by security services	20
Wind power generators and photovoltaic systems	10
Specialised machinery for the laying of railroads (e.g. locomotive engines, ballast wagons, container wagons and container sleeper Wagons)	20
Second hand cargo and passenger ships and additional capital expenditure	The cost is written off over the expected useful life of the ship based on the certificates issued by the Shipping Registry Organization
Notes: 2 For additions during the years 2012-2018 a deduction for wear and tear at 7% per annum will be allowed 3 For additions during the years 2012-2018 a deduction for wear and tear at 20% per annum will be allowed 4 For additions during the years 2017-2018 a deduction for wear and tear at 7% per annum will be allowed

Deductions allowed for businesses.

For the purpose of ascertaining the taxable income, there shall be deducted all outgoings and expenses wholly and exclusively incurred by the company in the production of income including:

Expenditure on repair of premises, plant machinery and means of transport
Ordinary annual contributions paid by an employer to approved funds
Bad debts of any business
Expenditure on scientific research
Expenditure on patents, patent rights or intellectual property rights
Donations or contributions made for educational cultural or other charitable purposes (unlimited)
Expenditure up to €1.200 for building area up to 120m2, up to €1.100 for building area of 121-1.000m2, up to €700 for building area above 1.000m2, made for maintenance, preservation or restoration of an ancient monument
Interest in relation to the acquisition of business assets used in the business.
Interest incurred in connection with the acquisition of shares in a 100% (directly or indirectly) owned subsidiary company (as of 1.1.2012) is deductible on the proviso that the assets of the subsidiary do not include assets not used in the business (Please also refer to ATAD section)
Contributions to a fund approved under regulations for educational purposes and maintenance of an individual attending any university, college, school or other educational institution
Special contribution for employees in the private sector
Expenses in relation to rental income
Interest expense incurred exclusively in relation to rented property
Notional Interest Deduction (NID) effective as of 1 January 2015 (Please also refer to NID section).

Cyprus, the largest island state in the Mediterranean region, offers very friendly tax regime for individuals and businesses combined with the advantages of a developed economy that is governed democratically and with predictable and equitable rules of law. The Gross Domestic Product per capita in Cyprus was last recorded at 30926.50 US dollars in 2018. The GDP per Capita in Cyprus is equivalent to 245 percent of the world’s average.

References:

Cyprus Tax profile – advantages itemised

Tax Advisory EY – facts of tax