BRIEF REVIEW OF TAXATION IN CYPRUS 2025

One of the main reasons Cyprus has a long-standing position as a leading International business center is its legislation. Cyprus’ tax legislation, double tax treaties and Company Law  are at the forefront enabling investors with clear laws and guidelines and competitive tax rates to make their decisions on their investments.

Cyprus’ tax system is characterized by stability and any amendments adopted are for the benefit of the investors. Recently Cyprus has included new provisions in its tax laws further enhancing the opportunities for foreign entrepreneurs to make Cyprus as their permanent business hub and transferring their base here. Namely the term of domiciliation was introduced whereby a foreign national moving to Cyprus permanently will be exempt from tax including Special Defense Contribution on dividends and interest received. This is in addition with the already existing tax exemption of personal Income tax.

 CORPORATION TAX AND SPECIAL DEFENCE CONTRIBUTION

A company is taxed in Cyprus if its management and control is in Cyprus. The major factor in deciding that is in effect where the board of its directors are taking a decision which is their usual place of residence. In the case were the company is not managed and controlled in Cyprus but is not taxed elsewhere, it will be deemed as tax resident of Cyprus due to incorporation.

• In general trading profits are taxed at 12.5% Corporation tax. Trading profits include profit from sale of goods, services, consulting.
• Special Defense Contribution (SDC) on company profit is payable only when the owner of the company is Cyprus tax resident and domiciled. Companies with owners that are not Cyprus tax resident and domiciled are not subject to SDC. The applicable rate is currently 17%. A deemed dividend distribution (DDD) applies on 70% of the accounting profits after tax on the proportion of the shareholders that are Cyprus tax resident and domiciled.   The DDD takes place two years after the end of the year of assessment. Previous years losses are ignored.
• Profit from a permanent establishment abroad is not taxable in Cyprus.
• Tax losses are allowed to be carried forward for up to 5 years. Group loss relief also applies but special provisions apply.
• Foreign tax levied on income of the company can be deducted on tax arising on the same income in Cyprus.
• Interest received as part of the normal trading (banking, financing) is taxed as part of the trading profit after deducting interest payable and other expenses. If the interest is not part of the normal trading, then it is taxed at 17% SDC (30% before 2023) on its gross amount. Non-Tax residents of Cyprus are exempt. Tax residents of Cyprus which are non-Cyprus domiciled are also exempt.
• Cyprus does not impose any withholding tax on interest paid to non-resident recipients.
• Royalties earned from sources within Cyprus by a company which is not a resident of Cyprus is liable to ten percent (10%) withholding tax unless the double tax treaty provides for lower. If such right however is granted to a Cyprus company for use outside Cyprus, then there is no withholding tax and the corporate rate is applied only on the profit margin left in the Cyprus company. An 80% exemption is provided on the income received from royalties provided certain parameters are met.

CORPORATION TAX AND HOLDING COMPANIES

• Dividends received from abroad are exempt. The exemption does not apply if 50% of the income of company paying the dividend arises from investment income and the foreign tax levied on that company’s profit is significantly lower than the tax payable from the company receiving the dividend in Cyprus. In case the exemption does not apply then the dividends are subject to 17% SDC.  However, the result is usually nil again because any tax paid directly or indirectly on the dividend in the foreign country (which normally is the case), it can be used as a deduction from the SDC.
• Interest and dividends paid from Cyprus to non-residents and non-Cyprus domiciled people are exempt from withholding tax. An individual can be a tax resident in Cyprus and not domiciled and avoid SDC completely. Payments to zero or low (less than 6.25%) or black listed jurisdictions are subject to withholding tax.
• Profits from the sale of shares, bonds, debentures, stocks and other financial instruments are exempt from taxation.
• There are no thin capitalization rules in the Cyprus tax legislation.

DOUBLE TAX TREATIES – EUROPEAN UNION

Cyprus strong double tax treaty network and favorable tax regime has established it as a financial stronghold in many areas  as well as European Union countries. Careful planning using the above can minimize a company’s tax expense.

CAPITAL GAINS TAX

Capital gains tax of 20% applies on the profit sale of immovable property located in Cyprus. Same for shares of companies that own immovable property in Cyprus. Cost is adjusted for inflation.  Exemptions and relief’s apply.

VAT

There are four tax rates as per the Vat legislation.  Standard rate 19% from 2015, reduced rate 9%, reduced rates 5% and Zero rate 0%. According to the category of the good and service offered the above rate are applicable.

PERSONAL INCOME TAX – REDOMICILIATION TO CYPRUS INCENTIVES

Cyprus tax residents are taxed on their worldwide income. Non-Cyprus tax residents are taxed only on the income that arises within and from sources within Cyprus. If a person is residing in Cyprus more than 183 days in a calendar year then is deemed to be tax resident as well.

Personal Income Tax Rates are based on tax bands and for 2024 and  2025 are:

EURO                                                      %

0-19500                                                 0%

19501-28000                                       20%

28001-36300                                       25%

36.301 -60000                                     30%

60001 and over                                  35%

Exemptions apply.

Interest received by Cyprus tax resident and domiciled person is taxed at 17% SDC (30% before 2023) and Dividends received at 17%.  In order for the SDC to apply a person has to be more than 183 days in a calendar year in Cyprus –therefore tax resident-and also have a Cyprus domicile.  There are regulations whereby an individual can elect to be tax resident in Cyprus if he resides more than 60 days.

A person is considered having his domicile of origin in Cyprus if he has his regular place of abode in Cyprus as per the Wills and Succession Law except where:

1. The person has a domicile outside of Cyprus as per the Wills and Succession Law and has not been a tax resident in Cyprus for a period of 20 consecutive years preceding the tax year.
2. The person has not been a Cyprus tax resident for a period of 20 consecutive years prior to the introduction of the law.

If the person was a tax resident of Cyprus for at least 17 years out of the last 20 consecutive years, will be considered as domiciled in Cyprus.

Individuals not tax resident and/or not domiciled in Cyprus are exempt from SDC.

Special Incentive applies for persons which were not tax resident in Cyprus previously and their earnings exceed €55,000 per year and was resident outside of Cyprus for a period of at least 10 consecutive years before commencement of employment. 50% of the income will be exempt from tax for the next 17 years. This applies only for first employment in Cyprus only.

Another similar incentive is the 20% or €8550 (whichever is smaller) exemption, for 7 years, of the income of a person that was not tax resident of Cyprus for at least 3 years before commencing employment in Cyprus.

Also, variable remuneration of individuals working in Cyprus by Alternative investment funds, which is connected to the carried interest of the fund can elect to be taxed at a flat rate of 8% with a minimum annual tax liability of 10,000 euro.

Furthermore, pension received from abroad is taxed at 5%. The first €3420 are exempt.

SOCIAL INSURANCE CONTRIBUTIONS FOR EMPLOYEES WORKING IN CYPRUS.

• Employees Social Insurance Contributions are 8%.
• The employer also contributes on the employee’s salary at a rate of 12.5%.
• Self-employed contributions 16.6% depending on the employment category.

Minimum and maximum limits exist.

GENERAL HEALTHCARE SYSTEM (GHS) CONTRIBUTIONS

• Employee’s contributions 2,65%
• Employer’s Contributions 2,90%
• Self-employed 4,00%
• Cyprus tax resident individuals earning dividends, interest or rent is also subject to 2.65%
• An individual earning rental income from Cyprus located immovable property is also subject to GHS of 2.65% irrespective of being tax resident in Cyprus or not.
• There is a 180,000 euro annual income cap for GHS contributions

CYPRUS Companies and tax planning

Cyprus companies can be used in many ways as a vehicle in optimizing tax structures and holding investment.

Main uses are

• Investment holding company.  A Cyprus company can be used both for investments in the European Union, taking advantage of the EU parent-subsidiary and interest directives, and also out of the EU which Cyprus has very advantageous Double tax treaty agreements. The income arising from these investment holdings can be exempt from tax in most of the cases. For example, Profit from sale of shares (and many other titles) are not taxable in Cyprus. Also, dividends received are not taxable in Cyprus (see small exemption above) and when paid from Cyprus company abroad again there is no withholding tax.
• Finance companies. A Cyprus company can act either directly as finance company or intermediary, usually on a back-to-back loan, from the original lender company possibly from a tax heaven country. Any interest charged is tax deductible from the interest received from the final borrower. The company will be taxed on the net margin of the interest received.
• Trading company. Used to establish presence in the EU with VAT number. Can be used for buying and selling products within Cyprus, EU and the rest of the world. I.e. Cyprus Company buys from China and then sells to UK. Profit is taxable in Cyprus after deduction of business expenses.
• Agency and Royalty company. Similar to trading but can charge commissions on direct deliveries and sales from supplier to final buyer. Same applies with Royalties. Tax is chargeable to profit after deducting expenses. An 80% exemption applies for all royalty income and profit on sale of the Royalty.
• Double Tax Treaties and European Union Directives. Extensive network with very favorable treaties with more than 60 countries.  Furthermore, all the EU directives apply in Cyprus including the Parent Subsidiary Directive which makes it a gateway for investments to the European Union for non-EU investors.

 

This is a very basic review of Cyprus Tax law and should not be used to form an opinion. For any issues we advice readers to consult us, specifying the details of the matter.

For more information please contact Mr Michalis Louca   michalis@mloucas.com