Cyprus provides an advantageous EU-compliant tax system with a plethora of incentives for businesses and individuals. The island has one of the most favorable tax regimes throughout the EU including a corporate tax rate of 12,5% in addition to other tax advantages such as its non-domicile tax exemption policy.
Cyprus Tax Residence
In order to be eligible as a Cyprus tax resident the following conditions must be met:
Cyprus tax residents are taxed on their worldwide income. Non-Cyprus tax residents are only taxed on income accrued through their business activities and sources in Cyprus. This applies to both individuals and corporate entities. A company is considered a Cyprus tax resident if its management and control is in Cyprus.
Non – Domicile Tax Residence
Cyprus offers significant tax exemptions for individuals who are tax resident but not domiciled in the Republic, as they are not subject to paying the ‘Special Contribution for Defence’. Effectively this means that these individual’s and company’s incomes from dividends, interest income (arising from the ordinary business activities) and rental income are wholly tax exempt. An individual is exempt from these taxes and contributions for the first 17 years of his tax residence in Cyprus, as during this period he is considered non-domiciled.
Cyprus has one of the lowest EU corporate tax rates at 12,5%. The advantages do not stop there as there are additional incentives and tax exemptions for corporate income. The following types of income can be wholly exempt from corporate tax:
Various deductions may apply on company taxation, such as the Notional Interest Deduction applicable to tax resident companies and permanent establishments of non-resident companies in Cyprus. Companies may be eligible for this deduction in cases where equity is introduced to a company in the form of paid-up share capital or share premium. The Notional Interest Deduction can be up to 80% of taxable profit, and the effective tax rate can be up to 2.5%.
There is an 80% deduction on taxable net profit derived from qualifying intangible assets under Cyprus’ Intellectual Property Box regime. Furthermore there are no tax consequences on reorganizations of companies, such as in the case of a Merger.
The Cyprus corporate tax system recognizes some types of companies as having special tax regimes, such as shipping companies. Qualifying EU or non-EU (under conditions) shipowners, characters and shipmanagers may be exempt from all taxation under the Cyprus Tonnage Tax System, in qualifying activities. For more information on the Cyprus shipping industry you can refer to our article “Cyprus: Maritime & Shipping”.
Personal Income Tax
Personal tax rates in Cyprus are also significantly low. The income tax rates that apply to individuals are the following:
1. First €19,500 – 0%
2. €19,501 to €28,000 – 20%
3. €28,001 to €36,300 – 25%
4. €36,301 to €60,000 – 30%
5. Over €60,000 – 35%
In addition to the low income tax there are additional incentives. Income from dividends, passive interest and securities are again income tax exempt. Tax deductions also apply to rental income, where 20% of gross rental income is tax exempt. Foreign pension income is taxed at a flat rate of 5% for pension income over €3,420, although the individual can choose to be taxed according to the above personal income tax brackets.
Other than the aforementioned, one of the most significant personal income tax incentives Cyprus offers is the 50% tax exemption of an individual’s remuneration from employment in Cyprus whose salary exceeds €100,000. An individual is eligible for this exemption provided that he was not a Cyprus tax resident 3 out of the last 5 years and not a tax resident in the tax year immediately before commencement of employment. This sizeable tax exemption is applicable for 10 years.
Capital Gains Tax, VAT & Other Taxation
The only activities at which capital gains tax applies is at the sale of immovable property situated in Cyprus or the sale of shares in companies owning immovable property (except shares listed on a recognized stock exchange). The taxation rate is 20%. Gains from the sale of immovable property situated outside Cyprus are tax exempt. The VAT rate is 19%, however it is reduced to 5% in some cases (e.g. primary residential property).
The immovable property tax has been abolished from January 2017. Estate Duty (Inheritance Tax) has also been abolished, since January 2000. Withholding taxes do not apply for dividends, interests, or royalties paid to non-residents of Cyprus. If royalties were earned on rights used in Cyprus then a 10% withholding tax applies, although this may be reduced or eliminated through some of Cyprus’s approximately 60 double tax treaties.