In the realm of international business and investment, tax incentives play a pivotal role in shaping investment decisions and business growth strategies. This guide provides a comprehensive overview of the attractive tax benefits and incentives offered by Cyprus, a jurisdiction increasingly recognized for its favorable and business-friendly tax regime.
Cyprus offers a favorable tax environment with numerous benefits, particularly appealing for businesses and investors. The country’s corporate tax rate on net profits is competitively low at just 12.5%. Additionally, dividend income in Cyprus is exempt from taxation, providing a significant advantage for investors.
One of the key features of Cyprus’s tax regime is the exemption on profits realized from the disposal of securities, including shares in subsidiaries, bonds, derivatives, stocks, and other securities. This exemption covers all gains, encompassing both capital gains and gains from trading in securities. Moreover, the country allows a Notional Interest Deduction (NID) on newly introduced paid capital, further enhancing its tax efficiency.
Cyprus’s status as a member of the European Union (EU) also adds to its attractiveness, providing the benefits of EU jurisdiction. The country boasts an extensive network of double tax treaties, ensuring zero or low withholding tax rates on interest, dividends, and royalties. This is complemented by the absence of withholding tax on dividends, interest, and royalties paid to non-resident individuals and corporations.
For companies with international operations, the interest paid to non-resident group companies is tax-deductible, adding another layer of tax efficiency. Cyprus’s tax laws are also favorable for intellectual property (IP), offering an 80% exemption on profits derived from qualifying intangible assets like copyrights, patented inventions, and trademarks, applicable to assets developed after June 30, 2016.
Losses can be offset against other sources of income and carried forward for five years. These losses can also be set off against the profits of another company within the same group of Cyprus tax-resident companies. However, it’s important to note that capital gains tax in Cyprus is applicable at a rate of 20% on gains from immovable property located within the country.
Finally, Cyprus’s tax regime is bolstered by its extensive tax treaty network with more than 60 countries, providing additional advantages for global businesses and investors. This comprehensive framework makes Cyprus an attractive destination for investment and business operations, offering numerous tax incentives and benefits.
| Taxable (EUR) | Tax Rate |
| 0 to 19,500 | 0% |
| 19,501 to 28,000 | 20% |
| 28,001 to 36,300 | 25% |
| 36,301 to 60,000 | 30% |
| 60,000+ | 35% |
Spouses are taxed separately, not jointly, on all types of income.
Employment and business income received by non-residents, as well as rental income, is taxed at the rates that apply to residents.
All companies that are tax residents of Cyprus are taxed on their income accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from business activity that is carried out through a PE in Cyprus and on certain other income arising from sources in Cyprus.
The standard CIT rate in Cyprus is 12.5%.
The Special Defence Contribution (SDC) in Cyprus is levied only on specific types of income for Cyprus tax resident companies and Cyprus Permanent Establishments (PEs) of non-resident companies. This includes non-exempt dividend income, ‘passive’ interest income, and rental income. However, non-tax residents of Cyprus with non-Cyprus PEs are not subject to SDC.
Dividend income can be exempt from SDC if it meets the participation exemption criteria outlined in the Dividend income section under Income determination. In contrast, ‘active’ interest income, which encompasses interest earned in the regular course of business or closely linked to it, is taxed under Corporate Income Tax (CIT) at the standard rate of 12.5%, after allowable expense deductions.
Interest classified as ‘passive’ interest income, which does not meet the criteria for ‘active’ interest, is subjected to SDC at 30% without any expense deductions. However, this type of interest is exempt from CIT.
As of June 2022, ‘passive’ interest income from specific sources like Cyprus government bonds, listed Cyprus and foreign corporate bonds, and bonds issued by Cyprus state organizations or local authorities listed on a recognized stock exchange are subject to a reduced SDC rate of 3%. Additionally, from 8 June 2022, entities like Cyprus state organizations, local authorities, pension funds, provident funds, and the Cyprus Social Insurance Fund will also be subject to a 3% SDC rate on all their interest income.
Interest income received by collective investment schemes (CISs), whether close-ended or open-ended, is exempt from SDC and considered ‘active’ interest income, thus subject to CIT.
Rental income, after a 25% reduction, is also liable for SDC at 3% (effectively 2.25%) along with the standard CIT rate of 12.5%, after deducting allowable expenses.
A significant update came on 13 September 2023, when the Cyprus Tax Authority (CTA) issued a Circular. According to this, rental income from self-catering accommodations rented out via online platforms will, under certain conditions, be regarded as business income. Consequently, this income will be subject to Income Tax and exempt from the Special Defence Contribution.
