By: David

Updated: Jan 4, 2024

Taxation of Your Cyprus Limited

What taxes does a Cyprus Limited face?

Cyprus offers a variety of tax benefits, especially for your company. Tax benefits are due to the advantageous legislation for the founders of a Cyprus Limited, which we will discuss in the following article.

It's important to stress that Cyprus is not an offshore tax haven, as the Cypriot tax system and legislation fully comply with European Union (EU) and Organisation for Economic Cooperation and Development (OECD) laws.

Cyprus has fully adopted all EU directives and does not impose any minimum holding period, percentage shareholding, or other restrictions most member states use. This becomes one of the most significant tax advantages for Cyprus's investment activities: the sector's worldwide recognition, conformity, and credibility.

If you want to calculate the tax burden on an estimated company income quickly, you can use our net profit calculator for Cyprus-based companies.

Taxes on corporate income

Corporate income tax (CIT)

The standard Corporate Income Tax rate (CIT) in Cyprus is 12.5%, while local government taxes on income are not enforced. Cyprus imposes corporation tax on your company if incorporated or registered under any Cyprus law and any foreign company that maintains business or has a permanent business establishment in Cyprus.

You are considered under Cyprus's permanent establishment (PE) regulations when maintaining a fixed address in the country. PE includes management offices, branches, factories, or similar locations. Thus, as a tax resident in Cyprus, you are liable to tax on your worldwide income, which is received in Cyprus and abroad.

Exemptions from corporate tax

The Cyprus CIT law offers more than just low tax rates. You will enjoy many tax exemptions for many and varied types of income, profits, and gains.

Profits of a foreign permanent establishment

With effect as of 1 July 2016, you may elect to tax the profits earned by a non-Cyprus permanent establishment with a tax credit for foreign taxes incurred. Rules apply in some instances when granting you foreign tax credits where a non-Cyprus permanent establishment was previously exempt. Subsequently, you are subject to tax on the profits of the non-Cyprus permanent establishment.

Capital gains

Profits from the sale of securities are unconditionally exempt from CIT. You pay no tax on securities. Cyprus' Tax Authorities define securities as shares, bonds, debentures, founders' shares, and other securities of companies or other legal persons incorporated in Cyprus or abroad and options thereon. Cryptocurrencies are treated like a security.

The regularization includes multiple trading options: Short positions, futures/forwards, swaps, depositary receipts (ADRs, GDRs), rights of claim on bonds and debentures, index participation, repurchase agreements, units in open-end or closed-end collective investment schemes.

Note that Capital gains on Cyprus-situated immovable property (and on non-quoted shares directly or indirectly holding such Cyprus-situated immovable property) are taxed separately in Cyprus.

Dividend income

If you receive dividends from other Cyprus tax-resident companies or foreign investments, you do not have to pay taxes in Cyprus. Exceptions apply for dividends deductible for tax purposes for the paying company.

Such deductible foreign dividends are subject to CIT but exempted from Special Defence Contribution (SDC). Other foreign dividend income (i.e., non-deductible) is also exempt (participation exemption) from SDC unless:

• More than 50% of the foreign-paying company's activities directly or indirectly result in investment income and
• The foreign tax is significantly lower than the tax burden in Cyprus (i.e., an effective tax rate of less than 6.25%).

Make sure you match the Cyprus participation exemption requirements on foreign dividend income; otherwise, the Tax Authorities will make you pay. Any foreign withholding tax (WHT) imposition on dividends paid to the Cyprus company is obliged to the Cyprus SDC rate of 17% on such dividends without requiring double tax treaties to be in place with the paying jurisdiction.

Foreign currency exchange (forex) differences

Forex differences are tax neutral for CIT purposes (i.e., forex gains are not taxable, and forex losses are not deductible). However, forex differences from trading in foreign currencies (and related derivatives) are subject to CIT.

Audiovisual tax exemption

Profits from the production of films, series, and other related audiovisual programs in Cyprus are exempt from CIT matching the two following conditions:

• The audiovisual tax exemption shall not exceed 35% of the eligible production expenditure incurred in Cyprus.
• The amount of audiovisual tax exemption, subject to specific criteria and conditions, shall not exceed 50% of your taxable income from the production.

If Tax Authorities deny your audiovisual tax exemption due to the mentioned percentage limitation, taxes will be carried forward and credited within the next five years.

Special Defence Contribution (SDC)

If your company is a Cyprus tax resident, income from investments (dividends, interest, and rent) is subject to the Special Defence Contribution tax. We learned about SDC for dividends, moving on to passive interest and rent.

SDC on interest income

Interests received by closed-end or open-end collective investment schemes (CISs) are not subject to SDC as they are considered 'active' interest income. Interest received in the ordinary course of your business is also considered 'active' interest income. It is only taxed under CIT (after deducting allowable expenses) at the standard CIT rate of 12.5%.

Receiving interest that matches neither of the two cases is considered 'passive' interest income, which is eventually subject to SDC (without expense deduction) at the rate of 30%. 'Passive' interest is then, however, exempt from further CIT.

SDC on rental income

Gross rental income reduced by 25% is also subject to SDC at 3% (i.e., an effective rate of 2.25%) and CIT (after deducting allowable expenses) of 12.5%.

Corporate tax deductions for expenses

Generally, when your expenses are incurred wholly and exclusively in earning taxable income and are supported by documentary evidence, they are deductible for corporate tax purposes.

Depreciation and amortization

Tax Authorities in Cyprus compute the depreciation rate for your tangible assets on a linear basis at set rates that vary depending on the type of asset. If you sell depreciated property, you can recapture the tax depreciation amount and tax it as ordinary income, depending upon the level of sale proceeds. Land does not attract tax depreciation.

Tax amortization on any capital nature expenditure for your acquisition or development of intellectual property (IP) was introduced on 1 July 2016. It is allocated over the lifetime of the IP, per accepted accounting principles, with a maximum period of 20 years (excluding goodwill and IPs falling under the transitional rules of the old Cyprus IP box, which continue with that box's tax amortization). You may not claim all or part of the available tax amortization for a particular year.

Interest expenses

Interest expenses incurred by the company to generate taxable income should be deductible in the company's tax computation. Still, we again face two exceptional cases in which the Cyprus policy differs:

• Interest expense that finances assets that generate tax-exempt income is not deductible in the first seven years of ownership of such assets.
• Interest expense associated with such assets held beyond seven years becomes tax-deductible.

New Cyprus IP box

If you operate exclusively in intellectual property (i.e., leases, licenses, or rights), you will face further tax advantages in Cyprus. The regulations for such businesses, called IP boxes, have changed over the past few years and have specified qualifications to be classified as an IP box. The new Cyprus IP box allows a deductible notional expense calculated as 80% x qualifying profits from qualifying IP.

What is a qualifying IP?

For the 80% deduction, qualifying IP may be legally or economically owned and comprise:

• patents
• copyrighted software
• utility models, IP assets that grant protection to plants and genetic material, orphan drug designations, extensions of patent protection, and
• other IP that a designated authority certified as non-obvious, helpful, and novel
• where you satisfy the size criteria (i.e., annual IP related revenue does not exceed EUR 7.5 million for the taxpayer, and total yearly income does not exceed EUR 50 million, using a five-year average for both calculations).

Unfortunately, marketing-related IPs, such as trademarks, do not qualify and are not considered IP boxes.

I match the qualifications for the IP box. What about my profits?

The Cyprus IP box's qualifying profits include:

• royalties or other amounts due to the use of qualifying IP
• amounts for the grant of a license for the exploitation of qualifying IP
• amounts derived from insurance/compensation due to the qualifying IP
• trading income from the sale of qualifying IP (note that capital gains on IP are excluded; as such, capital gains are not subject to taxation in Cyprus), and
• IP income is embedded in the sale of products, services, or the use of processes directly related to qualifying IP assets.

In calculating the amount of the qualifying IP profits entitled to the 80% deduction, a fraction applies to the above IP profits based on the R&D activity of the taxpayer; the higher the amount of R&D undertaken by the taxpayer itself (or via a taxable foreign PE or unrelated third party outsourcing), the higher the amount of R&D fraction (modified nexus fraction).

Charitable contributions

Charitable donations or contributions made for educational, cultural, or other charitable purposes to the Republic of Cyprus (including local authorities) or approved philanthropic institutions are 100% deductible. This deduction holds as long as you provide relevant vouchers for these expenses.

Employer's contributions

In 2024, social insurance contributions account for 21.3 percent of income. Employers pay 12.5 %, and your employees (if any) pay 8.8 % of the gross salary. As a self-employed entrepreneur, you pay contributions totaling 16.6 % of your income. The maximum amount of insurable earnings is 62.868 € per annum.

You and your family receive free or subsidized general, specialist, and dental care as a contributor. Anyone who emigrates to Cyprus and has paid regular social security contributions in another EU country for two years is entitled to the same insurance coverage as Cypriot citizens for a limited period. Pensioners who are citizens of an EU country receive free treatment.

Losses carried forward

Your tax loss incurred during a tax year is carried forward and is set off against the five-year profits, while your current year's loss can still be set off against the profit of another company, subject to conditions. These conditions include that the companies are Cyprus tax resident companies of a group.

The transition of tax losses between companies is possible for businesses in a group defined as:

• One Cyprus tax resident company holding directly or indirectly at least 75% of the voting shares of another Cyprus tax resident company, or,
• Both Cyprus tax resident companies are at least 75% (voting shares) held by a third company directly or indirectly.

As of 1 January 2015 interposition of a non- Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is/are tax resident of either an EU country or in a country with which Cyprus has a tax treaty or an exchange of information agreement (bilateral or multilateral). A partnership or a sole trader transferring business into a company can carry forward tax losses for future utilization.

An exempt foreign permanent establishment's losses can be offset with profits of the Cyprus head office. In such a case, future profits of an exempt foreign permanent establishment abroad are taxable for the losses allowed.

Other Taxes

Annual Levy

All companies registered with the Cypriot Registrar of Companies must pay an annual fee of €350.

• The annual fee is payable by 30 June of each year.
• If the fee is not paid on time, tax authorities will charge 10% if you still complete the payment within two months of the due date. Late payments within five months of the due date include an additional charge of 30%. The Registrar of Companies can strike you off if you do not pay its annual levy within one year of the due date.

VAT

Cyprus value-added tax (VAT) is chargeable on any supply of goods or services made within Cyprus, where it is a taxable supply made by a taxable person during or in furtherance of his business. Also, VAT is imposed on the intra-community acquisition of goods coming to Cyprus from:

• another EU Member State by a legal person
• on services received by a Cypriot taxable person from outside Cyprus and
• on importing goods outside the European Union, irrespective of the importer (thresholds apply).

The standard VAT rate in Cyprus is 19%. Additionally, two reduced VAT rates, 5% and 9%, apply in Cyprus. You find some common examples in the following.

VAT Exemptions

There also exist exemptions to VAT. These VAT exemptions include:

• Rents (subject to legislation conditions concerning leasing immovable property for business purposes)
• Supply of immovable property (except the disposal of "new buildings" and non-developed building land intended for structures constructed in the course of business activity)
• Insurance and financial services
• Medical and certain related services
• Educational and certain associated services

Summary

Cyprus offers significant tax and duty advantages to its resident companies and lays the foundation for your company's rapid growth. Corporations only pay 12,5% Corporate income tax (CIT), and the new Cyprus IP box allows for a deductible notional expense, which is calculated as 80% x qualifying profits from qualifying IP.

In addition, the Cyprus company may use tax exemptions on profits, capital gains, and dividends income (e.g., no tax on received dividends from other Cyprus tax resident companies or foreign investments).

With Cyprus fully adopting all EU directives, you enjoy worldwide recognition, conformity, and credibility of the sector and find the perfect home base for your scalable business on the Mediterranean island.

David