Corporate Tax 2025 – Cyprus

1. Their Residence and Basic Tax Treatment

1.1 Corporate Structures and Tax Treatment

Businesses in Cyprus generally adopt a corporate form. The most common type of corporate form is that of a private (or public) limited liability company with shares. A Cypriot company is fiscally opaque for tax purposes; therefore, it is taxed as a separate legal entity.

Pursuant to Cypriot law, a company is a legal person with a separate legal personality, distinct from its members and its directors. Thus, its shareholders are not personally liable for the obligations of the company and the liability of the shareholders is limited to the share capital contributed. The existence of the company does not depend on the existence or continuation of its members.

Additionally, a Cypriot company may be limited by guarantee. Usually, companies limited by guarantee are incorporated as non-profit organisations in order to pursue charitable purposes.

1.2 Transparent Entities

Cypriot law allows for the establishment of general and limited partnerships. A partnership is not treated as a separate taxable person. It is a transparent entity and the tax is imposed on the partners and not on the partnership. Partnerships are widely used in joint venture projects and in smaller (usually family-owned) enterprises.

1.3 Determining Residence of Incorporated Businesses

The test used in Cyprus for determining the residence of incorporated businesses and transparent entities is the so-called management and control test. Cyprus' income tax legislation does not include a clear provision on how an entity becomes a Cyprus tax resident. General practice looks at the management and control thereof.

The minimum requirements for an entity to be considered a Cyprus tax resident are quite general and include:

• the place of residence of the majority of the directors;
• the place where the meetings of the board of directors are held; and
• the place where the general policy of the entity is formulated.

1.4 Tax Rates

Tax Rates Paid by Incorporated Businesses

The corporation tax rate is 12.5%. Business profits of Cyprus tax-resident companies, adjusted in relation to allowances and exemptions, are subject to a flat tax rate of 12.5%.

Individual Tax Rates

Income for individuals is subject to progressive tax rates. The first EUR19,500 is tax-free, the next EUR8,500 is subject to a tax rate of 20%, the next EUR8,300 is taxed at 25%, the next EUR23,500 at 30% and any amount above EUR60,000 at 35%. A number of deductions and personal allowances are available.

On 15 November 2024, the Council of Ministers of Cyprus exempted individuals whose total gross annual income is below EUR19,500 from the obligation to submit a personal income tax return for the tax year 2024.

Businesses owned directly by individuals are subject to the individual tax rates. The same applies to businesses owned through transparent entities.

2. Key General Features of the Tax Regime Applicable to Incorporated Businesses

2.1 Calculation for Taxable Profits

Business profits of a Cypriot company, adjusted for various disallowances and exemptions, are subject to tax at 12.5%. Cyprus tax residents are taxed on their worldwide income. Profits are taxed on an accrual basis and the International Financial Reporting Standards are followed.

Generally, expenses wholly and exclusively incurred by a company in the production of taxable income are allowable. Private expenses, expenses not matched to taxable income or not validated through proper supporting documentation, provisions (depreciation, amortisation, impairment, and obsolete stock), expenses linked to non-taxable assets, and exchange differences are considered as non-deductible expenses. However, capital allowances, balancing allowance calculated on the disposal of a non-current asset, notional interest deduction, and notional loss in related-party transactions are also deductible.

2.2 Special Incentives for Technology Investments

The current IP tax regime in Cyprus is applicable as of 1 July 2016. This follows the nexus approach – according to which, a direct link between qualifying income and own qualifying expenses is essential for the IP to qualify. The level of the qualifying profits is positively correlated to the extent that R&D activities are performed by the same entity.

Under the previous IP box regime that applied in Cyprus, an overall 80% deduction on profits was granted. Under the current IP tax rules, 80% of the overall income derived from the qualifying intangible asset is treated as a deductible expense.

A qualifying intangible asset is defined as an asset that, as a result of R&D activities, has been acquired, developed or exploited by a person within the course of carrying out their business. Such assets specifically include:

• patents;
• computer software; and
• other IP that is legally protected and comprises:
  1. utility models;
  2. IP assets that provide protection to plants and genetic material or orphan drug destinations, in addition to extensions of protection for patents; or
  3. non-obvious, useful and novel IP assets (which are certified as such by an appropriate authority) where the person utilising such does not generate annual gross revenues in excess of EUR7.5 million from all intangible assets (or EUR50 million for groups).

Qualifying intangible assets specifically exclude trade marks, business names, brand image rights, and other IP rights used for the marketing of products and services.

Persons that may benefit from Cyprus' IP tax regime include Cyprus tax-resident taxpayers, tax-resident permanent establishments of nontax resident persons, and foreign permanent establishments that are subject to tax in Cyprus.

2.3 Other Special Incentives

In addition to the IP tax regime explained in 2.2 Special Incentives for Technology Investments, there are a number of special incentives that apply generally – as well as to particular industries – in Cyprus.

Cyprus Holding Companies

Cyprus represents an attractive jurisdiction in which to set up a holding company. Specifically, dividend income received by a Cypriot holding company is generally exempt from any income tax in Cyprus (subject to the hybrid instrument exception explained in 9.6 Proposals for Dealing With Hybrid Instruments) and from special defence contribution (SDC) (subject to the passive dividend rule explained in 6.3 Tax on Dividends From Foreign Subsidiaries). Also, no withholding tax applies to any outgoing dividend or other profit distributions or interest, irrespective of the existence of a double tax treaty (DTT). Furthermore, profits from the sale of shares are tax-exempt. In general, no restrictions on foreign share ownership exist and, as a result, a foreign investor is allowed to be the sole shareholder of a Cypriot company.

Tonnage Tax System

Cyprus tax-resident ship-owners or ship management companies that qualify under the relevant legislation with regard to qualifying ships (as defined therein) engaged in qualifying shipping activities (as defined therein) can fall under the tonnage tax system (TTS). The TTS refers to flat given rates of tax based on the net tonnage of the ship – ie, no requirement for a computation of tax-adjusted profits exists. It is also important to note that there is no tax levied on the disposal of qualifying ships and that dividends distributed out of companies under the TTS are not subject to the SDC.

Incentives for Individuals

Special incentives are also provided to individuals. A tax incentive was introduced in 2022 and amended on 30 June 2023 that provides that a natural person employed in Cyprus (as of 1 January 2022) enjoys a tax exemption of 50% for a period of 17 years from the date of employment, irrespective of whether the individual changed employers during the relevant 17-year period – provided they have previously not been resident in Cyprus for a period of at least 15 consecutive years and earn more than EUR55,000 per year. Previously (ie, before the June 2023 amendment), the exemption was only granted for the first employment of the individual in Cyprus.

Furthermore, individuals who first take up employment in Cyprus after 26 July 2022, with annual emoluments lower than EUR55,000, will be eligible for a 20% or EUR8,550 exemption (whichever is lower) for a maximum period of seven years. An individual must have been employed abroad for at least three consecutive years prior to the commencement of employment in Cyprus in order to claim this exemption, which can be claimed from the year after taking up employment in Cyprus.

Non-doms

In addition, individuals who are not tax-resident in Cyprus or individuals who are tax-resident but non-domiciled in Cyprus are not subject to the SDC on dividends, interest or rents.

Innovative SMEs

A qualifying person that makes an investment in an innovative SME (as defined by the Cypriot Income Tax Law) may deduct the costs of the investment from the taxable income subject to limitations imposed by the law, such as:

• the tax deduction is limited to 50% of the investor's taxable income in the year in which the investment is made;
• the deductible amount cannot be more than EUR150,000 within a tax year; and
• the investor must retain the relevant investment in the innovative SME for at least three years.

This incentive is available until 31 December 2026.

Start-up visa

On 19 December 2024, the Deputy Ministry of Research and Digital Policy announced the approval of a revised start-up visa scheme, which is applicable as of 1 January 2025. This scheme enables owners and senior executives from third countries to enter, reside and work in Cyprus for the purposes of establishing a new start-up in Cyprus or transferring an existing start-up into Cyprus.

2.4 Basic Rules on Loss Relief

On a company level, tax-adjusted losses can be carried forward and be set off against taxadjusted profits for the next five years. Losses cannot be carried back.

On a group level (subject to the existence of certain criteria and the formation of a tax group), group members may surrender losses from one loss-making member to another profitable one. A direct or indirect holding of at least 75% for the entire tax year is necessary for a company to be considered as forming part of a tax group.

As of 2015, the interception of companies established in the EU – or in countries that either have a DDT with Cyprus or have signed the OECD terms for exchange of information – can be taken into consideration for the calculation of an indirect holding. Furthermore, group relief is available between companies established in EU member states, provided that the EU subsidiary has exhausted all means of surrendering or carrying forward the losses in its own state.

2.5 Imposed Limits on Deduction of Interest

The Cypriot Income Tax Law provides that any interest relating to (or that is deemed to relate to) the cost of acquiring a private motor vehicle – irrespective of whether it is used in the business – or to the cost of acquiring any other asset not used in the business is not deductible for a period of seven years.

The Commissioner of Taxation has taken the position that shares are not an asset used in the business and, as such, any interest on loans to acquire shares is not deductible for a seven-year period. This position is justified on the grounds that any income from the holding of shares (ie, dividends and capital gains) is exempt from corporation tax.

As of 1 January 2012, the above-mentioned provision does not apply in cases where new shares are acquired directly or indirectly in a wholly owned subsidiary – provided that this subsidiary does not own any assets that are not used in the business. If this subsidiary owns assets that are not used in the business, the restriction of interest will only correspond to the percentage of assets not used in the business.

Also, from 1 January 2020, Cyprus' tax legislation contains an interest limitation rule (ILR) that limits the otherwise deductible-exceeding borrowing costs of the Cypriot taxpayer/Cypriot group to 30% of adjusted taxable profit (taxable EBITDA). The ILR contains an

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