Cyprus Taxation system
One of the most advantageous tax systems in the European Union is thought to exist in Cyprus. This article aims to explain how the tax system in Cyprus operates and the reasons why more and more people are realizing that the island is a great place to relocate to. People move here to enjoy the wonderful climate, delicious food, and laid-back Mediterranean lifestyle while minimizing their tax burden.
Disclaimer: This article offers basic knowledge on Cyprus’s tax laws but it is important to note that it is NOT a legal document, or to offer financial advice or information on potential tax ramifications. It serves only as a source of information. Please Contact Us or get in touch with a certified local tax adviser if you have any questions or would like detailed financial information on your tax obligations in Cyprus.
Table of Contents
Cyprus Tax Residents
Of course, you must be a tax resident on the island in order to be subject to the Cyprus tax system. It is a requirement to be such that you fall under one of the two following categories:
- You must either spend more than 183 days in Cyprus in any given calendar year, or
- Spend at least 60 days there while not also being a tax resident in another country, or spend less than 183 days in any one country in any given calendar year. You must also have a permanent home in Cyprus (either rented or owned), conduct business there, or hold employment there. (Read more here)
Cyprus’s tax laws distinguish between residents and those with a Cyprus domicile, which is significant. In accordance with current legislation, residents who were either born in Cyprus or have resided there for at least 17 years are considered to be domiciled in Cyprus. Understanding the distinction between Cyprus residents and domiciles is crucial because it affects your ability to pay certain taxes, as we’ll explain later.
Personal Income Tax
The individual income tax system in Cyprus is progressive. A sizable tax-free allowance of €19,500 is one of the most significant aspects of the nation’s tax system. Income tax is assessed at a beneficial progressive rate over this threshold according to the following scheme:
|Income (in EUR)
|up to 19,500
|60,001 and more
Additionally, residents can benefit from a variety of tax advantages, including sizable deductions and exemptions. Cyprus’s tax system is advantageous to businesses as well because it has Europe’s lowest corporate income tax rate.
Tax Exemptions and Deductions
The Cyprus tax system’s generous tax exemptions and deductions for individuals represent yet another major benefit. For instance, the following income is totally exempt from paying income tax:
- Dividend income
- Interest income
- Profits from the sales of securities (such as shares, bonds or debentures)
Additionally, the earnings from such services are entirely tax-free if a Cyprus tax resident performs paid services outside of Cyprus for more than 90 days in any given tax year.
The tax laws of Cyprus also provide individuals with additional significant advantages in terms of income reductions that may be deducted from taxes. Among the practical tax deductions that are available are:
- Financial losses for the current year and losses from the previous five years
- contributions to reputable charities
- 20% of total rental revenue
- Deductions of up to 1/6 of the chargeable income may be made for social insurance, medical fund, and life insurance premiums (up to certain amounts).
- Exemption of 50% of pay from any employment performed in the Republic by a person who resided outside the Republic prior to the employment’s start date, provided that the employee’s annual salary exceeds €100,000. (Conditions apply)
- Payouts from the provision of salaried services to non-resident employers or to a resident employer’s permanent establishment outside the Republic for a total of more than 90 days during the assessment year
- Remuneration for any work performed in the Republic
Notes: As mentioned above, the majority of investment income, including dividends and bank interest, is not taxed. However, a Special Contribution to Defence (SCD) tax was imposed on such earnings by the Cypriot government. A total of 17% of all dividend income worldwide, 30% of bank interest, and 3% of rental income must be contributed. SCD is only necessary for domiciled residents, though. As previously stated, if a person is not a native of Cyprus and has not lived on the island for at least 17 years, they are not regarded as a domiciled resident. This actually means that for the first 17 years of your residency in the country, you will be completely exempt from all of your dividend, interest, and rental income.
Special Contribution for Defence (SCD)
As mentioned above, the majority of investment income, including dividends and bank interest, is not taxed. However, a Special Contribution to Defence (SCD) tax was imposed on such earnings by the Cypriot government. A total of 17% of all dividend income worldwide, 30% of bank interest, and 3% of rental income must be contributed. SCD is only necessary for domiciled residents, though. As previously stated, if a person is not a native of Cyprus and has not lived on the island for at least 17 years, they are not regarded as a domiciled resident. This actually means that for the first 17 years of your residency in the country, you will be completely exempt from all of your dividend, interest, and rental income.
The Cyprus tax system not only benefits individuals but also businesses and companies in many ways financially. The 12.5% corporate tax rate, which is the lowest in Europe for corporate income taxes, is unquestionably the greatest of these benefits.
Companies that want to benefit from Cyprus’s tax system must have residency status, just as is the case with personal taxation eligibility in Cyprus. A company is deemed to be a Cyprus tax resident company under the law if it is managed and controlled there. It’s important to note that obtaining residency status is unaffected by a company’s place of registration.
The following types of income are exempt from taxes in significant amounts for businesses that are subject to taxation in Cyprus.
- Tax exemption for profits from tradable securities
- Tax exemptions for interest and dividend income
- Profits from permanent establishments (PE) maintained abroad are exempt from tax. The Cyprus company is also permitted to deduct any foreign tax losses from a PE.
- differences in foreign currency resulting from transactions
Value Added Tax (VAT)
In 1992, Cyprus implemented a value-added tax. It is currently assessed on the provision of all goods and services within the nation, the purchase of goods from other Member States, and the importation of goods from other nations.
There are reduced rates of 9%, 5%, and 0% in addition to the standard VAT rate of 19%. These might apply to particular products or services. Additionally, Cyprus completely exempts the following industries from VAT:
- Health and welfare
- Postal services
- Cultural services provided by non-profit organizations
Note that the standard EU requirements of VIES and INTRASTAT are also applicable in Cyprus.
A 6-7% income tax is levied on all personal income, and the employee is responsible for paying it.
Foreign Pension Income
The tax system in Cyprus provides a practical means of paying back taxes on foreign-sourced retirement income. Tax-free pension income is available up to €3.420 per year. Over this threshold, your annual pension income is subject to a flat-rate 5% tax. You can, however, also decide to include your pension in your yearly income total. In this manner, it will be taxed in accordance with the previously described progressive tax system alongside the rest of your yearly income.
You probably now see additional advantages you will be able to take advantage of once you relocate to Cyprus and start paying taxes here. It is crucial to remember that neither this article does NOT offer legal, or financial advice or information on potential tax repercussions. It also shouldn’t be treated that way. This is prepared to provide you with the basic and fundamental knowledge of the tax system in Cyprus. It is advised that you get in touch with a certified local tax adviser, or contact us if you have any questions or would like detailed financial information on your tax obligations in Cyprus.