Cyprus – Corporate Taxes Summary
Corporate income tax (CIT)
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%.
As of 1 January 2019, CFC rules apply, i.e. non-distributed profits of CFCs directly or indirectly controlled by a Cyprus tax resident company may become subject to tax in Cyprus (certain exceptions may apply).
The Cyprus CIT law explicitly provides for a number of exemptions for many and varied types of incomes, profits, and gains.
Special Defence Contribution (SDC)
SDC is imposed only on non-exempt dividend income, ‘passive’ interest income, and rental income earned by Cyprus tax resident companies and Cyprus PEs of non-Cyprus tax resident companies. Non-tax residents of Cyprus with non-Cyprus PEs are exempt from SDC.
Dividend income may be exempt from SDC, subject to participation exemption criteria.
Interest received by companies in the ordinary course of their business, including interest closely connected to the ordinary course of business, is also considered as ‘active’ interest income and is only taxed under CIT (after deducting allowable expenses) at the standard CIT rate of 12.5%.
When companies receive interest that does not satisfy the conditions prescribed immediately above, the interest is considered to be ‘passive’ interest income, which is subject to SDC (without expense deduction) at the rate of 17%. Such ‘passive’ nature interest is, however, exempt from CIT.
As of June 2022, ‘passive’ interest income earned from Cyprus government bonds, Cyprus and foreign corporate bonds listed on a recognised stock exchange, and bonds issued by Cyprus state organisations or by Cyprus or foreign local authorities listed on a recognised stock exchange shall be subject to SDC at the reduced rate of 3%. Moreover, as of 8 June 2022, Cyprus state organisations and local authorities, pension funds, provident funds, and the Cyprus Social Insurance Fund will be subject to SDC at the reduced rate of 3% on all interest income that they earn.
Interest received by close-ended or open-ended collective investment schemes (CISs) is never subject to SDC as it is considered as ‘active’ interest income and is subject to CIT.
Gross rental income reduced by 25% is also subject to SDC at the rate of 3% (i.e. effective rate of 2.25%) in addition to CIT (after deducting allowable expenses) of 12.5%.
On 13 September 2023 the CTA issued a Circular pursuant of which rental income from self-catering accommodation that is rented out via online platforms will be treated, subject to certain conditions, as business income (therefore, subject to Income Tax and exempt from Special Defence Contribution).
For ship-owning companies, the profits derived by the owner of a ship registered in the European Union or European Economic Area (EEA) (as well as other foreign jurisdictions, subject to conditions) from its operation/charter out are fully exempt from all direct taxes. The term ‘owner’ includes a bareboat charterer of a non-Cyprus flag vessel parallel registered in Cyprus. A similar exemption applies to charterers and ship managers.
Bareboat charter out agreements remain eligible for tonnage tax, with restrictions introduced for bareboat charter agreements to third parties.
Instead of CIT, ship owners, charterers, and managers pay tonnage tax on the net tonnage of the ships they own, charter, or manage. For shipowners there are also incentives provided for environmentally friendly vessels that can lead to a lower (up to 30%) tonnage tax liability. In addition, there is no tax on dividends paid at all levels of distribution by the above persons out of profits subject to tonnage tax and there is no taxation on the sale or transfer of a ship, share in a ship, or shares in a ship-owning company and their distributions. The same legislation also provides for income tax exemption of the salaries and benefits of the captain, the officers, and the crew aboard Cyprus and EU/EEA qualifying flag vessels engaged in qualifying activities.
This treatment applies until 31 December 2029 and is compulsory for Cyprus flag ship owners, but optional for other ship owners, charterers, and ship managers.
Local income taxes
There are no local government taxes on income in Cyprus.