The Cypriot tax system is particularly attractive to international citizens and companies due to its flexibility and favorable tax residency criteria. A thorough understanding of these tax fundamentals is crucial for leveraging tax benefits as well as understanding and fulfilling obligations in this Mediterranean state. This article provides an in-depth insight into Cyprus’ tax framework, including the taxation of individuals and companies, capital gains tax, VAT registration and the benefits of setting up a business on the island.
Tax residency in Cyprus
Tax residency is the key concept in the Cypriot tax system. Individuals who are tax resident in Cyprus are subject to tax on their worldwide income. This includes income from work, certain benefits in kind and income from Cypriot and international sources. In contrast, persons who are not resident in Cyprus for tax purposes are only taxed on certain income that originates in Cyprus.
The 183-day rule
A sound understanding of these tax bases is crucial in order to take advantage of tax benefits as well as to understand and utilize obligations in this Mediterranean country. This provision is based on physical presence and facilitates the determination of tax residency.
The 60-day rule
Since January 1, 2017, Cyprus has offered an additional method for determining tax residency in the form of the “60-day rule”. This rule targets individuals who do not spend more than 183 days in any other state, are not considered tax resident in any state, reside in Cyprus for at least 60 days, and have substantial ties to the country, such as business activities, employment, or a managerial position in a Cyprus-based company. In addition, there must be a permanent residential property in Cyprus that is either owned or rented.
Calculation of days of stay
When determining tax residency under the 183-day and 60-day rules, specific rules apply for calculating the number of days of residence:
- The day of departure from Cyprus counts as a day of stay outside Cyprus.
- The day of arrival in Cyprus counts as a day of stay in the country.
- Arrival and departure on the same day in Cyprus counts as one day’s stay in the country.
- Leaving and entering the country on the same day counts as one day’s stay outside Cyprus.
These regulations offer international citizens and entrepreneurs a flexible basis for effectively planning and optimizing their tax residency. The clear criteria and the possibility of becoming a tax resident through the 60-day rule without having to spend the majority of the year in Cyprus make Cyprus an attractive location for those who want to legally minimize their tax burden.
Understanding income tax in Cyprus for individuals
Personal income tax in Cyprus follows a progressive rate system that aims to ensure fair taxation according to the financial capacity of taxpayers. This progressive approach ensures that higher incomes are subject to a higher tax rate, thereby achieving a fair distribution of the tax burden. Below you will find a detailed analysis of the current income tax rates in Cyprus and information on the taxation of pension income and widows’ and widowers’ pensions.
Current income tax rates in Cyprus
The personal income tax structure is as follows:
- 0% tax rate for income up to €19,500. This income range is completely tax-free.
- 20% tax rate is applied to income in the range of €19,501 to €28,000.
- 25% tax rate applies to income between €28,001 and €36,300.
- 30% tax rate is levied on income from €36,301 to €60,000.
- 35% tax rate applies to income exceeding €60,000.
These tax rates show that the Cypriot tax system is designed to relieve the burden on people with lower incomes through an allowance and to tax higher incomes more heavily.
Special features
- A flat tax rate of 5% is applied to pension incomes exceeding €3,420. A flat tax rate of 5% is applied to pension incomes exceeding €3,420.
- Widow’s or widower’s pensions from Cypriot sources are subject to a special tax rate of 20% for amounts above the €19,500 allowance. In this case, it is also possible to apply the regular income tax rates instead.
Income tax Cyprus for companies
Tax resident companies in Cyprus are taxed on their worldwide income. This covers all income earned in Cyprus and abroad and ensures that companies pay their fair share of tax regardless of where they earn their income.
When is a company considered tax resident in Cyprus?
A company is deemed tax resident in Cyprus if it is managed and controlled within the country. From 2023, a company incorporated in Cyprus will automatically be considered tax resident in Cyprus, provided it is not considered tax resident in any other jurisdiction. This regulation aims to increase tax transparency and define residency more clearly.
How are non-resident companies taxed in Cyprus?
Non-resident companies are taxed only on their income derived from a business activity carried out through a permanent establishment in Cyprus and on certain income derived from sources in Cyprus. This regulation ensures that companies are taxed for the economic activities they conduct within Cyprus’s borders.
Controlled foreign companies (CFC)
The rules for controlled foreign companies (CFCs) have applied in Cyprus since January 1, 2019. These rules state that undistributed profits of CFCs that are directly or indirectly controlled by a Cyprus tax resident company may be taxable in Cyprus. However, there are certain exceptions that can minimize the tax burden for companies.
Cyprus & DBA
yprus permits the crediting of taxes paid abroad against the Cyprus corporate tax liability. This avoids double taxation of income and promotes international business activities.
Implementation of the EU directive on global minimum taxation in Cyprus
As an EU member state, Cyprus will transpose the EU directive on global minimum taxation for multinational groups and large domestic groups into its national law. This will take effect from January 1, 2024 and is aimed at
ensure that companies worldwide make a fair tax contribution.
What is global minimum taxation?
The introduction of global minimum taxation is also known as “Pillar Two” of the OECD/G20 initiative to combat base erosion and profit shifting (BEPS). The minimum tax sets a worldwide minimum tax rate of 15% for multinational companies with an annual turnover of more than 750 million euros.
The GloBE rules consist of two main mechanisms:
- The Income Inclusion Rule (IIR): This obliges parent companies to pay a top-up tax if their foreign subsidiaries are taxed below the minimum tax rate.
- The Undertaxed Profits Rule (UTPR): This serves as a safety net to the IIR by allocating the taxing rights for income taxed below the effective tax rate of 15% to other entities within the group in jurisdictions other than that of the parent company.
Cyprus has therefore decided to introduce a Qualified Domestic Top-Up Tax (QDMTT) from January 1, 2025 for annual consolidated sales of more than EUR 750 million, which will allow the additional tax to be levied within its own jurisdiction instead of transferring the collection to a foreign jurisdiction.
Capital gains tax in Cyprus
Capital Gains Tax (CGT) constitutes a significant aspect of the Cypriot tax system. It is levied on the profit from the sale of immovable property located in Cyprus. This also includes gains from the sale of shares in companies that directly own such immovable assets. As of December 17, 2015, shares in companies that indirectly own immovable assets in Cyprus and whose market value derives at least 50% from such immovable assets are also subject to capital gains tax. When shares are sold, only the portion of the gain attributable to immovable assets in Cyprus is taxed.
VAT registration in Cyprus
Who needs to register?
Every business with a VAT-liable turnover that has exceeded €15,600 in the past 12 months or is expected to do so within the next 30 days is required to register. Companies below this threshold or those that offer VAT-exempt services but wish to claim input tax deduction can register voluntarily.
Registration is also mandatory for the intra-Community acquisition of goods over €10,251.61 or for the provision of services for which the recipient is liable for VAT under the reverse charge rules.
Registration procedure VAT registration is carried out by submitting the application form provided.
VAT registration for foreigners
Since August 20, 2020, non-residents of Cyprus must also register if they carry out VAT-liable activities in the country or if such activities are expected. There is no VAT exemption for this group.
Non-established persons who only carry out activities with a VAT rate of 0% can apply for exemption from registration.
VAT declaration and refund
VAT returns must be submitted electronically and on a quarterly basis. The VAT payment must be made by the 10th day of the second month after the end of the quarter. It is possible to apply for an alternative tax period, but this requires the approval of the tax commissioner.
From August 20, 2020, the payment of VAT credits and related interest can be postponed if the income tax returns were not submitted on time. The refund will only be made once all tax obligations have been fulfilled. The right to apply for a refund of a VAT credit is limited to six years.
Application of the reverse charge mechanism
The intra-Community reverse charge mechanism is applied to certain business transactions and is part of the efforts to simplify and harmonize VAT regulations in Cyprus. This ensures that both domestic and foreign companies have clear guidelines for their VAT obligations.
Requirements for setting up a company in Cyprus
Anyone wishing to set up a company in Cyprus is faced with certain requirements. The key point is that the main business office, i.e. the hub of business decisions, must actually be located on Cypriot soil. In addition, the following conditions must be observed for a successful business start-up:
- A local managing director who actively intervenes in the operational business
- Generation of active income through trading activities, services or comparable activities
- A bank account held in Cyprus for the limited liability company
- Registration of an employer identification number
- Company-owned business premises in Cyprus
- Telephone, fax and Internet connections in the name of the company
- Telephone availability under company name
- Implementation of financial and payroll accounting
- Employment of own employees who contribute to value creation
- Acquisition of a VAT identification number
Who is a company formation in Malta suitable for
Setting up a company in Cyprus is particularly suitable for people who run their business remotely, such as freelancers, online marketing specialists, FBA traders, as well as those involved in intellectual property. Individuals working as day traders, authors, youtubers or digital nomads will also find attractive conditions in Cyprus.
The set-up costs are low compared to other EU countries, and in conjunction with tax residency on the island, there are significant tax advantages. In order to take full advantage of Cyprus’ favorable tax rates, the appointment of a local managing director is crucial.
The tax savings compared to high-tax countries are particularly evident in the case of high annual profits. But even with moderate profits, setting up a company in Cyprus can be worthwhile, provided you make the most of all the tax and operational advantages. Both the current company costs and personal living costs and tax burdens should be taken into account.
Possible legal forms in Cyprus
Cyprus is based on British company law. The following legal forms are available:
- Limited Liability Company by Shares: Private or Public
- Limited Liability Company by Guarantee: With or without share capital
- General Partnership (OG)
- Limited Partnership (KG)
- Sole Proprietorship
- Societas Europaea (SE)
Bank account in Cyprus
The financial crisis has left deep scars in Cyprus, particularly through the dramatic “bail-in” of 2013, in which bank deposits of over 100,000 euros were partially expropriated. This event severely shook confidence in the location once regarded as a banking haven.
When a bank account in Cyprus makes sense
Today, it is no longer a matter of course to regard accounts in Cyprus as particularly secure. Nevertheless, there are still valid reasons for opening a bank account on the island. For example, a bank account in Cyprus can be useful for providing the necessary proof of assets when setting up a company or as a local account for day-to-day transactions if you relocate to Cyprus.
The days when Cypriot banks were often used to open accounts for shell companies in offshore jurisdictions are over. Since June 2018, the Central Bank of Cyprus has instructed commercial banks to terminate banking relationships with no real business activity.
Nevertheless, it remains possible for companies that actually operate in Cyprus, such as a Cyprus Limited with local business operations, to open both private and business bank accounts. This option is still available and can be useful for day-to-day business and living on the island.
The Role of the Managing Director in Cyprus & Taxation
The company management and the residence of the managing director are decisive for the tax classification of a company in Cyprus. A local managing director is required to benefit from the preferential tax rate of 12.5%. While the domicile of the shareholders is more flexible, it is important for tax efficiency to take into account the legal provisions of the respective home country.
For shareholders from Germany or Austria, it is mandatory to be able to prove that they are resident in Cyprus for tax purposes. This includes active local management, established business operations and local revenues. Mere representation by third parties is insufficient.
A business structure in Cyprus includes:
- A local, actively involved managing director.
- A business account for the company.
- An employer identification number and proper bookkeeping.
- Own business premises and infrastructure.
- Own employees who contribute to business activities.
- A local sales tax identification number.
- Business relations within Cyprus.
The use of a straw man should be avoided in order to avoid legal difficulties with the tax authorities. Instead, we recommend transparent and legally compliant management.
Shareholders resident in Cyprus already benefit from tax residency with a minimum stay of 60 days per year. This applies on condition that they are not deemed to be resident for tax purposes in any other country. This regulation offers attractive tax advantages for freelancers and small companies in particular.
Conclusion
Cyprus offers numerous advantages as a tax location for private individuals and companies wishing to legally minimize their tax burden. The combination of flexible tax residency rules, attractive income tax rates for individuals and companies, as well as progressive rules to avoid double taxation and implement global minimum taxation, makes Cyprus an attractive location for those seeking optimized tax planning. In addition, the clear requirements for VAT registration and the requirements for company management make it easier to decide to set up a company on the island. However, it is important to carefully examine the tax framework and, if necessary, seek expert advice in order to take full advantage of the benefits and ensure compliance. With the right strategy, Cyprus can significantly reduce your tax burden while providing a solid foundation for your business growth.
In a world characterized by complex legal and tax regulations, the provision of specialized knowledge and tailor-made solutions in this context is a core value that our firm offers its clients. Expert advice enables DW&P to differentiate and stand out in the following areas:
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