The advantageous Tax System in Cyprus is attracting several people to relocate in Cyprus and even more companies to establish branches and main offices in Cyprus. Nowadays Cyprus is the most ideal location for holding companies, in the EU. In the effort to attract offshore companies to establish in the island, the Government introduced an ensemble of tax incentives by which Cyprus had become a financial centre in Europe in the ‘70s. With the negotiations for the accession to the EU, which started in 1990, Cyprus Tax System had to come in line with certain requirements and comply with OECD initiatives against harmful tax practices. The main changes in the Tax legislation, applied on 1st January 2003.
Despite Cyprus Tax Law has been harmonized the respective legislation of the other European countries, it still maintains low tax rates. Those who qualify or choose to become tax residents in Cyprus can save up a significant amount of money, depending on each person’s circumstances, instead of paying higher taxes at your home country. However the tax rates in Cyprus rank amongst the lowest in Europe. Specifically the Tax System in Cyprus is progressive, with the rate growing according to the income.
Every person who lives in Cyprus for more than 183 days per every tax year (1st January – 31st December) is liable to pay tax on their worldwide income, with exception regarding income from employment from a foreign source. Any income derived from property rentals in Cyprus is subject to tax and also to Special Contribution for Defence is deductedon passive income such as rentals, dividents e.t.c, with rates fluctuating between 3% to 15%. Non-residents are exempt from this tax. Individuals are liable to pay tax on income as employees and as self-employed persons. A person resident in another country and employed in Cyprus should only pay tax on income earned in Cyprus. Self-employed Taxpayers are obligated to make payments on advance, which will eventually be offset on filing an annual report. Also, employers are obligated each month to deduct the amount of tax and national insurance, from the salaries of any employee liable to pay tax. The rates up to date for the income tax are shown on the following table:
| Tax Rate (%) | Tax base (Euro) |
| 0 | Up to 19,500 |
| 20% | 19,501-28,000 |
| 25% | 28,001-36,300 |
| 30% | 36,301 and over |
Individuals who are physically present in Cyprus for less than 183 days in a calendar year are taxable in Cyprus on income derived from sources and employment exercised in Cyprus only. A non-resident person taking up employment and becoming resident in Cyprus is given a 20% tax-fee allowance on employment income for the three years that follow the year of becoming resident in Cyprus.
When it comes to companies, the basic tax rate for all companies resident in Cyprus is 10% and 25% for semi-government bodies. Companies that are registered but not resident in Cyprus are only taxed on their Cyprus source income. The rate of 10% is the lowest corporate tax rate in Europe. The good news is that both local and foreign companies are paying a uniform tax rate, exchange controls and restrictions on importing and exporting money have been lifted and all EU enterprises are free to do business in Cyprus. Further more, shipping companies that are sailing under the flag of the Republic of Cyprus are not paying any tax on profits or dividends paid.
Dividend income, irrespective of its source, is exempt from tax and also Special Contribution for Defence (15%), as long as a minimum of 1% of the share capital of the overseas participation is being held by the Cyprus holding company. The exemption is not applicable in case:
a) The overseas company that pays the dividend is directly or indirectly participating in more than 50% of the activities which create investment income, and
b) The company paying the dividend is subject to tax which is substantially lower (under 5%) than the tax payable by the Company receiving the dividend in Cyprus.
Any profit derived from the disposal of securities, regardless their nature (revenue or capital), is not subject to tax. By law, securities include shares, bonds, founder’s shares, debentures, and other securities of companies or other legal persons, as well as options over such securities. Cypriot companies are not liable to pay any tax due to disposal of real estate and other assets that are held outside Cyprus, as capital gains tax applies only on gains from disposals of immovable property situated in Cyprus or on unlisted shares of a company which owns immovable property in Cyprus.
A wide network of double tax treaties between Cyprus and more than 40 countries including countries in Europe, North America, as well as Russia and China, is established in order to secure reduced or nil rates of withholding tax on dividends, interest and royalties, as well as the avoidance of double taxation of residents deriving income from the other treaty country.
With so many advaqntages offered by the Tax System in Cyprus it is not a surprise why so many people choose Cyprus to rehabiliate and so many companies deside to become resident in Cyprus!
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