Eltoma Property can assist you by identifying the types of tax payable in Cyprus when buying a holiday home; alongside the applicable incentives and exemptions when purchasing a primary or secondary property in Cyprus, as well as how much you will pay for income tax and other assets.
Income in Cyprus is conducted under numerous Directives. Specific incomes are taxable under only one Directive, according to how they were derived.
The Tax Directives (Categories) are as follows:
- Corporate Income Tax
- Personal Income Tax
- Value Added Tax (V.A.T.).
- Capital Gains Tax
- Special Defense Contribution Tax
- Immovable Property Ownership Tax
- Inheritance Tax
- Stamp Duty Tax
Corporate Income Tax:
All companies are liable for 12.5% annual Corporate Income tax, which is the lowest rate in the EU. An exemption however are ship management companies, which are liable to 4.25% annual Income Tax.
In regards to tax deductible (tax is levied on Net Income), corporate expenses are tax deductible with the exemption of entertainment (restaurants, hotels etc.) for which there is an annual ceiling. Following this, expenses which exceed the ceiling are not tax deductible.
Corporate losses can be brought forward for up to 5 years, therefore minimizing the tax burden of the following year.
It is important to note that corporate profits fall under double taxation – taxed at the corporate level when the company earns them and taxed again in the personal level (personal income tax) when the company administers its profits as dividends (Under Special Defense Contribution).
How is Corporate Income Tax in Cyprus paid?
Cyprus tax is based on the idea of self-assessment, relating to individuals and corporations calculating their tax liabilities themselves. Businesses have to estimate their annual income for the current year, estimate the tax payable, and pay it to the government in two instalments within the year, first on the 31st of July and the second on the 31st of December, under the temporary income tax provision.
Upon submitting audited final accounts, the audited taxable income/tax liability, should be around 70% of the estimated income declared (and paid) under provisional income tax, alternatively the company is liable to some penalties.
Personal Income Tax
Salary income earned in the Republic is taxed with brackets as follows:
| Income bracket | Tax rate |
| 0-19,500 | 30% |
| 19,501-28,000 | 30% |
| 28,001 – 36,300 | 30% |
| 36,301 + | 30% |
As seen from the table, the first €19,500 is exempt from taxation. Along with this, contributions to the Social Insurance fund of the Republic of Cyprus are tax deductible (exempted). Donations to authorised institutions are also exempt, but the individual has to provide the suitable receipts.
However, €150 can be claimed as donations without submitting receipts. Furthermore, premiums paid for life insurance and subscriptions to recognised professional bodies are exempt. Contributions to recognized retirement/provident funds could also be exempt.
How is Personal Income Tax in Cyprus paid?
It is the employer’s duty to calculate, deduct and pay the appropriate personal income tax of any employees on a monthly basis via Pay as You Earn: P.A.Y.E. tax.
P.A.Y.E. tax is payable for the current month, and can be delayed for 1 month, companies usually pay for the previous month, e.g. by the end of September they will pay for August.
Compliance:
Individuals who are liable for personal Income tax are obligated to complete and submit a form (IR1) to Inland Revenue once a year. Companies have to submit an Inland Revenue 7 (I.R.7) form, with the stated amounts or declared/paid as salaries, once a year.
Deemed dividends:
The authorities assume that 70% of corporate after tax profits will be administered to shareholders within 2 years. Shareholders who live within the Republic who receives dividends are taxed under Special Defense Contribution with a 17% burden. Therefore, irrespective of whether a corporation chooses to divide its profits as dividends, or to re-invest them, 70% of profits are taxed as dividends regardless. Cohesively, this makes the effective corporate tax rate for profitable Cyprus corporations to approximately 15% instead of the nominal rate of 12.5%. The above regulation does not apply for shareholders that are non-tax-residents in Cyprus.
Value Added Tax (VAT):
Value Added Tax (V.A.T.) is a pan European indirect tax on purchases, payable by the end users (consumers). V.A.T registered companies, also known as businesses are obligated to act as agents of the government in the sense that they collect V.A.T from their customers and pay it to the government, despite that businesses are not V.A.T taxable themselves. Additionally, it is the legal accountability of the agent to manage accurate transaction records and present V.A.T data to the government.
As of the moment, the standard V.A.T rate is 19% in the Republic of Cyprus. Corporations selling to individuals or other businesses within the Republic are compelled to increase their products/services by 19%. Following this, some transactions have a 0% V.A.T rate, eg. Basic good, rent payments etc. Various other transactions such as restaurants have a minimized rate of 9%.
For sales from a corporation based in one EU member to a customer based in a different EU member state, the standard rate of the supplier applies if the customer is an individual. However, the V.A.T rate is zero if the customer is a V.A.T registered company.
Sales to Customers who stay in a non-member state (foreign sales) are exempt from V.A.T, this normally applies only for services, not for physical goods.
How is VAT in Cyprus paid?
Every 3 months, the difference between V.A.T charged on Sales and the V.A.T incurred on purchases within the Republic is payable to the government.
Compliance:
A V.A.T declaration form is required to be submitted every quarter. (VIES) V.A.T Information Exchange System was introduced by the E.U. in order to deter and avoid the abuse of the 0% V.A.T rate on intra-community transactions also known as sales from a business based in one EU member state to a company based in another EU member state.
Following this, any V.A.T registered entity which sells goods or services to a V.A.T registered entity in a different member state is obligated to declare all the intra-community sales made during a calendar month. And so, it is the agent’s responsibility to maintain records of V.A.T registered customers’ V.A.T numbers.
See VAT Tax & Compliance Requirements for more information.
Capital Gains Tax:
There is no capital gains tax for financial instruments/securities in Cyprus, which therefore makes the island perfect to set up Financial Services Entities.
However, there is an exemption of 20% capital gains tax on real estate. In addition to this, the selling of shares of a company which owns real estate is subject to Capital Gains Tax (CGT).
An individual can be liable to an exemption from capital gains tax if they sell their first property or the property in which they reside, however there is a ceiling to the amount which can be claimed as exempt.
Special Defence Tax:
Dividends, rent income and interest earned are all taxable under special defense contribution.
Cyprus residents who earn dividends, irrespective of whether they are Cypriot nationals or not are taxed at 17%. Furthermore, dividends paid from one company to another are not taxed and also, dividends paid to non-residents are not taxed. Also, interest earned on deposits is taxed at 30%. Rent income is taxed at 3%.
Following this, there are cases where exemptions apply such as interest earned from government bonds, deposits with semi-government entities etc (e.g. housing finance organisation) is taxed at 3% and physical persons whose income is less than €7,000 per year are also exempt.
Please note that interest earned from the usual operations of a company, e.g. late payment interest on invoices, is not considered interest.
There is a special category however that relates to the case if company directors have balances with their companies, i.e. borrowed money from the company, the government believes that the Director earns 9% interest on these loans, and deemed interest is added on to their taxable income.
How is Special Defense Tax in Cyprus paid?
Corporations that pay interest, dividends are obligated to estimate the tax payable and pay it, SDC is always paid at the source.
Compliance:
Individuals should include whether they receive rent income and/or dividends in their annual income declaration form and corporations should prepare and declare dividends payment form.
The following are the international aspects of taxation in Cyprus:
- Transfer Pricing: There is no clear legislation in the Cyprus tax code. Although, arm’s length test will apply to related party transactions.
- Anti-avoidance rules are enforced. Cyprus Tax Code follows OECD Recommendations
- Double Taxation Agreements: see below.
For Double Taxation Agreements – see the Cyprus Double Taxation Treaties page.
Annual reporting obligations:
International companies in Cyprus are required to comply with the following:
Annual return:
- The annual return has to be submitted to the Registrar accompanied by the complete set of financial returns.
Financial statements:
- Every corporation must draw up a complete set of financial statements in accordance with the international financial reporting standards.
Audit:
- Every company in Cyprus is required to appoint a local qualified auditor to audit the financial records and submit an annual financial report to the authorities. Along with this, a copy of the audited financial statements alongside with the Annual Report must be submitted to the Registrar. Lastly, the financial statements are required to be prepared and submitted by December 31st of the year following the year of the registration of company.
Eltoma Property have experts on hand to assist with all taxation matters regarding property purchasing, transferal and the disposal of assets. Contact us for more information. Alternatively you can read more about Cyprus taxes by clicking the link below:
