The Corporation Tax Rate in Cyprus is 12.5%. A tax resident of Cyprus will consequently be taxed on its profits arising from Revenue – Expenses. Any income from in Cyprus, or abroad, will be subject to income tax except specific sources of income such as Dividend Income taxed at 0%. A non-Cyprus tax resident is a Cyprus Company which has no management and control in Cyprus meaning all decision are taken outside Cyprus. In addition, an overseas Company which has a PE (Permanent Establishment) in Cyprus only incomes coming/arising from sources in Cyprus will be taxed in Cyprus.

The Cyprus Tax legislation provides for a number of exemptions, for example, varied types of incomes, profits, and gains (see the Cyprus Tax Outlook 2022 for more information).

Another important and interesting exemption is the 80% exemption for IP related sources of income again subject to specific conditions.

If a Company is subject to the IP Box, the corporation Tax rate (effective) is 2.5%. IP Box Regime is a corporate tax regime practiced in many countries. It is used to stimulate research and development. However, Cyprus has the lowest IP tax rate in the European Union. The source of income for IP Box Companies is revenues from licenses, royalties, sale or transfer of qualified IP assets.

Interest income

• Business activity that earns Interest.
• Interest on the ordinary activities of a business and Interest earned by open or close ended investment schemes will not be considered for defense contribution.

All residents of the Republic of Cyprus, as a result, will have to pay defense contributions on certain sources of their income;

• Government Savings Certificates that earns individuals Interest.
• Government Bonds that earned an individual Interest.
• Interest earned by an approved provident Fund.
• Social Insurance Fund that earned interest.
• Rental income, if it is less than 25%.

This applies to the profits of Cypriot Tax resident companies.

As per the Special Defence Contribution Law, Companies which do not distribute at least 70% of their profits after tax, as defined by the relevant tax law, within two years after the end of the relevant tax year, will be deemed to have distributed as dividends 70% of these profits.

The amount of deemed distribution is reduced by any actual dividends paid out of the profits of the relevant year at any time. This special contribution for defence is payable by the Company for the account of the shareholders.

Deemed Distribution of Dividends is applied when the ultimate beneficial shareholders are both Cyprus tax residents and Cyprus domiciled.