Corporate Tax Exempt Incomes, Deductible and Non Deductible Expenses

Tax Exempt Incomes for Companies

Dividend Income: Completely exempt from corporate income tax under Article 8(20) of the Income Tax Law. Dividend income (from both Cyprus and foreign companies) is fully exempt from CIT. This exemption is a fundamental pillar of Cyprus’s holding company regime and applies without conditions such as minimum holding periods or ownership thresholds for CIT purposes (unlike Special Defence Contribution, which has separate anti-avoidance conditions).
The CIT exemption does NOT apply in two specific circumstances:
- Anti-hybrid rule: Where the dividend payment is treated as a deductible expense in the paying company’s jurisdiction
- Non-genuine arrangements: Where the paying company is in an EU blacklisted jurisdiction and the arrangement lacks genuine economic substance
While dividend income is exempt from CIT, it may still be subject to Special Defence Contribution (SDC) under certain conditions. Companies should assess both CIT and SDC treatment when evaluating dividend flows. See the SDC for Companies page for details.
Interest Income: ✦ Modified 2026 Companies’ interest income is now subject to Corporate Income Tax only (and is exempt from Special Defence Contribution). This applies to both business-related and passive interest income.
📋 Previous Provisions
Until 2025: Passive interest income (not arising from the ordinary business operations or closely related to the business) was exempt from Corporate Income Tax but subject to Special Defence Contribution at 30%.
Foreign Exchange Gains: Entirely exempt, except for those arising from trading in foreign currencies and derivatives. Companies trading in FX can elect to be taxed only on realized FX differences.
Disposal of Securities: All gains are exempt. Securities include ordinary shares, founder shares, preference shares, debentures, bonds, options on securities, participation rights in companies or other legal persons, and units in open or closed collective investment schemes (CIS).
The exemption applies regardless of:
- The holding period
- The country of incorporation of the issuing entity
- The size of the shareholding
Capital gains from securities disposals are ALSO exempt even if the underlying company holds immovable property (as opposed to share disposals under the Capital Gains Tax Law, which may be taxable if the company is property-rich).
Qualifying Loan Restructuring Gains: Potentially fully exempt, particularly for loans classified as non-performing as of 31 December 2015.
Profits from Foreign Permanent Establishments: A Cyprus company may elect to exempt from CIT all profits attributable to a foreign PE. Key features of this regime:
- If the election is made, the foreign PE’s profits are fully exempt, but any losses from that PE cannot offset Cyprus profits
- The election is irrevocable once made for a particular PE
- 2026 change: The PE exemption does NOT apply if the PE is located in a jurisdiction on the EU’s blacklist of non-cooperative jurisdictions (PE profits must be reported to Cyprus CIT)
- If the PE exemption is not claimed, foreign tax paid can be credited against Cyprus CIT
Preserved Building Rent: Entirely exempt under certain conditions.
Affordable Rent Income (Ανακαινίζω – Ενοικιάζω Scheme): ✦ New from 2026 Income from renting a residential unit at an affordable rent to qualifying tenants under the Ministry of Interior’s “Ανακαινίζω – Ενοικιάζω” scheme is fully exempt from CIT. The exemption requires that the tenants meet the income criteria set out in the scheme and are not related parties (within the meaning of Article 33), spouses, or relatives up to the fourth degree of the landlord.
Audio-visual Industry Income: Exempt up to 50% of taxable income for persons active in film, series, and other audio-visual programme production in Cyprus. The exempt amount is additionally capped at 35% of eligible expenses as approved by the competent authority under the relevant scheme.
Intellectual Property Disposal — Capital Gains: Gains from the disposal of intellectual property that is held as a capital asset (not a trading asset) by a company that has not claimed the old IP box deduction under Article 9(1)(ε) are excluded from taxable income, as they are capital in nature and Cyprus does not impose capital gains tax on movable assets. For companies using the Cyprus IP Box regime (Article 9(1)(κ)), disposal gains on qualifying intangible assets benefit from an 80% deduction (see Deductible Expenses below), resulting in an effective CIT rate of 3% at the current 15% rate. IP disposals generating trading income outside the IP box are taxable at the full CIT rate.

Deductible Expenses for Companies

All expenses incurred wholly and exclusively for the production of income are deductible in calculating the taxable income of a company, including:

Interest on Business Assets: Incurred for acquiring assets used in the business is fully deductible.
Interest on Shares: Interest expense incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company is deductible for income tax purposes provided that the subsidiary does not own, directly or indirectly, any assets that are not used in the business. If the subsidiary does hold assets not used in the business, the deduction is restricted to the amount of interest expense attributable to the assets used in the business. This rule applies to acquisitions of subsidiaries from 1 January 2012, and an interest limitation rule is in effect in accordance with the EU Anti-Tax Avoidance Directive (from 1 January 2019).
Notional Interest Deduction (NID): Granted on new equity introduced to the company from 1 January 2015 onwards. The NID is limited to 80% of the taxable profits and calculated using a reference rate plus a 5% premium. Read more here.
IP Regime 80% Deduction: An 80% deduction is applied to the net profit derived from royalty income, embedded income, and other qualifying income within the Cyprus intellectual property (IP) box, as determined by the modified nexus fraction. This benefit applies to income arising from qualifying intangible assets from 1 July 2016. Qualifying intangible assets may be legally or economically owned and include patents, copyrighted software, utility models, plant and genetic material protections, and orphan drug designations. Marketing-related intangible assets, such as trademarks, are excluded.
Maintenance of Preserved Buildings: Deductible, with the amount varying by the size of the building.
Donations to Approved Charitable Organisations: Fully deductible.
Cultural Institution Donations: Donations to approved cultural institutions (πολιτιστικά ιδρύματα) as approved by the Deputy Minister of Culture are deductible up to €50,000. Qualifying institutions include public law entities and non-profit associations or foundations whose primary purpose is non-profit cultural research, study, or organisation of cultural activities.
Employee Fund Contributions to Approved Funds: Entirely deductible.
Bad Debts: Trade receivables written off as irrecoverable are deductible in the year of write-off, provided the Commissioner is satisfied they became irrecoverable during that year and were definitively written off in the accounting records. A specific provision for doubtful debts is also deductible to the extent the Commissioner is satisfied that the receivables in question are, or will ultimately prove to be, irrecoverable. Any amounts subsequently recovered are taxable income in the year of recovery.
Research and Development Expenses: Fully deductible, with an additional ✦ Extended 2026 20% super-deduction for tax years 2025 to 2030 (previously 2022-2024). This additional deduction cannot be combined with the Cyprus IP regime deduction.
📋 Previous Provisions
Until 2024: Additional 20% deduction for R&D expenses was available for tax years 2022-2024 only.
Innovative SME Investment: Deductible up to 30% of the invested amount, capped at €150,000, valid until 31 December 2026. Direct or indirect investment through funds or trading platforms is eligible, provided the shares are held for at least three years.
Expenditure on Film Infrastructure and Technological Equipment: Deductible up to 20%, subject to specific conditions.
Taxed Employee Benefits: Benefits provided to an employee and/or their family members that have been taxed in the hands of the employee are fully deductible.
Business Entertainment Expenses: ↑ Increased 2026 Deductible within the limits of 1% of gross income or €30,000 (whichever is lower).
📋 Previous Provisions
Until 2025: Entertainment expense ceiling was €17,086 (lower of 1% turnover or €17,086).
Share Floating Expenses: ✦ New from 2026 Expenses relating to the flotation of shares are deductible up to €300,000.
Cost-of-Living Allowance (COLA) — 200% Super Deduction: ✦ New from 2026 Employers paying cost-of-living allowance to employees may claim a deduction equal to 200% of the COLA payments made in the preceding tax year. This means for every €1 of COLA paid, the employer can deduct €2 from taxable income.
Key conditions and mechanics:
- Trade union agreement required: The COLA must be paid under a collective agreement between the employer and a registered trade union, or under an enterprise-level agreement covering all employees
- First-year limitation: In the first year of a new COLA agreement, only the standard 100% deduction applies. The 200% super deduction is available from the second year onwards
- Prior-year basis: The 200% deduction is calculated on COLA payments made in the year preceding the tax year — i.e., the deduction claimed in the 2027 return is based on COLA paid in 2026
- All employees covered: The COLA must apply uniformly to all eligible employees under the agreement, not selectively
Worked Example: A company pays €50,000 total COLA to its employees in 2026 under a collective agreement entered in 2025. In its 2027 tax return (for tax year 2027), it can claim a 200% deduction = €100,000. At a 15% CIT rate, this yields a tax saving of €15,000 on €50,000 of actual COLA costs — an effective 30% subsidy. Note: In the 2026 return, only the standard 100% deduction (€50,000) applies as it is the first year of the agreement.
Intangible Asset Amortization: ✦ Modified 2026 Indefinite-life intangibles are now assigned a 20-year useful life for amortization purposes, providing certainty on deduction timing.
📋 Previous Provisions
Previously: Indefinite-life intangibles were treated without a prescribed useful life, creating uncertainty in amortization schedules.
Energy Efficiency Capital Allowances: ✦ Extended 2026 Extended to 2030 (accelerated depreciation on energy efficiency improvements and electric vehicle investments).
Agricultural Machinery Depreciation: ✦ Extended 2026 Accelerated depreciation for agricultural and livestock machinery continues to be available.
Wear and Tear Allowances: Companies are allowed to deduct wear and tear allowances on assets used in the business from their taxable income. See rates on our dedicated page for Wear and Tear Allowances.

Non-Deductible Expenses for Companies

Non-Business-Related Expenses: Fully non-deductible if not incurred wholly and exclusively for income production.
Unsupported Expenditures: Non-deductible if lacking proper documentation.
Private Vehicle Expenses: Entirely non-deductible, except after seven years from the vehicle’s acquisition.
Interest on Private Motor Vehicle Acquisition: The entirety of interest payable or deemed payable for the purchase of a private motor vehicle is non-deductible, regardless of its use within the business. This exclusion also applies to interest for other assets not used in the business. The restriction is lifted after seven years from the acquisition date of the relevant asset.
Wages and Salaries with Unpaid Contributions: Remuneration relating to services rendered within a tax year is non-deductible if the corresponding social insurance and other contributions have not been settled within the same year they are due. Should these contributions be paid within the subsequent two years, such wages and salaries become deductible in the tax year in which the payment is made.
Interest and Royalties to Low-Tax Jurisdiction Related Parties: ✦ New from 2026 Under Article 11(17) of the Income Tax Law, interest and royalty expenses paid or accrued to a related entity are non-deductible where the recipient entity:
- Is tax resident in a low-tax jurisdiction (LTJ), or
- Is incorporated or registered in an LTJ and has no tax residence in any normal (non-LTJ) jurisdiction — capturing entities that have no legitimate tax home anywhere
Related party condition: This non-deductibility applies only where the payer and recipient are connected through a direct or indirect ownership interest exceeding 50% of voting rights, share capital, or profit entitlement (in any direction, or via a common owner). Arm’s length payments to unrelated LTJ entities fall outside the scope of this provision.
The non-deductibility overrides the general deduction principle — it applies even if the payment was incurred wholly and exclusively for business purposes.
A low-tax jurisdiction is defined as a jurisdiction with a statutory CIT rate below 50% of the Cyprus rate. With Cyprus CIT at 15% from 2026, the current LTJ threshold is below 7.5%.
Key exceptions: (1) Interest on securities listed on a recognised stock exchange is excluded where the paying company could not reasonably be expected to know the recipient is a related-party LTJ entity. (2) The rule does not apply where withholding tax has already been applied under Articles 21 or 21A ITL. Companies should verify the jurisdiction classification and ownership structure for all related-party recipients of interest and royalty payments.
Excess Borrowing Costs (EBITDA Rule): Under Article 11(16) ITL (implementing the EU Anti-Tax Avoidance Directive), a company’s excess borrowing costs — broadly, net interest expense — that exceed 30% of tax-adjusted EBITDA (referred to in the law as ΕΠΤΦΑΠ) are non-deductible for CIT purposes in that year.
- Safe harbour: Excess borrowing costs up to €3,000,000 per year (per company, or per Cyprus group) are always deductible, regardless of the 30% EBITDA ratio
- Carryforward: Disallowed excess costs can be carried forward and deducted in the following 5 years (subject to the same 30% limit). Unused interest capacity (where actual costs are below 30% EBITDA) can also be carried forward for 5 years
- Group application: For Cyprus group members, the rule is applied on a consolidated Cyprus-group basis
- Exemptions: Standalone entities (not part of a consolidated group, with no associated enterprises or PEs) and regulated financial organisations are exempt from this rule. Pre-17 June 2016 loans are grandfathered
- Equity escape: A company that is part of a consolidated accounting group may elect full deductibility of excess borrowing costs if its equity/total assets ratio is equal to or within 2 percentage points of the group ratio
Practical impact: This rule primarily affects companies with significant third-party or intra-group debt. Cyprus holding or financing companies with interest expense should model the 30% EBITDA cap and €3M safe harbour when planning capital structures. Tax-exempt income (such as dividends and securities gains) is excluded from the EBITDA base, which can reduce the cap for holding companies.
Rent Payments – Non-Electronic: ✦ Non-Deductible from 1 July 2026 Rent payments that are not made through electronic means (bank transfer, card, or electronic payment) are not tax-deductible from 1 July 2026 onwards. All rent payments must be evidenced electronically.
Attention: This rule applies from 1 July 2026. Companies must ensure all rent payments are made electronically and properly documented to maintain deductibility.
Stamp Duty: ✓ Abolished Stamp duty has been fully abolished from 1 January 2026. No stamp duty applies to any transactions.

Disclaimer

Please note that the information provided here is for general guidance only and does not constitute professional tax advice. Tax laws and interpretations are subject to change, and individual circumstances can significantly affect tax obligations and benefits.

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