Corporate Tax Exempt Incomes, Deductible and Non Deductible expenses

Tax Exempt Income for Companies:

  • Dividend Income: Completely exempt, unless such dividends are deductible from the paying company’s taxable income outside of Cyprus.
  • Interest Income: Fully exempt, provided it’s not part of the business’s ordinary operations or closely related to the business. Such interest is treated as passive interest and is subject to Special Defence Contribution.
  • 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” encompass shares, bonds, and other instruments, whether Cypriot or foreign. The disposal of collective investment scheme participations is included in the definition of Securities.
  • Qualifying Loan Restructuring Gains: Potentially fully exempt, particularly for loans classified as non-performing as of 31 December 2015.
  • Profits from Foreign Permanent Establishments: Fully exempt if certain criteria are met, with the option to elect for taxation.
  • Preserved Building Rent: Entirely exempt, under certain conditions.
  • Audio-visual Industry Income: Exempt up to 50%, provided specific conditions are fulfilled.
  • Intellectual Property Rights Disposal: Fully exempt.

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: Incurred for acquiring assets used in the business is fully deductible.
  • 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.
  • Maintenance of Preserved Buildings: Deductible, with the amount varying by the size of the building.
  • Donations to approved charitable organisations: Fully deductible.
  • Political Donations: Deductible up to €50,000 subject to conditions.
  • Employee Fund Contributions to approved funds: Entirely deductible.
  • Research and Development Expenses: Fully deductible, with an additional 20% deduction for the years 2022 to 2024. This additional deduction cannot be combined with the Cyprus IP regime deduction.
  • 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.
  • Wear and tear allowances: Companies are allowed to deduct wear and tear allowances on assets used in the business from their taxable income. See the 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.
  • Business Entertainment Expenses: Deductible within the limits of 1% of gross income or €17,086 (whichever is lower).
  • 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.
  • Interest on Shares of Subsidiaries: Interest incurred for acquiring shares in a fully owned subsidiary is deductible only if the subsidiary does not possess any non-business-related assets. If it does hold such assets, the interest expense deduction is limited to the proportion of assets utilized in the business. This condition applies to shares acquired from 1 January 2012.
  • 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.

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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For personalized tax advice tailored to your specific situation, we strongly recommend consulting with a qualified tax professional. Our team is equipped with the expertise to navigate the intricacies of Cyprus tax law and provide you with customized solutions. Contact us to ensure that you are making the most informed decisions for your tax-related matters.

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