Corporate Taxation in Cyprus
Cyprus Full Tax Exemption
Non-Tax Resident Companies

Cyprus is known for its favorable corporate tax regime, offering a low corporate tax rate and several exemptions to attract international businesses, holding companies, and investors. Here’s an overview of how corporate taxation works in Cyprus, and under which conditions a company can qualify for full tax exemptions on certain types of income.

Corporate Tax Rate in Cyprus

The standard corporate income tax rate in Cyprus is 12.5%, one of the lowest in the European Union.
This tax applies to the worldwide income of companies that are tax residents of Cyprus (i.e., companies managed and controlled from Cyprus).

Full Tax Exemption – Qualifying Income and Situations

While the general corporate tax rate is 12.5%, several types of income are fully exempt from taxation under Cyprus’s tax regime. These exemptions make Cyprus a popular jurisdiction for holding companies, shipping companies, and investment funds. The main categories of income that can qualify for full tax exemption are:

Dividend Income Exemption

Dividend income received by a Cyprus tax-resident company from another company (domestic or foreign) is generally fully exempt from corporate tax.

Conditions for exemption:
The dividend-paying company must either:
Not derive more than 50% of its income from investment activities (this is the “passive income test”), or
Be subject to taxation of at least 6.25% in its home country.
If these conditions are not met, the dividend may be subject to Special Defense Contribution (SDC) at 17%, but not to corporate tax.

Profits from Foreign Permanent Establishments (PE)

Profits from a foreign permanent establishment (PE) of a Cyprus company are exempt from corporate tax in Cyprus if:

The PE is subject to taxation in its country of operation.
Less than 50% of the PE’s income is derived from passive income (like dividends or interest).
Companies may choose to be taxed in Cyprus on their foreign PE profits if this results in a lower tax burden.

Capital Gains from the Disposal of Securities

Profits from the sale of shares (as well as bonds, debentures, and other securities) are exempt from both corporate tax and capital gains tax in Cyprus.
This exemption applies regardless of whether the securities are in Cyprus or abroad, making Cyprus a popular jurisdiction for holding companies.

Foreign Exchange (FX) Gains

All foreign exchange gains (realized or unrealized) are exempt from corporate tax, unless related to trading in foreign currencies or derivatives.
This is a significant benefit for companies engaged in international trade or foreign exchange transactions.

Interest Income Exemption

Interest income derived from ordinary business activities or closely connected to the company’s main operations is taxable at the normal corporate tax rate.
However, passive interest income (e.g., interest from bank deposits) is exempt from corporate tax but may be subject to 30% Special Defense Contribution (SDC).

Shipping Companies: Tonnage Tax System

Shipping companies operating under the Cyprus tonnage tax system are exempt from corporate tax on profits derived from the operation or management of ships in international waters.
Instead of corporate tax, they pay tonnage tax based on the net tonnage of their vessels, which is generally much lower than corporate tax.
This exemption applies to Cyprus-registered ships and foreign-registered ships managed from Cyprus.

Reorganizations and Mergers

Profits or gains arising from approved corporate reorganizations (such as mergers, demergers, and transfers of assets) are fully exempt from corporate tax in Cyprus.

Intellectual Property (IP) Income

Under Cyprus’s IP Box regime, 80% of qualifying profits from the exploitation of intellectual property (e.g., patents, copyrights) are exempt from corporate tax.
This effectively results in an effective tax rate of 2.5% on qualifying IP income, though this is not a full exemption.

Tax Residency and Management Requirements

For a company to benefit from these tax exemptions, it must generally be tax resident in Cyprus. A company is considered a Cyprus tax resident if it is managed and controlled from Cyprus. This means:

The majority of the board of directors should be resident in Cyprus.
Key management decisions and board meetings should take place in Cyprus.

If the company is not tax resident in Cyprus, it will only be taxed on Cyprus-sourced income and will not benefit from the worldwide income exemptions.

Non-Tax Resident Companies

A non-tax resident company (i.e., a company managed and controlled outside of Cyprus) is generally not subject to corporate tax on foreign income, but it is taxed on any Cyprus-sourced income, such as income from a permanent establishment or immovable property in Cyprus.

A Cyprus company can achieve full tax exemption on certain types of income, particularly dividend income, profits from foreign permanent establishments, capital gains from securities, and profits from shipping activities. To qualify for these exemptions, the company must typically be tax resident in Cyprus, meaning its management and control are based in Cyprus. This favorable tax regime makes Cyprus an attractive jurisdiction for holding companies, shipping companies, and international businesses looking for tax efficiency.