In Cyprus, all employers are required to register with the Tax Department within 60 days of commencing business operations. This registration can be done online or in person at a Tax Department office. Additionally, employers must register with the Social Insurance Register within 7 days of hiring their first employee.

Pay As You Earn (PAYE) System

Employers are responsible for withholding their employees' personal income tax through the Pay As You Earn (PAYE) system. The amount of tax withheld is based on the employee's salary and tax bracket. These withheld taxes must be reported and submitted to the Tax Department by the end of the following month, using the TD61 tax form.

Social Security Contributions

Both employers and employees are required to make social security contributions. The current total contribution rate is 20.2% of gross salary, split as follows: 7.8% from the employee, 7.8% from the employer, and 4.6% from the government. These contributions are capped at a maximum amount, which is determined annually. Employers are responsible for withholding their employees' share of social security contributions, as well as making their own contributions.

Additional Contributions

Employers are also required to make contributions to three other funds: the Industrial Training Fund, the Redundancy Fund, and the Social Cohesion Fund.

Deadlines

PAYE taxes must be reported and submitted to the Tax Department by the end of the following month. Social security contributions must be paid to the social security authority by the end of the month following the pay period.

In Cyprus, employees are subject to several tax deductions from their gross salary. These deductions cover income tax, social security contributions, and certain other contributions.

Primary Deductions

• Income Tax:

  • Progressive tax rates ranging from 0% to 35%
  • Taxable income is calculated after subtracting allowable deductions
  • Exemptions for certain types of income (e.g., dividends, interest)

• Social Security Contributions:

  • Mandatory for all employees
  • Covers pensions, healthcare, unemployment benefits, and other social benefits
  • Shared contribution between employee (8.3%) and employer (8.3%)
  • Government also contributes a portion (4.9%)
  • Contributions are capped at a maximum income level

Additional Deductions

• General Health System (GHS):

  • 2.65% of gross salary
  • Finances the national healthcare system

• Special Contributions:

  • Redundancy Fund (1.2%)
  • Social Cohesion Fund (2%)
  • Training Development Fund (0.5%)

Key Considerations

• Taxable Income Determination:

  • Considers gross salary, allowable deductions, and exemptions
  • Deductions include social security contributions, GHS contributions, and certain other expenses (e.g., charitable donations, life insurance premiums)

• Allowable Deductions:

  • Limited to certain expenses

• Exemptions:

  • Specific conditions for eligibility
  • May apply to certain types of income or individuals

Businesses providing services in Cyprus are required to register for VAT if their annual taxable turnover exceeds €15,600. However, certain services may be subject to mandatory VAT registration regardless of turnover.

VAT Rates for Services

Cyprus applies several VAT rates to services:

• Standard VAT Rate: 19% (applies to most services unless a reduced or zero rate applies)
• Reduced VAT Rates:
  • 9% for specified services, including hotel accommodation, restaurant services (excluding alcoholic beverages), and transport services
  • 5% for services such as food for human consumption, medicines, and certain renovation services
• Zero Rate: Applies to certain services such as exports of services and international transport

VAT Exemptions for Services

Certain services are exempt from VAT, meaning VAT is not charged on their supply. These exemptions include:

• Financial services
• Insurance services
• Educational services
• Healthcare services
• Social services

VAT Registration and Compliance

Businesses providing taxable services in Cyprus must:

• Register for VAT with the Tax Department
• Issue VAT invoices for their services
• Collect VAT from their customers
• File VAT returns and pay VAT due

Specific VAT Rules for Certain Services

Special VAT rules may apply to specific services, such as:

• Electronic services
• Real estate services
• Travel services

Cyprus is known for offering several tax incentives to attract foreign investment and support business growth. These incentives are designed to make the country an attractive destination for businesses of all sizes and across various sectors.

Corporate Income Tax (CIT) Incentives

Cyprus boasts a competitive general CIT rate of 12.5%, one of the lowest in the EU. Companies that generate income from intellectual property (IP) can benefit from an 80% exemption on qualifying IP income, effectively reducing the tax rate to as low as 2.5%. Furthermore, companies investing in research and development (R&D) or innovative start-ups can receive tax deductions or credits.

Employment Tax Incentives

Cyprus offers a 50% tax exemption on employment income for newly hired employees earning over €55,000 annually for up to 17 years, provided they were not tax residents of Cyprus for the previous 10 years. There's also a 20% tax exemption on employment income for certain foreign executives and company directors. Foreign pension income is exempt from taxation in Cyprus.

Holding Company Regime

Dividend and interest income received by Cyprus holding companies from non-Cyprus resident subsidiaries is generally exempt from taxation. This makes Cyprus an attractive location for holding and investment structures.

Other Tax Incentives

Cyprus offers a 20% tax credit on eligible R&D expenses. There's also a deduction for amounts invested in approved innovative small and medium-sized enterprises. Businesses can depreciate certain assets at an accelerated rate, reducing taxable income.

Specific Incentives for Certain Sectors

Cyprus has a favorable tonnage tax regime for shipping companies. Tax incentives are also available for film production companies.