Sovereign Cyprus - Cyprus Corporate Income Tax

A company is tax resident of Cyprus if it is managed and controlled in Cyprus. Under the tax reform package, the definition of a Cyprus tax resident company was further expanded to include companies that have been incorporated under the Cyprus Companies Law – the ‘incorporation test’ ­– unless a double tax treaty provides otherwise. Companies that have transferred their registered office to Cyprus will be considered as incorporated in Cyprus.

The Special Defence Contribution (SDC) is imposed only on non-exempt dividend income and ‘passive’ interest income earned by Cyprus tax resident companies and Cyprus permanent establishments of non-Cyprus tax resident companies. Non-tax residents of Cyprus with non-Cyprus PEs are exempt from SDC.

A key change under the tax reform package was the reduction of the SDC charge from 17% to 5% for actual dividends distributed out of post-2026 profits, significantly lowering the tax cost of distributing new profits for Cyprus tax resident individuals receiving dividends from Cyprus tax resident companies and non-Cyprus tax resident companies.

However, for a transitional period, dividends received from Cyprus tax resident companies out of profits earned up to 31 December 2025 will remain taxed at 17% if the dividend is received on or before 31 December 2031.

The previous automatic shareholder-level taxation through the deemed dividend distribution (DDD) mechanism was also abolished in respect of profits earned by Cyprus tax resident companies after 1 January 2026, allowing for full retention of profits.

For shareholdings held on or before 31 December 2025, where there is an actual dividend payment to a non-Cyprus tax resident or a Cyprus tax resident non-domiciled individual that corresponds to profits that were previously taxed under DDD, the recipient will be entitled to a refund of the tax paid under DDD rules.

With the abolition of DDD, a new anti-avoidance rule was introduced in respect of ‘concealed dividends’. Where value is transferred to shareholders or connected persons in a way that effectively represents a distribution of profits, an increased 10% rate of SDC applies.

A 5% withholding tax is introduced on dividends that are paid to companies that are resident in jurisdictions classified as low tax to align with EU and OECD anti-avoidance standards.

The SDC previously imposed on rental income is abolished, leaving rental income taxable solely under income tax rules.

Cyprus corporate tax generally exempts gains from selling securities – shares or bonds ­– but imposes a 20% Capital Gains Tax (CGT) on gains from Cyprus-situated immovable property or non-quoted shares directly or indirectly holding Cyprus-situated immovable property.

Under the tax reform package, the threshold for indirect disposal of shares in a company that owns immovable property in Cyprus was reduced from 50% to 20%. As a result, CGT may be triggered if shares are sold in a company that indirectly participates in a company or companies that own immovable property situated in Cyprus and at least 20% of the fair market value of the shares sold is derived from the immovable property in Cyprus.

To address under-valuation in indirect real estate disposals, when shares of property rich companies are sold the consideration for CGT purposes will be assessed by reference to the underlying fair market value.

The previous CGT exception for the sale of shares listed on a ‘recognised’ stock exchange was replaced with an exception for sale of shares listed on a ‘regulated’ stock exchange. Grandfathering rules have been introduced for disposal of shares listed on a recognised stock exchange that were acquired before 1 January 2026.

No CGT is imposed on the sale of shares listed on a non-regulated stock exchange if the disposal amount does not exceed €50,000 in a tax year. If the disposal amount exceeds €50,000, CGT will be applied.

A number of attractive tax incentives and credits are available to qualifying businesses in Cyprus, including:

• A unilateral tax credit is applied for taxes paid abroad by a Cyprus company or its subsidiaries if the income is subject to the Cyprus tax. Cyprus DTA provisions may also be utilised if they are more beneficial than the tax credit.
• The Cyprus Intellectual Property (IP) Box regime provides an 80% deduction on qualifying profits derived from qualifying patents, copyrighted software and other IP assets, which can reduce the effective tax rate to as low as 3% and remains fully in force under the nexus approach.
• The Cyprus Notional Interest Deduction (NID) allows companies to claim a notional deduction on taxable profits when raising capital via new equity, offering a tax benefit similar to interest deductions on debt financing. The NID deduction is capped at 80% of taxable profits from new equity before applying NID, which can reduce the effective tax rate to as low as 3%.
• No capital gains tax (CGT) is applied on the disposal of securities except in respect of ‘property-rich’ companies.
• Dividend participation exemption on dividends from qualifying subsidiaries, subject to conditions.
• Exemption from tax on gains arising from the disposal of securities.
• Company re-organisation rules based on the EU Mergers Directive allow for tax-neutral group
  restructuring.
• Tax neutrality on foreign exchange differences unless they arise from trading in currencies.
• Cyprus has an advantageous non-domicile regime for new residents, which offers additional exemptions from the Special Defence Contribution (SDC) on worldwide dividends, interest and rental income for up to 17 years.
• Cyprus offers a 50% exemption on employment income exceeding €100,000 per annum for non-residents taking up employment in Cyprus.
• Cyprus imposes no wealth tax, no inheritance tax and generally no capital gains tax on assets other than immovable property located within Cyprus.