Generally, expenditure wholly and exclusively incurred for the generation of taxable income is deductible against the company's taxable income. Such expenditure should be supported by invoices and relevant receipts or other supporting documents.
Depreciation and amortisation
For tangible assets, depreciation is computed on a straight-line basis at set rates that vary, depending on the type of asset. On the sale of such depreciated property, tax depreciation may be recaptured and taxed as ordinary income, depending upon the level of sale proceeds.
Property and equipment acquired during the tax years 2012 through 2018 are eligible for accelerated tax depreciation at the rate of 20% per annum (excluding assets that are already eligible for a higher annual rate of tax depreciation).
Industrial and hotel buildings acquired during the tax years 2012 through 2018 are eligible for accelerated tax depreciation at the rate of 7% per annum.
Land does not attract tax depreciation.
Tax amortisation on any expenditure of a capital nature for the acquisition or development of IP is introduced with effect from 1 July 2016 and is allocated over the lifetime of the IP, in accordance with accepted accounting principles, with a maximum period of 20 years (excluding goodwill and IPs falling under the transitional rules of the old Cyprus IP box, which continue with that box’s tax amortisation). A taxpayer may elect not to claim all or part of the available tax amortisation for a particular tax year.
Any amounts paid for the acquisition of trading goodwill should be deductible upon the subsequent sale of such trading goodwill.
Start-up expenses, such as formation expenses, are generally not tax deductible in the computation of the company’s taxable income.
Research and development (R&D) expenses
Any expenditure on scientific research of a capital nature for which no tax depreciation is granted is deductible from taxable income and spread equally over the year in which it has been incurred and the five subsequent years. Scientific research expenditure of a revenue nature is deducted in the year incurred.
See Intellectual property (IP) regime in the Tax credits and incentives section as well.
Generally, interest expenses incurred by the company for the generation of taxable income should be deductible in the company’s tax computation.
Interest expense that finances assets that generate tax-exempt income is not deductible in the first seven years of ownership of such assets. Interest expense associated with such assets held beyond seven years becomes tax deductible from thereon.
Interest expense financing the acquisition of 100% shareholdings in subsidiaries that are directly or indirectly trading is deductible, provided that the acquisition was made on or after 1 January 2012.
As of 1 January 2019, an interest limitation rule applies in accordance with the ATAD. See Interest limitation rule in the Group taxation section for more information.
Bad debts of any business should generally be deductible, provided they are write-offs/provisions against specific trading receivables and the taxpayer can evidently prove that sufficient steps were taken beforehand to recover them.
Charitable donations or contributions made for educational, cultural, or other charitable purposes to the Republic of Cyprus (including local authorities), or to approved charitable institutions, are wholly deductible, provided that these expenses are supported with relevant vouchers.
Fines and penalties
Fines and penalties are generally not deductible in the computation of the taxable income of the company.
Taxes that are deducted in computing profits for CIT purposes include VAT not recovered and the employer’s share of contributions to the social insurance and other employee-related funds.
Net operating losses
Tax losses can be carried forward (from the end of the tax year in which the loss occurred) and set-off against taxable profits of the next five years. Carryback of tax losses is not permitted. Under certain conditions, they may also be eligible for group relief (see the Group taxation section).
Payments to foreign affiliates
A Cyprus corporation can claim a deduction for royalties and interest charges paid to foreign affiliates, and a reasonable amount of head office expenses of an overseas company, provided such expenditures can be justified as having been incurred in the production of the income and subject to the rules generally applicable for the deduction of such expenditure.
In the case of insurance companies, the amount of head office expenses should not exceed 3% of the net premiums in Cyprus for the general insurance business and 2% for the life insurance business.