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 through a balancing statement computed upon disposal 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. With effect from 1 January 2020, the requirement of preparing a balancing statement upon disposal of the IP has been abolished.
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
As of 20 July 2022, expenditure for scientific research and for R&D (as recognised by international accounting standards) that is incurred by a person (i.e. legal entities and individuals) that: (i) carries on a business and (ii) has the economic ownership of the intangible asset that arises, or it’s possible to arise, from incurring such expenditure is deductible for IT Law purposes.
Any such expenditure of capital nature is tax amortised in a reasonable manner over its useful economic life (as per accepted accounting principles) with a maximum period of 20 years.
For any such expenditure incurred during the years 2022, 2023, and 2024, an additional allowance is granted equal to 20% of the expenditure incurred, which (i) cannot be claimed in parallel with the 80% allowance on net profit under the Cyprus nexus IP regime (i.e. cannot be claimed in parallel with New Cyprus IP Box) and (ii) a person may elect, for each tax year, to waive claiming (in whole or in part).
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.
Hybrid mismatch rules
The hybrid mismatch rules cover situations of ‘double deduction’ or ‘deduction without inclusion’ relating to hybrid entities, hybrid financial instruments, hybridity involving PEs, imported mismatches, and tax residency mismatches. The new tax provisions also include rules on hybrid transfers and on reverse hybrid entities.
Generally, in order for the hybrid mismatch rules to be in scope, the hybridity needs to involve associated enterprises, an HO and a PE (or two or more PEs of the same entity) or a structured arrangement (this is when the mismatch is priced into the terms of an arrangement).
The hybrid mismatch rules aim to ‘neutralise’ the hybrid tax position (e.g. by denying a tax deduction in Cyprus for a hybrid payment made by a Cyprus entity). The ‘neutralising’ rules only apply to those taxpayers subject to Cyprus CIT, with the exception of the reverse hybrid rule, which may apply more broadly.
The Cyprus transposition law provides that the annual deduction on new equity granted under the Cyprus notional interest deduction (NID) regime, as well as similar deductions granted by other jurisdictions, do not fall within the scope of Cyprus’ hybrid mismatch rules.
To the extent that a hybrid mismatch results in a double deduction for tax purposes of a payment, expense, or loss, the deduction shall be denied in Cyprus if Cyprus is the investor jurisdiction. If Cyprus is not the investor jurisdiction but rather is the payer jurisdiction, then Cyprus would again deny deduction but only in the case where the investor jurisdiction has not itself denied the deduction.
Nevertheless, any deduction shall be eligible for off-setting against current or future dual inclusion income. Dual inclusion income is income that is included for tax purposes in both Cyprus and in the other jurisdiction.
Deduction without inclusion
To the extent that a hybrid mismatch results in a deduction without inclusion for tax purposes of a payment (or deemed payment between an HO and PE or between two or more PEs of the same entity), the deduction shall be denied in Cyprus if Cyprus is the payer jurisdiction. If Cyprus is not the payer jurisdiction but rather is the recipient jurisdiction, then Cyprus should tax the income except in the following cases, as Cyprus has opted, under the possibilities provided for in the Directive, not to apply the hybrid rule of taxation of income to: (i) a payment to a hybrid entity or (ii) a payment or a deemed payment involving PEs and hybridity. However, see below for the specific cases of disregarded PEs and reverse hybrid entities.
Temporarily excluded from the ‘deduction without inclusion’ rule, are, under certain conditions, hybrid mismatches resulting from intra-group financial instruments issued with the sole purpose of meeting the issuer’s loss-absorbing capacity requirements (e.g. regulatory hybrid capital). This temporary exclusion for such financial instruments applies until 31 December 2022.
The law provides that these new provisions do not apply in cases where Cyprus will include (for tax purposes) dividend income for dividends that have a deduction (for tax purposes) in the jurisdiction of their payment. This is because the rules in effect in Cyprus since 2016 already deal with this hybridity.
Imported mismatches are essentially payments from Cyprus that indirectly fund hybrid mismatches between parties outside of Cyprus. These can also result in a denial of deduction in Cyprus for the payment in cases where the other parties involved in the hybrid mismatch have not made adjustments to neutralise the hybrid mismatch.
Disregarded PE income
Cyprus requires income inclusion for tax purposes to the extent a hybrid mismatch involves income of a disregarded exempt foreign PE, unless a DTT concluded with a third country (i.e. with a non-EU member state) requires Cyprus to exempt the income. A disregarded PE is one where the HO jurisdiction considers the resident taxpayer to have a PE in another jurisdiction, but the other jurisdiction views matters differently and does not consider there to be a PE in its jurisdiction.
To the extent a hybrid transfer is designed to produce WHT relief for more than one of the parties involved, then Cyprus shall limit the relief it grants to the Cyprus taxpayer in proportion to the net taxable income in Cyprus. A hybrid transfer is where an arrangement to transfer a financial instrument results in the underlying return on that instrument being considered for tax purposes to be derived simultaneously by more than one party in the arrangement.
Reverse hybrid entities
A reverse hybrid entity is an entity that is not considered to be a taxpayer in its jurisdiction of incorporation or establishment (e.g. a partnership where the partners are considered to be the taxpayer and not the partnership itself) but is considered as a taxable entity when viewed from the investor’s jurisdiction perspective.
A reverse hybrid entity, under conditions, shall be regarded as a resident of Cyprus in cases where Cyprus is the jurisdiction of incorporation or establishment of the entity, and shall be subject to Cyprus CIT (and Cyprus SDC) on its income to the extent this income is not otherwise taxed in Cyprus or in any other jurisdiction.
This rule shall not apply to collective investment vehicles set up in accordance with the Open-Ended Undertakings for Collective Investment (UCI) law and the Alternative Investment Funds (AIFs) law.
This rule is effective as of 1 January 2022.
Tax residency mismatches
To the extent that the dual (or more) tax residency status of a taxpayer results in a double deduction of a payment, expense, or loss, Cyprus shall deny deduction insofar as the duplicate deduction is set off in the other jurisdiction against non-dual-inclusion income (dual inclusion income is income that is included for tax purposes in both Cyprus and the other jurisdiction).
In cases where the other jurisdiction is another EU member state, the ‘loser’ state under the tax residency tie-breaker rule of the relevant DTT between Cyprus and that other EU member state shall deny the deduction.