CYPRUS Law and Practice Contributed by: Stella Strati, Patrikios Legal
Generally, expenses wholly and exclusively incurred by a company in the production of taxable income are allowable. Private expenses, expenses not matched to taxable income or not validated through proper supporting documentation, provisions (deprecia - tion, amortisation, impairment, and obsolete stock), expenses linked to non-taxable assets, and exchange differences are considered non-deductible expenses. However, capital allowances, balancing allowances calculated on the disposal of a non-current asset, notional interest deduction, and notional loss in relat - ed-party transactions are also deductible. Further to the latest tax reform, starting from 1 Janu - ary 2026, gains arising from the sale, gift, exchange or use of a crypto-asset are subject to a flat rate of 8%. 2.2 Technology Investments The current IP tax regime in Cyprus follows the nexus approach – according to which, a direct link between qualifying income and own qualifying expenses is essential for the IP to qualify. The level of the qualifying profits is positively correlated to the extent that R&D activities are performed by the same entity. Under the current IP tax rules, 80% of the overall income derived from the qualifying intangible asset is treated as a deductible expense. A qualifying intangible asset is defined as an asset that, as a result of R&D activities, has been acquired, developed or exploited by a person within the course of carrying out their business. Such assets specifically include: • patents; • computer software; and • other IP that is legally protected and comprises: (a) utility models; (b) IP assets that provide protection to plants and genetic material or orphan drug designa - tions, in addition to extensions of protection for patents; or (c) non-obvious, useful and novel IP assets (which are certified as such by an appropriate author - ity) where the person utilising the asset does not generate annual gross revenues in excess
of EUR7.5 million from all intangible assets (or EUR50 million for groups). Qualifying intangible assets specifically exclude trade marks, business names, brand image rights, and other IP rights used for the marketing of products and ser - vices. Persons that may benefit from Cyprus’ IP tax regime include Cyprus tax-resident taxpayers, tax-resident permanent establishments (PEs) of non-tax resident persons, and foreign permanent establishments that are subject to tax in Cyprus. 2.3 Special Incentives In addition to the Cyprus IP tax regime explained in 2.2 Technology Investments , there are a number of special incentives that apply in Cyprus. Cyprus Holding Companies Cyprus is an attractive jurisdiction for establishing a holding company. Specifically, dividend income received by a Cyprus holding company is gener - ally exempt from any income tax in Cyprus (subject to the hybrid instrument exception explained in 9.6 Hybrid Instruments and BEPS Implementation ) and from special defence contribution (SDC) (subject to the passive dividend rule explained in 6.3 Dividends From Foreign Subsidiaries ). Also, no withholding tax applies to any outgoing dividend or other profit dis - tributions or interest, irrespective of the existence of a double-tax treaty (DTT). Furthermore, profits from the sale of shares are tax-exempt. In general, no restrictions on foreign share ownership exist, and, as a result, a foreign investor is allowed to be the sole shareholder of a Cyprus company. Tonnage Tax System Cyprus tax-resident ship-owners or ship management companies that qualify under the relevant legislation with regard to qualifying ships (as defined therein) engaged in qualifying shipping activities (as defined therein) can fall under the tonnage tax system (TTS). The TTS refers to fixed rates of tax based on the net tonnage of the ship – ie, no requirement for a compu - tation of tax-adjusted profits exists. It is also important to note that there is no tax levied on the disposal of
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