Part II

Developments in the Member States

Corporate taxation
Cyprus has lowered its corporate tax rate from 2025 % (stable since 1991) to 10 % from 1 January 2003. For
semi-governmental bodies the tax rate was only reduced to 10 % in 2009, bringing it in line with the CIT rate
applied to non-governmental corporations. Alongside the reduction of the tax rate, several tax incentives were
abolished. In the years 2003 and 2004, there was an additional 5 % corporate tax for chargeable income exceeding
1.7 million. Special regimes apply, however, to the shipping sector. Companies can carry forward trading losses
indefinitely (up to 2002 a five-year limit applied), but carrying back is not allowed. Inventories may be valued at
the lower of cost or net realisable value. An annual levy on registered companies of 350 applies since 2011.

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Other taxes (Defence Contribution)

All residents are subject to the Defence Contribution, which has been a final levy on unearned income and not
deductible for income tax purposes since 2003. It is applied with different rates on dividends, interest, rental
payments and the taxable income of public corporate bodies. Dividends are temporarily subject to the Defence
Contribution at a rate of 20 % for the years 2012 and 2013, after which the rate will decrease to 17 %, with the
contribution on domestic dividends withheld at source. Interest payments not accruing from ordinary business
activities are taxed at a rate of 15 %. Individuals with an annual income not exceeding 12 000 may apply for a
7 % refund. A 3 % rate applies to interest on savings certificates issued by the government; however, dividends
and interest are not subject to PIT. Rental payments are subject to the Defence Contribution at a rate of 3 %.
VAT and excise duties
On 01.03.2012 the standard VAT rate was increased to 17 % (it had been 15 % since 2003), keeping the two
reduced rates constant at 5 % and 8 %, respectively. In addition Cyprus exempts certain products letting of
immovable property, cultural, sport, banking, insurance, medical and hospital services from VAT altogether, and
applies a zero rate on supplies of goods and services to sea-going vessels, and international transportation, as well
as exports and intra-Community dispatches of goods and services Since 2011 formerly exempt foodstuff and
pharmaceutical products as well as the formerly higher taxed construction/purchase of the first residence have been
subject to a 5 % VAT rate. The reduced VAT rates for hotel accommodation and restaurant services (5 % formerly
8 %) originally temporarily introduced in 2009 to fight the crisis were extended in 2012. The excise duties on
energy, in particular on unleaded petrol and on diesel were aligned with the EU minima in 2010. The 2011 increase
in excise duties focused on tobacco products namely an increase by 40 cents by packet.
Wealth and transaction taxes
There are neither net wealth taxes nor inheritance and gift taxes in Cyprus. Immovable property is subject to a real
estate tax, which is levied on the estimated market value of the property in 1980. For natural persons, rates range
from 0 % to 0.8 %, depending on the property value. A real estate transfer tax is levied in a progressive way at
3 %, 5 % and 8 % of the property value. Since April 2011 a bank levy is imposed on the total amount of deposits at
a rate of 0,095 %, limited to 20 % of the total taxable profits of the financial institution. Capital gains are, in
general, not taxable. Gains on the disposal of immovable property located in Cyprus are taxed at 20 %. The capital
gain is the difference between the sales proceeds and the original cost, adjusted to take into account increases in the
cost of living index.
Social contributions
Employers' social contributions are due for the Social Security Fund, redundancy insurance and for the Training
Development Fund. Altogether, the employers' contribution rate amounts to 8.5 %. Employers must also pay a
payroll tax (2 % of gross wage) to the social cohesion fund, which is not deductible for corporate income purposes.
Employees pay 6.8 % of their salary as social contribution up to a ceiling of 52 104. Public sector employees pay
3% of their gross salaries towards the government pension scheme since 2011. The self-employed pay 12.6 % of
notional income as social contribution. SSC of employed and self-employed are augmented by a 4.3 % payment of
the state. In general, employers have to contribute to the Central Holiday Fund; the rates vary according to the
annual leave entitlement of the employee.

Taxation trends in the European Union

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