The second package of tax measures


The second package of measures for the improvement of public finances of the Republic of Cyprus was voted by the House of Representatives on 14 December 2011.  The measures were published in the official Cyprus Government Gazette on 30 December 2011.

As with the first package of measures the aim is to reduce government spending and increase revenue without negatively affecting foreign investors investing through the use of Cypriot companies.

The Amendments to the Laws / The measures

1.  Income Tax

 The amendments in the corporation income tax are effective as from 1 January 2012

(i)  Loans / financial assistance granted to Directors or Shareholders

The previous known Article 39 as per which notional interest up to the rate of 9% was imposed at the level of the Cypriot company on balances receivable from the Directors or Shareholders and up to their second-degree relatives is now abolished.

Instead, a monthly benefit of 9% per annum on the balance receivable at the end of each month is deemed to arise for the individual Directors or Shareholders and up to their second-degree relatives in relation to a loan or financial assistance granted to those individuals by the company.

The aforementioned deemed benefit is assessed and payable through the Pay As You Earn (PAYE) system.

As a result of these amendments and where applicable, tax will arise at the level of the individual Shareholders and Directors instead at the level of the Cypriot company as it was the case with the now abolished Article 39.

As per the wording of the legislation the above new provision should apply in the same way for both Cypriot and non Cypriot tax resident individuals.  In practice though, it is expected that regarding foreign, non Cypriot tax resident individuals, the benefit will be deemed to arise and thus taxable in their hands under Cypriot taxation only for the days they will physically spend in Cyprus.  As soon as this is clarified with the Cypriot tax authorities we will inform you accordingly.

(ii)  Tax deductibility of salaries and related costs

Salaries will be tax deductible for corporation income tax purposes if the employer’s contributions to the Social Security Fund, Social Cohesion Fund, Redundancy Fund, Industrial Training Fund, Pension and Provident Fund related to the salaries are paid in the year that they are due.

Otherwise, they will be tax deductible provided they are paid (including interest and penalties) within two years of their due date.

2.  Special Defence Contribution (SDC)

(i)  Increase of the SDC rate on dividends (applicable for the years 2012 and 2013)

The rate for dividend income increases from 17% to 20%.

The aim of this measure is higher taxation of dividend income received by Cypriot tax resident individuals.

It is noted that dividend income received by a Cypriot tax resident company is usually exempt from Cypriot taxation.

(ii)  Dividends between Cypriot tax resident companies (applicable as from 1 January 2012)

Dividends paid by a Cypriot tax resident company to another Cypriot company after 4 years following the end of the year in which the profits, out of which the dividends are paid, were generated they are taxable under SDC.

It is expected that this amendment will not be applicable in the case of structures with non-Cypriot tax resident ultimate individual shareholders, although this yet to be clarified with the Cypriot tax authorities.

Further to the above, dividends paid out of income emanating directly or indirectly from dividends on which SDC was suffered are exempt from SDC.

3.  Special contribution for private sector employees (applicable for the years 2012 and 2013)

The bands are as follows:

Gross monthly emoluments (€)


0 – 2.500


2.501 – 3.500


3.501 – 4.500


above 4.501


The above are paid in half by the employee and half by the employer.

The special contribution does not apply to the remuneration of qualifying Cyprus ships’ crew, on payments of approved Provident Funds and retirement benefits.

Special Contributions are allowed as deductible for Income Tax purposes both for the employer and the employee.

4.  VAT amendments

(i)  Standard VAT rate  

The standard VAT rate is increased from 15% to 17% as from 1 March 2012.

 (ii)  Issue of receipts

As from 16 January 2012, VAT registered persons are obliged, at the time of supply of goods or provision of services to non-taxable persons in Cyprus, to issue and provide to the non-taxable person an appropriate receipt, unless a cash invoice has been issued to the non-taxable person.  The issuers should maintain such receipts for a period of seven years.

Significant administrative and criminal penalties may be imposed in case of non-compliance.

Contacts for tax enquiries:

Constantinos Demetriou (in charge of Direct Tax Compliance):

Petros Loizou:

Nicolas Manoli:

Phivos Kashioulis (in charge of Indirect Tax (VAT) Compliance):