Cyprus operates a well-defined tax system that includes obligations for both employers and employees. Understanding these requirements is crucial for companies operating within the country, whether they are local entities or foreign businesses employing staff. Compliance with payroll taxes, social contributions, and income tax withholding is mandatory and ensures smooth operations while meeting legal obligations towards employees and the state.
Managing payroll and tax compliance can be complex, involving various calculations, deductions, and reporting requirements. Employers are responsible for correctly calculating and remitting employee income tax and social contributions, as well as paying their own share of social contributions. Employees, in turn, are subject to income tax on their earnings and contribute to social security and the national health system, with certain deductions and allowances available to reduce their taxable income.
Employer Social Security and Payroll Tax Obligations
Employers in Cyprus are required to contribute to several funds based on their employees' gross earnings. These contributions are a significant part of the cost of employment. The main contributions include Social Insurance, National Health System (GESY), Redundancy Fund, Social Cohesion Fund, and Training Development Fund. These contributions are calculated on gross emoluments up to a maximum insurable earnings limit, which is adjusted annually. For 2025, the maximum insurable earnings limit is expected to be updated, but based on current trends, it will likely see a slight increase from the previous year.
The standard employer contribution rates are as follows:
| Fund | Employer Contribution Rate |
|---|---|
| Social Insurance | 8.3% |
| National Health System | 2.9% |
| Redundancy Fund | 1.2% |
| Social Cohesion Fund | 2.0% |
| Training Development Fund | 0.5% |
| Total | 14.9% |
These rates are applied to the employee's gross salary, up to the maximum insurable earnings limit. Any earnings above this limit are not subject to these specific contributions.
Income Tax Withholding Requirements
Employers are responsible for withholding income tax from their employees' salaries under the Pay As You Earn (PAYE) system. The amount of tax to be withheld depends on the employee's total taxable income, taking into account applicable tax rates and any eligible deductions and allowances. Cyprus has a progressive income tax system for individuals.
The income tax rates for individuals are:
| Annual Taxable Income (€) | Tax Rate (%) | Tax Cumulative (€) |
|---|---|---|
| 0 - 19,500 | 0 | 0 |
| 19,501 - 28,000 | 20 | 1,700 |
| 28,001 - 38,000 | 25 | 4,200 |
| 38,001 - 60,000 | 30 | 10,800 |
| Over 60,000 | 35 |
Employers calculate the monthly tax withholding based on the employee's projected annual income, considering their tax code and submitted declarations regarding deductions and allowances. The tax is deducted from the gross salary before payment to the employee and remitted to the Tax Department.
Employee Tax Deductions and Allowances
Employees in Cyprus are entitled to certain deductions and allowances that reduce their taxable income. Employers typically take these into account when calculating the monthly PAYE withholding, provided the employee has properly declared them. Common deductible expenses and allowances include:
- Social Insurance Contributions: Employee contributions to the Social Insurance Fund are deductible. The employee rate is 8.3% of gross emoluments, up to the maximum insurable earnings limit.
- National Health System (GESY) Contributions: Employee contributions to GESY are deductible. The employee rate is 2.65% of gross emoluments, up to a maximum earnings limit (which is higher than the social insurance limit).
- Provident Fund Contributions: Contributions made by the employee to an approved provident or pension fund are deductible, subject to certain limits.
- Life Insurance Premiums: Premiums paid for life insurance policies are deductible, subject to certain conditions and limits (typically a percentage of taxable income).
- Donations: Donations to approved charities are deductible, subject to certain limits.
- Rent Income: 20% of rental income is allowed as a deduction.
The total amount of certain deductions (like provident fund, life insurance, and donations) is capped, typically at a percentage of the individual's taxable income before these deductions.
Tax Compliance and Reporting Deadlines
Employers must adhere to strict deadlines for reporting and remitting payroll taxes and social contributions. Monthly payroll submissions and payments are generally due by specific dates in the month following the payroll period.
- Monthly PAYE and Social Contributions: Employers must submit monthly declarations (Form TD63) and pay the withheld income tax and both employer and employee social contributions by the end of the month following the payroll period. Payments are typically made electronically via the TAXISnet system.
- Annual Employer's Return: Employers are required to submit an annual return (Form TD7) detailing the total emoluments paid to each employee and the total tax withheld during the previous tax year. This return is usually due by the end of July following the tax year.
- Employee Income Tax Return: While employers handle withholding, employees are generally required to file their own annual income tax return (Form TD1) if their gross income exceeds a certain threshold (€19,500). The deadline for electronic submission is typically the end of July following the tax year.
Failure to comply with these deadlines can result in penalties and interest charges.
Special Tax Considerations for Foreign Workers and Companies
Cyprus offers certain tax incentives that can be particularly relevant for foreign workers and international companies.
- Non-Domiciled Status: Individuals who are tax residents in Cyprus but are considered non-domiciled for tax purposes can benefit from exemptions on passive income such as interest, dividends, and rental income. This status is determined based on domicile of origin or choice and can be maintained for up to 17 years of residency in Cyprus.
- Exemption for New Residents (50% Exemption): Individuals who were not tax residents of Cyprus for at least 10 consecutive years prior to commencing employment in Cyprus may be eligible for a 50% exemption on their employment income, provided their annual remuneration exceeds €55,000. This exemption applies for a period of 17 years from the commencement of employment.
- Exemption for New Residents (20% Exemption): An older incentive provides a 20% exemption on remuneration from employment exercised in Cyprus by an individual who was not a resident of Cyprus before the commencement of the employment. This exemption is capped annually and applies for a period of 5 years from the commencement of employment. It is generally less beneficial than the 50% exemption but may apply if the €55,000 threshold is not met.
- Permanent Establishment (PE): Foreign companies employing staff in Cyprus may inadvertently create a permanent establishment, triggering corporate tax obligations in Cyprus. The activities and presence of employees are key factors in determining whether a PE exists.
- Remote Work: The tax implications for foreign companies with employees working remotely from Cyprus depend on various factors, including the employee's tax residency status and whether the remote work activities constitute a PE for the foreign company.
Understanding these special considerations is vital for foreign companies and their employees to optimize their tax position and ensure compliance with Cyprus tax law.
