Top 10 Tax Mistakes Cyprus Companies Make

Cyprus offers one of the most favourable tax environments in the European Union but that doesn’t make it foolproof. Every year, businesses based in Cyprus fall into avoidable traps that create unnecessary penalties, compliance stress or lost opportunities. Some of these mistakes stem from misinterpreting local laws. Others result from outdated habits, poor recordkeeping or overreliance on “advisors” who don’t stay up-to-date.

This article breaks down the 10 most common tax errors we see among Cyprus-based companies, along with what to do instead.

1. Ignoring Economic Substance Requirements

Since 2019, the EU has tightened substance rules for companies operating in low-tax jurisdictions. Cyprus now requires businesses, especially holding companies and intellectual property firms to demonstrate real activity (staff, office space and decision-making on the island).

What to do: Maintain Cyprus-based directors, hold local board meetings and ensure core decisions are made in Cyprus. Nominee structures must be handled with extreme care.

2. Treating the 12.5% Rate as a Given

Not all income qualifies for the standard 12.5% corporate tax. Misclassification can result in higher effective tax rates or audits. For example, certain passive income may be subject to Special Defence Contribution (SDC) or capital gains tax instead.

What to do: Understand the nature of your income. Passive income (like interest or certain royalties) may need additional treatment or disclosure.

3. Missing the VAT Registration Threshold

Businesses exceeding €15,600 in turnover must register for VAT. Many small or newly formed companies delay this, assuming they will register “later” which often leads to retroactive penalties.

What to do: Monitor turnover monthly and register once you are nearing the threshold. If you provide B2B services across EU borders, consider registering early under the reverse charge mechanism.

4. Underusing the IP Box Regime

Cyprus offers a tax-effective Intellectual Property regime with effective rates as low as 2.5% on qualifying profits. Yet many eligible businesses skip this entirely either unaware or unprepared for the documentation it requires.

What to do: Keep development records, ensure your IP has economic nexus in Cyprus, and speak to an advisor early. Retrospective claims rarely succeed.

5. Using Foreign Directors Without Caution

A Cyprus company with non-resident directors might lose tax residency status in Cyprus, especially under OECD scrutiny. This creates dual-taxation exposure and undermines the benefit of Cyprus’s treaties.

What to do: Appoint local directors with real decision-making power. Maintain board minutes and supporting documentation that reflects this.

6. Misunderstanding Dividend Taxation

Dividends paid to non-residents are not subject to withholding tax in Cyprus. But this doesn’t mean they are tax-free in the shareholder’s country. Many companies incorrectly advise shareholders based solely on Cyprus law.

What to do: Advise shareholders to consult with advisors in their country of residence. Ensure that tax residency certificates and proper documentation are maintained.

7. Failing to Renew Tax Residency Certificates

Many tax benefits (including treaty reliefs) depend on proving tax residency through an official certificate. These are valid for one calendar year only.

What to do: Apply for a new certificate annually and ensure it’s submitted to foreign tax authorities where required.

8. Not Preparing Transfer Pricing Documentation

Cyprus requires transfer pricing documentation for transactions between related entities exceeding €750,000 per annum (from 2022 onward). Many SMEs wrongly assume they’re exempt.

What to do: If you are dealing with a parent, subsidiary, or other related company, prepare a local file or a simplified analysis to prove arm’s length pricing.

9. Late or Incomplete Filings

Late filing of tax returns, VAT declarations or employer returns leads to automatic penalties, even if the amounts owed are minimal or nil.

What to do: Use a compliance calendar. Partner with an accountant or tax advisor who prioritises timely submissions.

10. Over-relying on “Set and Forget” Structures

Too many Cyprus companies are set up with templated advice and then left untouched. Over time, this creates exposure whether it’s a dormant director, outdated Articles of Association or missed changes in EU regulations.

What to do: Conduct annual reviews. Check your structure, filings and financial statements. Adjust to changing laws, not just your original plan.

Conclusion

Cyprus remains a tax-efficient jurisdiction, but only when managed proactively. Small oversights can lead to significant consequences, especially as EU-wide compliance expectations grow stricter. Whether you are managing a local trading company, a holding structure or an expat business, make sure your approach to tax is structured, documented and regularly reviewed.