Cyprus Companies: Deductible Expenses & Tax Deductions 2026

Cyprus offers a business-friendly tax regime, with a corporate income tax (CIT) rate of 15% (raised from 12.5% on 1 January 2026) – one of the lowest in the EU. A key aspect of this regime is the range of deductible expenses that companies can claim to reduce taxable income. This report outlines the general corporate tax deductions under Cyprus tax law (operational expenses, depreciation, interest, bad debts, R&D, etc.), and highlights specific deductible expense schemes and incentives especially relevant to SMEs and startups. Recent legislative developments up to 2025 are included, and summary tables provide a clear overview of deduction categories and eligibility criteria.

Overview of General Corporate Tax Deductions in Cyprus

Cyprus tax law follows a broad rule: expenses “wholly and exclusively” incurred in earning taxable income are deductible, provided they are properly documented with invoices and receipts. In practice, this covers most operational business expenses – e.g. employee salaries, rent, utilities, marketing, and other day-to-day running costs. However, certain categories have specific limitations or conditions, and some expenses are expressly non-deductible. The table below summarizes key categories of deductible expenses and relevant conditions under Cyprus corporate tax law:

Table 1: Key Categories of Deductible Expenses for Cyprus Companies

Expense Category	Deductibility and Key Conditions
Operational Expenses (general business costs)	Deductible in full if incurred exclusively for business and supported by documentation 2. Includes wages, office expenses, travel, etc. Exceptions: Certain costs have limits – e.g. business entertainment is only deductible up to 1% of gross revenue (max €17,086). Expenses for private motor vehicles are entirely non-deductible. Start-up formation costs (e.g. company registration fees) are not deductible.
Depreciation & Capital Allowances (tangible assets)	Deductible via annual wear-and-tear allowances on capital assets. Cyprus uses straight-line depreciation at prescribed rates by asset type. For example, commercial buildings: 3% p.a., industrial/agricultural buildings: 4% p.a., plant/ machinery: 10%–20%, computer hardware: 20%, tools: 33.3% 7 8 . Accelerated Depreciation: To stimulate investment, assets acquired in 2012–2018 enjoyed higher rates (e.g. 7% for industrial buildings, 20% for plant purchased in that period). New “green” investments in 2023–2026 qualify for accelerated rates: e.g. energy-saving building improvements at 7%, renewable energy systems at 20%, and electric vehicles or charging stations at 33.3% per year. (Land is not depreciable.)
Amortization of Intangibles (goodwill, IP, R&D)	Deductible via amortization of capital costs on intellectual property (IP) and other intangibles. For qualifying IP assets acquired or developed after 2016, companies may amortize the cost over the asset’s useful life (max 20 years) for tax purposes. (Goodwill paid for a business is deductible only upon disposal of that goodwill.) Research & Development (R&D) expenditures are deductible in the year incurred (if they meet international accounting standards and the company holds economic ownership of any resulting intangible). Capital R&D costs can be amortized over up to 20 years with no recapture on disposal. Notably, for R&D expenses incurred in 2022–2024, an additional 20% deduction (“super deduction”) is allowed – yielding a 120% total deduction on eligible R&D costs. (This incentive cannot be combined with the IP Box 80% deduction on the same profits – see later.)
Interest Expenses	Deductible if the borrowing is used for the company’s business/income generation. There are important caveats: – Interest on funds used to acquire assets that produce tax‐exempt income (e.g. investments yielding tax- free dividend income) is not deductible for the first 7 years of owning such assets. After 7 years, the interest becomes deductible. – Interest on loans to acquire a 100% share in a subsidiary is deductible (if the subsidiary is a trading company) for acquisitions made on or after 1 Jan 2012. This encourages business expansion via subsidiaries. – Since 1 Jan 2019, EU ATAD rules impose an Interest Limitation: net interest expense deduction is generally capped at 30% of EBITDA (tax-adjusted earnings). – Upcoming: From 1 Jan 2026, Cyprus will deny deductions for interest (and royalty) payments to related companies in low-tax jurisdictions, as an anti-abuse measure.
Bad Debt Write-offs	Deductible when specific trade receivables are formally written off as uncollectible in the books. The company must demonstrate that reasonable steps were taken to recover the debt before writing it off. (If a previously written-off debt is later recovered, that recovery is taxed as income in the year of collection.) General or unspecific bad debt provisions are not deductible – the write-off must relate to identified debtor balances.
Donations & Sponsorships	Deductible in full if made to approved charitable institutions or for certain public- benefit purposes in Cyprus (educational, cultural, etc.), provided official receipts are obtained. (Tax law disallows carrying forward any loss attributable to a donation; in other words, donations can reduce taxable profit to zero, but cannot create or deepen a tax loss for future use.)
Taxes and Social Contributions	Deductible: Employer’s contributions to social insurance, national health, and approved employee funds are allowed in full. Non-recoverable VAT on business purchases is also deductible. Non-deductible: Income taxes themselves (and Special Defence Contributions) are not deductible expenses. Fines and penalties for legal violations are also not deductible.

See also: Evgenios Evgeniou.

See also: Tax Benefits for Non-Domiciled Shareholders in Cyprus.

Notes: In addition to the above, Cyprus allows tax loss carry-forwards for 10 years (extended from five years effective 1 January 2026): losses can offset future profits within ten years of the loss year. Group loss relief is available for Cyprus group companies (75% ownership) and even with EU subsidiaries under certain conditions, which can be valuable for startups in group structures. Also, certain expenditures receive special treatment (e.g. renovation of Preservation Order buildings has a fixed per-square-meter deduction allowance). These provisions ensure that genuine business costs are recognized, while preventing abuse via personal or non-business expenses.

Specific Tax Incentives and Deductible Expense Schemes for SMEs & Startups

To further promote investment, innovation, and growth of small and young businesses, Cyprus has introduced targeted tax incentives in recent years. These go beyond standard deductions, offering enhanced write-offs or special allowances for certain activities. Below we outline the key schemes (as of 2023–2025) that particularly benefit SMEs (small and medium enterprises) and startups:

Enhanced Deduction for R&D Expenditure (120% Super-Deduction)

To encourage innovation, a super-deduction for R&D was enacted in mid-2022. Qualifying R&D and scientific research expenses incurred in tax years 2022, 2023, or 2024 enjoy a 120% deduction (i.e. an extra 20% on top of the actual expense). For example,€100K of eligible R&D spending yields a €120K tax deductible amount. Key points of this scheme:

• The R&D expenditure must be recognized under international accounting standards and undertaken by a business that has the economic ownership of any resulting intangible asset (e.g. a patent or software developed). Both SMEs and larger firms can qualify if they meet these criteria.
• The additional 20% allowance cannot be combined with the IP Box regime’s 80% profit deduction for the same project’s income. Taxpayers must choose the preferred benefit.
• The taxpayer may elect to not claim the extra deduction (or claim only part of it), for flexibility in managing tax losses or future allowances.
• This enhanced deduction scheme is in effect for expenditures through the end of 2024. (As of 2025, policymakers may review its extension or replacement as part of innovation policy.)

This incentive is especially valuable for tech startups, research-driven SMEs, biotech/pharma companies, and fintech firms, as it effectively subsidizes R&D by reducing taxable profits.

Tax Deduction for Investment in Innovative SMEs (Startup Investment Incentive)

Cyprus encourages private investment into startups through a tax deduction scheme for investments in “Certified Innovative Enterprises” (CIE) – typically young SMEs involved in innovation. Initially aimed at individual “angel” investors, the scheme was expanded in July 2022 to also cover corporate investors (legal persons). Key features:

• An investor (individual or company) who provides risk finance to an innovative SME – e.g. by purchasing new equity shares – can deduct a significant portion of the invested amount from their taxable income.
• Deduction limit: Up to 50% of the investor’s annual taxable income can be deducted for such investments, capped at €150,000 per year. (Any excess investment can carry forward for deduction for up to five subsequent years, within the same annual limits.)
• For corporate investors: if the investing company is an “independent investor” (not already connected to the investee), the deductible amount is limited to 30% of the invested sum. This is to ensure the relief targets genuine new capital injections.
• The startup or SME must be certified as “innovative” by the Deputy Ministry of Research & Innovation. Generally this means it either has R&D-intensity criteria or is within its first 7–10 years of operation with a novel product (the certification lasts 3 years).
• The scheme is available until 31 December 2026 under the current legislation.

Benefit: This incentive effectively makes investment in startups more attractive by giving investors (including VC funds or corporate venture arms) a tax break. It channels capital to innovative SMEs that might otherwise struggle to secure funding. For example, a business angel investing €100k in a Cyprus startup could deduct €50k from taxable income (subject to the caps), substantially reducing personal or corporate tax.

Accelerated Deduction for SMEs in the Audio-Visual Industry

Under Cyprus’s “Olivewood” initiative to boost the film and media industry, small or medium enterprises investing in audio-visual infrastructure or technology enjoy accelerated deductions:

• An SME can deduct 100% of the eligible investment in production-related equipment or infrastructure in the year of acquisition (immediate write-off).
• Cap: In that year, the deduction cannot exceed 20% of the investment’s value for a small enterprise, or 10% for a medium enterprise. (These percentages refer to how much of the expense can reduce taxable income in one year.)
• Any excess (the portion not deducted due to the cap) can be carried forward up to 5 years and claimed once the annual 20%/10% limit allows.
• The asset must remain in Cyprus for at least 5 years to prevent abuse (no quick resale offshore).

This scheme, alongside separate film production cash rebates, is part of making Cyprus attractive for film/ TV production. It primarily aids local production companies and studios (often SMEs) by front-loading tax relief on capital outlays for equipment. Essentially, it accelerates depreciation to a one-time deduction, subject to the limits above.

Intellectual Property (IP) Box – 80% Notional Deduction on IP Income

While not restricted to startups, Cyprus’s IP Box regime is noteworthy for innovative companies, including many tech startups and IP-heavy SMEs. Introduced in line with OECD guidelines (modified nexus approach), the “new” IP Box (post-2016) allows an 80% deduction of qualifying profits from eligible intellectual property. In effect, only 20% of the net IP income is taxed at 15%, yielding an effective tax rate as low as about 3% on IP-derived income.

• Qualifying IP includes patents, software copyrights, and other non-obvious, novel IP assets. Notably, SMEs with innovative technology that is not formally patented can qualify if they obtain certification of the IP’s novelty from a designated authority and meet size criteria (IP-related revenues ≤ €7.5m and group revenue ≤ €50m). (Marketing intangibles like trademarks are excluded.)
• Qualifying profits include royalties, licensing income, embedded IP income in product sales, and IP-related compensations. The 80% deduction applies to the proportion of profits corresponding toR&D undertaken by the taxpayer (per the nexus formula).
• For startups developing IP, this regime becomes highly valuable once the IP starts generatingincome. It can drastically reduce the tax burden, freeing up cash for reinvestment. (If an IP asset instead incurs a loss, only 20% of the loss is tax-deductible, mirroring the 80/20 split rule.)

Recent update: As of 2020, Cyprus simplified IP box amortization – there is no clawback (“recapture”) of tax amortization on disposal of IP rights. This adds certainty for companies planning an exit or IP sale.

Notional Interest Deduction (NID) on New Equity

To encourage companies to finance with equity (instead of excessive debt) and to strengthen their capital base – important for new ventures – Cyprus introduced a Notional Interest Deduction in 2015. The NID scheme allows a company to deduct a computed interest amount on new equity injections as if it were an interest expense. Key points:

• New equity (paid-in share capital or share premium) introduced after 1 Jan 2015 qualifies. The deduction is calculated as New Equity × NID interest rate.
• The NID interest rate equals the yield on 10-year government bonds of the country where the funds are employed, plus a premium (currently 5% as of 2020). For example, if the relevant bond yield is 1.5%, the NID rate would be 6.5%, and a €1,000,000 capital increase could yield a €65,000 notional interest deduction.
• The NID deduction is capped at 80% of the taxable profits generated by the new equity for that year. (Any unused NID cannot be carried forward.) Companies can choose not to claim NID or claim a partial amount to manage the cap efficiently.
• Anti-avoidance rules prevent abuse (e.g. recycling old funds as “new” equity).

For startups, NID can substantially reduce taxable profits once they become profitable, effectively rewarding founders or investors for capitalizing the company. Up to 80% of profit can be sheltered if it stems from new equity funding. This is particularly helpful for high-growth startups that attract significant equity investment (e.g. from venture capital) and want to minimize tax during expansion.

Other Recent Incentives and Considerations

• Film Production Tax Exemption: In addition to the SME capital investment deduction mentioned, Cyprus offers qualifying film productions an effective tax exemption/cash rebate up to 35% of eligible production expenses, capped at 50% of the production’s taxable income. This incentive (2018 scheme) is more of a credit/rebate mechanism than a pure expense deduction, but it has spurred the media sector (“Olivewood”). SMEs in content creation benefit either through the rebate or by offsetting taxable income.
• Environmental Investments: As noted, green technology investments (2023–2026) enjoy accelerated depreciation. This reflects a policy shift encouraging sustainability. Businesses (including SMEs) installing solar panels, energy-efficient systems, or electric fleets can write off costs faster, reducing taxable profit in early years of the investment.
• Startup Loss Relief: While not an “incentive” per se, it's important for startups to leverage the 10-year tax loss carry-forward rule (extended from five years on 1 January 2026). Early-stage companies often incur losses; Cyprus allows those losses to offset future profits (or even other group companies’ profits via group relief). As of 1 January 2026 the loss carry-forward period was extended to 10 years, which further benefits startups.

Recent Developments (2023–2025) in Brief

Several legislative changes in the 2023–2025 period have refined Cyprus’s tax deduction landscape:

• July 2022: Introduction of the 120% R&D super-deduction and the Innovative SME investment deduction (expanded to corporate investors). These were part of a policy package to promote innovation and entrepreneurship.
• January 2023: Launch of accelerated capital allowances for eco-friendly investments (2023–26) 10 as a post-pandemic recovery and green economy measure.
• 2023: Strengthening of anti-avoidance rules – e.g. legislating the 2026 start date for denying deductions on interest/royalties to low-tax affiliates, complementing earlier action in 2021 imposing withholding taxes on certain payments to blacklist jurisdictions.
• Ongoing 2025 Tax Reform Discussion: Following a government-commissioned blueprint (Feb 2025), the reform took effect on 1 January 2026, raising CIT to 15% and extending loss carry-forwards to 10 years, among other changes. Importantly, the proposal would retain key incentives like NID, IP Box, and the R&D deductions, recognizing their role in attracting and retaining business. As of August 2025, these proposals are under consultation and not yet law.

Cyprus’s tax regime thus continues to evolve, but the core deductible expense categories and special incentives remain intact. Companies – especially SMEs and startups – can significantly optimize their tax position by leveraging these deductions. Proper planning and compliance (with documentation and conditions) are essential to fully benefit from the allowances while adhering to the law.

Conclusion

In summary, Cyprus provides a comprehensive array of deductible expenses that reduce taxable corporate profits, from everyday operational costs to strategic R&D investments. Businesses should take full advantage of standard deductions (ensuring expenses are documented and meet the “wholly and exclusively for business” test) and be aware of specific limits (e.g. on entertainment or car expenses). Beyond that, Cyprus has positioned itself as an innovation-friendly jurisdiction with targeted tax incentives – such as enhanced R&D deductions, the IP Box, notional interest on equity, and startup investment relief – which can be especially advantageous for emerging companies. The table below recaps some of the special schemes discussed and their eligibility criteria:

Table 2: Selected Tax Incentive Schemes for SMEs/Startups in Cyprus (2023–2025)

Incentive Scheme	Benefit	Eligibility & Key Criteria	Validity
120% R&D Expense Deduction	Super-deduction: 120% of qualifying R&D costs is tax-deductible (i.e. extra 20% write-off).	Companies (all sizes) incurring scientific R&D expenditure, with economic ownership of resulting IP. Cannot combine with IP Box for same income. Must be IFRS-recognized R&D costs.	Tax years 2022– 2024 (for expenditure in this period).
Innovative SME Investment Deduction	Tax break for investors: Deduct 50% of the invested amount (up to 50% of annual income, max €150k) from taxable income. For corporate investors, deduction limited to 30% of investment.	Investments (new shares) in Certified Innovative SMEs (startups) by Cyprus-taxable investors (individuals or companies). SME must be approved as innovative by authorities. Investor must hold the shares ≥3 years.	Until 31 Dec 2026 (investment must occur by then). Unused deductions can carry forward 5 years.
SME Audio- Visual Equipment Deduction	Immediate write-off: 100% of qualifying audiovisual infrastructure or tech equipment investment deducted in year of purchase, capped at 20% (small) / 10% (medium) of the expenditure that year.	Small or medium enterprises in the film/TV/audiovisual sector investing in eligible production equipment or studio infrastructure in Cyprus. Asset must remain in Cyprus ≥5 years. Excess expenditure not deducted is carried forward up to 5 years.	Current incentive (no specific end date set in law; subject to periodic review of film scheme).
IP Box Regime (new Nexus IP Box)	Profit deduction: 80% of net qualifying IP income is deducted (only 20% taxed). Yields effective tax ~3% on IP revenues.	Companies generating income from qualifying intangibles (patents, software, other certified innovative IP). Must track R&D expenditure to apply nexus formula. Excludes marketing-related IP (trademarks). Includes SMEs meeting IP revenue size limits (≤€7.5m) for uncertified patents.	Ongoing (introduced 2016, no sunset; fully aligned with OECD standards).
Notional Interest Deduction (NID)	Interest-equivalent deduction: Notional interest on new equity (share capital) is deductible, up to 80% of profit. Enhances tax relief for equity-financed companies.	Any Cyprus-resident company that issues new equity (after 2015). No specific size restriction – used by large and small companies. New equity must be used for business purposes. Deduction is capped at 80% of relevant profits; not carried forward.	Ongoing (since 2015). NID rate adjusted annually (10-year bond yield + 5% premium). Subject to anti- avoidance provisions.

See also: Cyprus IP Box Regime: Complete Guide to Qualifying IP.

By utilizing the above deductions and incentives, Cyprus companies can optimize their taxable income and reinvest savings into growth. It is advisable for SMEs and startups to seek professional tax guidance to ensure all eligible expenses are claimed and to navigate the conditions of special schemes. With proper planning, the Cyprus tax framework provides substantial support for entrepreneurial success, balancing a low statutory tax rate with generous deductions that reward business development and innovation.

Last updated: January 2026 to reflect Cyprus s enacted tax reform — corporate income tax raised to 15%, with further measures effective 1 January 2026.