Deductible Expenses in a Cyprus Company (2026): The Complete Founder's Guide

Every founder running a Cyprus company asks the same question on day one: "What can I actually deduct?" The answer is both simple and precise. Simple, because Cyprus has a general deductibility rule that is broad and commercially sensible. Precise, because specific categories have specific caps and documentation rules that, if ignored, get added back by the tax auditor. This guide walks through every category a Cyprus company encounters in 2026 — what you can deduct, what is capped, and what is disallowed outright.

The general deductibility rule

Article 9 of the Cyprus Income Tax Law N.118(I)/2002 (as amended) allows the deduction of all expenses "wholly and exclusively incurred for the production of income". That one sentence does most of the heavy lifting. Three tests flow from it:

• Wholly — the expense is entirely for business purposes, not partly personal.
• Exclusively — there is no private benefit mixed in. Where an expense has both a business and a personal element, only the business portion is deductible and the split must be documented.
• For the production of income — the expense must be connected to generating taxable income, not a capital investment (capital is handled through depreciation/capital allowances).

On top of this general rule, Cyprus law lists specific allowable categories (Article 9) and specific non-deductible items (Article 11), plus a handful of enhanced deductions such as NID and the R&D super-deduction.

Salaries, directors’ fees, payroll costs

Fully deductible:

• Gross salaries of employees.
• Directors’ fees (provided they are reasonable for the work performed).
• Employer’s contributions to Social Insurance (8.8% up to the insurable-earnings ceiling).
• Employer’s GESY (2.90% on the contribution base up to €180,000 per employee).
• Employer’s contributions to the Social Cohesion Fund, Redundancy Fund and Industrial Training Fund.
• Employer-paid private medical insurance (subject to reasonableness).
• Bonuses, commissions, overtime, allowances paid in connection with employment.

One rule traps first-time founders: the company’sdirectors’ fees to the beneficial owner must be set at a commercially reasonable level. Inflating director compensation to zero out corporate tax attracts Tax Department attention; setting it unrealistically low to avoid PIT bands also invites scrutiny. A balanced salary/dividend mix — the subject of our dedicated article on the salary vs dividends mix — is the right approach.

Office rent and home-office usage

Deductible:

• Commercial office rent, fully.
• Utilities, internet, cleaning for commercial premises.
• Office fit-out amortised over its useful life.
• Registered office service fee — fully deductible.

Home office: allowed for a genuine home-office user on a proportionate basis. The typical approach is to calculate the percentage of the home used exclusively for business (e.g. one room out of five rooms = 20%) and apply that percentage to:

• Proportionate rent or mortgage interest (not principal).
• Proportionate utilities (electricity, water, heating, internet).
• Proportionate home insurance.
• Proportionate council tax.

Keep floor plans, utility bills and a clear usage explanation on file. Where the room has a dual use (office by day, guest room by night) the Tax Department will often deny full deduction and propose a reduced percentage.

Vehicles and travel

Company-owned vehicles used for business are deductible with private-use portion disallowed. Practical approach:

• Record business/private mileage via logs or a tracker app.
• Apportion fuel, insurance, servicing, parking accordingly.
• Depreciate the vehicle itself over its useful life (see below).

For passenger cars there are specific VAT-recovery restrictions and private-use benefit-in-kind rules for director-use cars. For mixed-use car arrangements, many founders find it cleaner to use a private car and claim a business-mileage reimbursement through the company instead of a company car.

Business travel:airfare, hotels, taxis, per-diems and conference fees are fully deductible when the travel is wholly for business. Keep the trip purpose documented — an itinerary, meeting confirmations, client emails — in the expense file.

Professional fees, software, subscriptions

All fully deductible:

• Legal fees (including our engagement fees and tax advice).
• Accounting and audit fees.
• Payroll-processing fees.
• Software subscriptions used in the business (Adobe, Figma, Slack, Notion, AWS, etc.).
• Industry-specific memberships and professional dues.
• Advertising, marketing, PR, SEO, paid-ads spend.
• Market research and data subscriptions.
• Bank charges and payment-processing fees (Stripe, Wise, bank fees).
• Insurance premiums (professional indemnity, D&O, cyber).

Entertainment and client meals (the cap)

Entertainment expenses — client meals, client hospitality, gifts — are deductible up to the lower of 1% of the company’s gross income or €30,000 per yearunder the 2026 reform (raised from €17,086 previously). Amounts above this ceiling are added back when computing taxable profit.

For a company with €500,000 gross income, the cap is 1% = €5,000. For a company with €5,000,000 gross income the cap is €30,000 (the absolute ceiling binds).

Keep receipts with the client name and commercial purpose. Entertainment spending without a clear business connection is disallowed fully, regardless of the cap.

Depreciation and capital allowances

Capital assets are not deductible in the year of acquisition. Instead, Cyprus allows annual depreciation at statutory rates:

Rates above are standard Cyprus Income Tax Law rates applied on a straight-line basis. Accelerated depreciation can apply to certain qualifying assets; a Cyprus tax professional should confirm the rate used in your TD4.

The R&D super-deduction

Qualifying research and development expenditure attracts a 120% deduction: €100 of qualifying R&D produces a €120 tax-deductible amount (a 20% uplift). The incentive applies to qualifying R&D incurred between 2025 and 2030. Qualifying R&D includes:

• Salaries of R&D staff directly engaged in development.
• Direct materials and consumables used in R&D.
• Cost of computer time, specialised software, cloud compute.
• External subcontracted R&D (with documentation of scope).

The super-deduction is compatible with the Cyprus IP Box regime, and for a SaaS / AI company it typically reduces effective tax meaningfully.

Notional Interest Deduction (NID)

NID is a deemed-interest deduction on new equity funds introduced into the company (share capital issued after 1 January 2015). Mechanics:

• NID = new equity × reference rate.
• Reference rate = 10-year government-bond yield of the country where the equity is invested + a 5% risk premium.
• NID cannot reduce taxable income by more than 80% per type of income.
• Cannot be combined with certain tax-neutral reorganisations or where the equity is part of a specific anti-abuse pattern.

NID is the single most underused Cyprus tool among first-time founders. A trading company funded with €500,000 of fresh equity and a reference rate of 10% gets €50,000 of NID per year — reducing the 15% corporate tax bill by €7,500 annually for no economic cost.

Loss carry-forward and group relief

Under the 2026 reform, tax losses can be carried forward for 7 tax years(up from 5) and offset against future taxable profit. Losses are ring-fenced per company — they do not transfer when the company is sold unless the ownership change passes the continuity test. The extension particularly helps start-ups, capital-intensive projects and companies with multi-year investment cycles.

Group relief: a Cyprus-tax-resident group (75%+ common ownership) can offset the current-year loss of one member against the current-year profit of another member, within the same tax year, subject to detailed conditions.

What is NOT deductible

Article 11 and general case law disallow the following:

• Company formation costs (incorporation, legal fees for setting up the company) — capitalised or disallowed per IFRS.
• Fines, penalties and punitive damages (e.g. tax penalties, traffic fines).
• Political donations and contributions to political parties.
• Private or personal expenses of directors or shareholders, including personal travel, personal meals, personal clothing.
• Personal income tax paid by the director or shareholder.
• Expenses not supported by a valid invoice or other evidence.
• Expenses in a foreign currency where the conversion is not supported by a bank statement or recognised rate source.
• The principal repayment on loans (only the interest portion is deductible).
• Donations to non-approved institutions (donations to charities on the Cyprus Ministry of Finance approved list are generally deductible in full with supporting receipts).
• Capital expenditure — deducted through depreciation instead.

Worked example: a €180k-revenue consultant

Consider a Cyprus-tax-resident consulting company with the following 2026 profile:

After corporate tax the company has €63,920 of retained profit available to distribute as dividends. For a non-dom director these dividends flow to the beneficial owner at 0% SDC (with only the GESY 2.65% contribution capped at the €180,000 contribution base).

The documentation you must keep

Cyprus Tax Department practice expects every deducted expense to be supported by:

• A valid invoice or receipt in the company’s name.
• Evidence of payment from the company’s bank account (not personal).
• A clear business purpose traceable on file (meeting notes, project reference, client name).
• For travel: itinerary and meeting confirmations.
• For entertainment: client name and purpose on the receipt.
• For home office: utility bills plus a written working of the business-use percentage.
• For R&D: project documentation, time sheets for R&D staff, subcontractor scopes.

Records must be retained for 6 years from the end of the relevant tax year. Cyprus Tax Department audits routinely request expense samples reaching back that far.