Running payroll in Cyprus

Cyprus isn’t just a popular tourist destination, but the Mediterranean island is also very popular with foreign investors and international companies looking for a suitable base from where to conduct business with partners in Europe and the Middle East. Thanks to its favorable business and investment environment, the country has gained an international reputation as a tax haven for foreign companies. 

However, foreign employers looking to hire local talent or to set up a local legal entity should be familiar with the country’s compliance requirements, including the rules and regulations applying to payroll. This guide will tell you everything you need to know about taxes and payroll in Cyprus.

The first steps for employers who need to process payroll for their employees in Cyprus is to register with the Tax Department as well as with the Social Insurance Services. After the registration process is completed, the authorities then issue a Tax Identification Code and a Social Insurance Number to use for payroll processing. 

New hires should be declared to both authorities as soon as the employment formalities are sorted. Employees living in Cyprus also need to register with Social Security and the national Tax Department to receive their personal tax and social security numbers. If they are not registered yet, employers have 7 days to hand in the paperwork necessary to register their employees. There is no formal obligation to set up a local bank account as payments to employees, tax authorities and social security bodies can also be made via a foreign bank account. 

Every employed person in Cyprus is covered by the national social security scheme. The system is funded by employers and employees in equal parts - the State also contributes to the social security costs. In 2019, the country introduced a new General Healthcare System which is also funded by employment contributions. Other than the main social security bodies, employers also have to make an 8% payment to a centralized holiday fund - exemptions are possible.

Tax considerations

Personal income tax in Cyprus is progressive with tax rates ranging from 20% to 35%. Income of up to EUR 19,500 is tax-free. Tax residents pay income tax on their worldwide income. For those without tax residency status in Cyprus, personal income tax is only levied on certain types of income earned in the country. To be considered a tax resident in Cyprus, individuals must spend at least 183 days within one single year in the country - exceptions apply. 

Benefits provided to employees are generally subject to income tax. Special rules apply to benefits in kind. There is a 50% tax exemption for expatriates coming to work in Cyprus. The exemption applies to income exceeding EUR 100,000 per year and is available for the first 10 years of employment in Cyprus.

For lower income, there is a 20% tax exemption - or up to EUR 8,550, whichever is lower. The 20% exemption is limited to 5 years. What’s more, Cypriot tax law provides for a 90-day tax exemption for any income earned working abroad for a foreign company.

Tax withholding and reporting 

Employers have to withhold their employees’ personal income tax through the PAYE (Pay As You Earn) system and report and submit the withheld amounts to the Tax Department by the end of the following month, using the TD61 tax form. PAYE payments to the tax authority can be made via bank transfer (also from a foreign bank account) or via the authority’s online system. Once a year (usually around the 31st of March), employers also have to file an online tax return (TD7 form). 

Employees need to file a personal income tax return (TD1 form) no later than the 31st of July of the following year. For this purpose, the employer must make sure to provide the employee with a so-called emoluments certificate which contains information on paid income tax as well as on social security and healthcare contributions (TD63 form). The tax year in Cyprus runs from January 1 to December 31.

Social security contributions

Employees in Cyprus are automatically covered by the country’s social insurance scheme. There are two main funds to which employees and employers make monthly contributions: 

• Social Insurance Fund

• General Health System (GHS)

The contribution to the Social Insurance Fund is currently set at 16.6% and is split between employee and employer in equal parts. Contributions to the General Health System amount to 2.65% for employees and to 2.9% for employers. 

In addition to these two main social security funds, employers also have to make a monthly contribution to three other funds supporting industrial training, redundancy and social cohesion. 

Employers are responsible for withholding their employees’ share as well as for making their own contributions. The deadline for payments to the social security authority is the end of the month following the pay period. Fines for late payments range between 3% and 27%. Since January 2021, it is mandatory to issue social security payments via the official online portal SISnet. 

Unless they decide to offer their employees more paid days off than the statutory requirement and wish to provide holiday pay to their employees directly, companies are also obliged to contribute to a Central Holiday Fund which is used to cover the employee’s statutory annual leave entitlement. Contributions amount to 8% of the employee’s annual earnings.

Here is an overview of the different social security contributions (incl. payments to the Central Holiday Fund) which are levied on employees and employers. Rates are valid as of January 2022.

* For the calculation of these contributions, an income ceiling of EUR 4,840 applies (January 2022). The income threshold is adjusted every year by the government.

** There is an annual income cap of EUR 180,000 for GHS contributions.

Please note: The government has already outlined the development of the social security contributions for the following years. According to the planned scheme, the contribution rate to the Social Insurance Fund for both employees and employers is due to increase every five years as follows: 

• January 2024: 8.8% for both employee and employer

• January 2029: 9.3% for both employee and employer

• January 2034: 9.8% for both employee and employer

• January 2039: 10.3% for both employee and employer

Employees in Cyprus are entitled to various benefits. These include:

• Annual leave and public holidays: 20 days of paid annual leave per year for employees with a 5-day working week (24 days for employees with a 6-day working week); plus between 14 and 17 public holidays

• Maternity leave: 18 weeks for the first, 22 weeks for the second and 26 weeks for the third (and any subsequent) child

• Paternity leave: 14 days of paternity leave which must be taken within the first 16 weeks after birth

• Parental leave: 18 weeks of unpaid leave can be taken by either one of the parents

• Sick leave: no obligation for employers to provide sick pay as sickness benefits are paid by social security starting from the 4th day of sick leave

For more information on employee benefits and other employment requirements in Cyprus (including severance pay and termination procedures), check out our Global Hiring Guide.

There is no national minimum wage in Cyprus which applies to all jobs and sectors. However, the law sets minimum remuneration levels for some specific job categories which are subject to low earnings (shop assistants, clerks, etc.). For those occupations, the minimum wage is currently (valid January 2022) set at EUR 870 per month - increases to EUR 924 after 6 months of continuous employment with the same employer. Chances are that Cyprus’ minimum wage will rise this year, following discussions between the Cypriot government and the International Labor Organization (ILO). 

There are no legal regulations for the compensation of overtime hours. Unless there is a collective agreement in place which specifies remuneration rates for additional hours, employers should state overtime pay in the individual employment contract. It is not mandatory to pay employees an annual bonus.

The law in Cyprus doesn’t stipulate a specific payroll frequency. Employers are therefore free to choose a payroll scheme which is most suitable for the company. Usually, employees get paid on a weekly or monthly basis. In most companies, employees receive their pay at the end of each month. Payments can be made via bank transfer, in cash or even in kind if this payment method is customary in the employer’s industry. It is advisable to convert payments to euros to calculate the necessary tax and social security deductions. 

Payslips should be provided to the employee for each pay period. They can either be digital or in hard copy form. Employers need to keep proper payroll records. Although the law fails to indicate a time frame for record keeping in payroll, the general standard for accounting books and records is 6 years.