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Tax-smart profit extraction: 10 strategies to boost earnings from your business

Running your own business provides the advantage of deciding how much profit should stay within the company and how much should be returned to you as the owner. However, this freedom brings up a common tax-planning question: What is the most tax-efficient way to extract money from your company?

Profit extraction methods vary, each with its own benefits and tax implications. Unfortunately, many entrepreneurs lack proper advice or understanding of these strategies and how to effectively implement them. In this series of articles, we will explore the following approaches for withdrawing funds from your business. We will analyze their financial implications for you and your company, as well as evaluate their tax effectiveness:

1. Salaries and bonuses
2. Benefits in kind
3. Director's remuneration
4. Pension contributions
5. Dividends
6. Selling assets to the company
7. Charging rent on personally owned property used by the business
8. Charging interest on loans to the company
9. Loans or advances from the company
10. Liquidation of the company

Should surplus profits be retained or extracted, and how much to withdraw?

Apart from legal and tax considerations, your personal financial needs and those of your business are the primary factors in determining the amount to extract and reinvest in the business. It goes without saying that to grow your business, you need to invest in it. Equally important is your personal need for funds to maintain your desired lifestyle. Striking the right balance is an art rather than a strict formula and requires a careful assessment of your current circumstances, future plans, and both your business and personal needs.

Legally, the declaration and payment of dividends are regulated by the Articles of your company, which are subject to statutory provisions and rules on capital maintenance outlined in the Cyprus Companies Law Cap.113. One fundamental rule is that dividends can only be distributed from profits. Therefore, even if your business has positive cash flow, you cannot pay dividends if there are no profits. However, you can utilize alternative methods such as taking a salary or receiving repayment of a previously given loan to the company.

While there is no statutory requirement for companies to distribute dividends, the Cyprus tax legislation imposes a "deemed dividend distribution." This means that companies are deemed to have distributed 70% of their after-tax accounting profits to their Cyprus-tax-resident shareholders at the end of the second year from the year in which the profit was made. This "notional dividend," as outlined in §3(3) of the Special Defence Contribution Law 117(I)/2002, is then subject to a 17% tax in the hands of the Cyprus-tax-resident shareholder. For example, if your business made an after-tax accounting profit in 2022 and paid out only 50% of it in dividends, the remaining 20% undistributed profits of 2022 will be deemed to have been distributed at the end of 2024 (if not fully paid by then), and you, as a shareholder, will be subject to a 17% special defence contribution.

The deemed dividend distribution serves a dual purpose for the Cyprus state. First, it ensures a steady inflow of tax revenue from individuals receiving dividend income. Second, it prevents excessive accumulation of profits and the capital appreciation of shares, which, if sold, would not incur any tax.

In conclusion, the amount you pay yourself from your company will be determined by both business and personal factors. However, it is the legal and tax aspects that define the feasible and tax-efficient methods of profit extraction. It is crucial to recognize that a lack of financial and tax planning may inadvertently lead to choosing a profit extraction method with high overall tax costs or one that hinders your company from seizing favorable business opportunities

Employment income

One effective approach to extracting profits from an owner-managed company is through employment income, such as salaries and bonuses. This strategy applies to individuals actively involved in the daily operations of the business, either as employees or executive directors. To formalize this arrangement, you'll need to sign an employment contract, thereby becoming an employee of your own company. When setting up the contract, it's important to note that the minimum monthly salary required by law in Cyprus is €885 initially, increasing to €940 after six months of employment.

Business implications

In addition to paying emoluments (net of 8.3% social insurance, 2.65% GHS and PAYE), the company will incur various employment-related contribution (payroll) costs:

8.3% - social insurance
2.9% - GHS
1.2% - redundancy fund
0.5% - industrial training (HRD)
2.0% - social cohesion
8.0% - holiday fund

If the company offers a vacation policy that exceeds the legal requirements specified in the Annual Leave with Payment Law 8/1967 (20 days for 5-day workweek employees or 24 days for 6-day workweek employees), it can request an exemption from contributing to the Holiday fund from the Director of Social Insurance.

Contributions, when a Holiday fund exemption is granted, are calculated based on insurable earnings, which cover nearly all types of emoluments and are subject to an upper limit that is adjusted annually in line with inflation. With the exception of social cohesion, which has no upper limit, neither the employer nor the employee is liable to contribute for any excess amount. For 2023, the maximum yearly amount of insurable earnings is €60,060 (€5,005 per month).

Personal implications

As an employee or executive director, two withholdings will be deducted from your employment income: 10.95% for (social insurance contributions and GHS), remitted to the Department of Social Insurance, and pay-as-you-earn (PAYE) personal income tax, calculated based on progressive tax rates after allowing for tax deductions (including social insurance). For instance, if your gross annual employment income is €21,898 you will incur a social insurance and GHS cost of €2,398 per year (8.3% and 2.65% of €21,898 respectively), but you will not pay income tax since your taxable earnings fall below €19,500.

Moreover, being on your company's payroll and making social insurance contributions entitles you to all benefits and grants provided by the social insurance scheme (e.g., old-age pension, unemployment benefits, maternity benefits) as well as participation in your company's provident fund, among others.

Tax effectiveness

Essentially, the company incurs an additional cost of 14.9% (or 22.9% if not exempt from the Holiday fund) on payments to its employees. However, it can reduce its taxable income by the amounts paid to the various funds, except for the social cohesion fund, which is not tax-deductible. As an employee of your business, you will pay 8.3% in social insurance and income tax on any earnings above €21,898.

Assuming the company has opted out of the Holiday fund, the minimum combined (company and owner) total cost, after social insurance and income tax, is 25.85%. This strategy can be somewhat expensive if used alone, but it is unavoidable because, as an employee of the business, you must receive a salary. If you work for your company without receiving remuneration, the Director of Social Insurance will likely impose such an arrangement, and you will be required to make contributions.

Lastly, in most cases, it is advantageous to involve your spouse in the business as a director or employee, whether on a full-time or part-time basis, and pay them remuneration, provided their marginal tax rate is lower than yours. It is usually recommended that the remuneration be deposited into a separate bank account in the spouse's name only, rather than a joint account. However, tax inspectors will likely scrutinize remuneration paid to family members to ensure it aligns with market rates. If the remuneration is unreasonably high considering the position and work performed, any excess amount will likely be disallowed as a business expense.


What exactly are benefits in kind? In essence, they refer to the direct or indirect perks that you, as an employee or executive director of your company, receive on top of your regular salary. While some benefits in kind are subject to taxation, others are not. Common examples of benefits in kind include health insurance, company cars, mobile phones, job-related perks, accommodation, childcare, school tuition, travel and entertainment allowances, as well as cheap or interest-free loans.

Unfortunately, the Cyprus Income Tax Law 118(I)/2002 provides only limited and ambiguous guidance on the taxation of benefits in kind. As a result, determining which benefits are taxable can be a complex task, heavily reliant on your specific circumstances and professional tax advice.

Business and personal implications

The primary business rationale behind utilizing benefits in kind lies in the flexibility they offer for structuring taxable or non-taxable perks within your company.

Taxable benefits can be considered as allowable expenses, effectively reducing the company's tax liability. However, according to Cyprus social insurance legislation, taxable benefits in kind are classified as insurable earnings, requiring both the employer and the employee to contribute to social insurance payments. Moreover, if the company covers an expense on your behalf, it may not be eligible to claim input VAT, which increases the overall cost of this approach. While there are ways to mitigate this VAT implication, benefits in kind remain a complex aspect of Cyprus income tax and cannot be easily generalized.

It's important to note that benefits in kind are considered part of your overall income, subject to both social insurance contributions and income tax.

Tax effectiveness

Similar to salary and bonus remuneration, the tax efficiency of benefits in kind is favorable up to a certain extent. However, unlike salaries and bonuses, the choice of benefits can significantly impact the overall cost involved.

Director's pay

In the realm of owner-managed businesses, the pursuit of extracting profits takes center stage, and one avenue often explored is through director's pay. This essay aims to shed light on the intricate tax implications associated with compensating directors, elucidating how it becomes a crucial mechanism for business owners to access their company's financial gains. By delving into the distinct categories of directors—executive and non-executive—we will unravel the contrasting roles they assume, the differing taxation methods applied to their remuneration, and the consequential impact these choices have on the overall financial landscape of the company. Armed with this comprehensive understanding, entrepreneurs can make astute decisions regarding director's pay, harnessing its potential to optimize their business's financial strategies and secure sustained prosperity.

Types of directors

In essense, there are two types of directors: executive and non-executive. Both types have legal duties and responsibilities, but they differ in their level of involvement in the business and how their pay is taxed.

Executive directors have an active leadership role and are usually responsible for day-to-day operations or strategic functions like managing finances or marketing. Non-executive directors have a monitoring and supervisory role and are not involved in day-to-day management.

Although both types of directors are considered office holders, executive directors, due to their close involvement in the business, can also be seen as employees. Non-executive directors, on the other hand, work under a contract for service and can be considered self-employed.

Taxation of Executive Directors (EDs)

In most small and medium-sized enterprises (SMEs) and companies with a single director, the owner serves as the director, shareholder, and manager.

The pay of executive directors is taxed similarly to that of employees. They contribute 6.8% of their insurable earnings to social funds and pay PAYE (Pay As You Earn) based on their progressive tax rate. The progressive tax rates for personal income in 2023 were as follows:

0% on earnings from €0 to €19,500
20% on earnings from €19,500 to €28,000
25% on earnings from €28,000 to €36,300
30% on earnings over €36,300 to €60,000
35% on earnings over €60,000

Taxation of Non-Executive Directors (NEDs)

In some cases, a business owner may choose to step back from daily operations and primarily supervise, monitor, and contribute to the company's strategy. It is also possible for a family member, co-founder, or close associate to be appointed as a non-executive director.

The taxation of NEDs' pay, which may include director's fees, benefits in kind, and other payments, follows the progressive tax rates similar to executive directors. However, NEDs' pay is not subject to social fund contributions for both the director and the company but only GHS.

Impact on the company

The significant tax benefit for a company paying remuneration to NEDs instead of executive directors is the avoidance of the 12% social contributions and 2.9% GHS. Salaries, fees, and benefits paid to both executive and non-executive directors are deductible expenses for the company, reducing the taxable income and resulting in lower corporate tax.

Lastly, drawing funds from your company in the form of director's fees or remuneration can be even more advantageous in terms of tax efficiency when the NED is not a tax resident of Cyprus or when directorship is provided as part of a service package from a Personal Service Company (PSC).


Extracting profits from your own business in the form of a pension can be a highly effective tax strategy, yet many business owners fail to recognize its benefits. This article aims to shed light on the workings of this tax strategy, its advantages, the associated tax benefits for both individuals and businesses, and the process of structuring a pension plan.

How does a pension plan work?

The essence of this tax strategy lies in diverting funds from your business into an established company pension plan (approved provident fund), which allows you to withdraw the funds without incurring income tax. Contributions to the pension plan can be made by both you and your business in a proportion that aligns with your personal and financial goals, optimizing your tax position. For instance, you might contribute 2% of your gross salary to the pension plan, while your business contributes 8%. Various contribution options are available.

Why consider a pension plan?

Including a pension as part of your remuneration offers several significant benefits. Firstly, it enables you to save for your future needs. Secondly, it minimizes your personal and business tax liability. Thirdly, you retain the flexibility to structure and customize the pension plan according to your specific circumstances. Fourthly, this type of remuneration does not count as insurable earnings, thus avoiding social insurance levies. Finally, it's important to note that fund withdrawals are not limited to pensionable age, as commonly misunderstood.

Anticipated tax savings

This tax strategy delivers dual tax savings: personal and business. Your personal tax saving results from reducing your taxable income through pension plan contributions. On the other hand, business contributions to the plan qualify as deductible business expenses, thereby reducing profits and lowering corporate tax liability. In most cases, the combined tax savings for individuals and businesses range from 50% to 60%. Compared to receiving dividends, the tax saving is at least 20%.

Starting your pension plan

Regardless of whether you seek professional advice from a financial or tax advisor, the process of implementing this strategy involves similar steps. First, assess your personal and business financial positions to determine the benefits of including a pension plan in your remuneration and how it will impact your business now and in the future. If the benefits justify utilizing a pension fund, the next step is to establish an approved provident fund and select an appropriate tax plan. This phase also includes defining the fund's mandate and ensuring contributions are securely invested. Finally, based on your personal financial needs, determine the available methods for accessing the funds.

Selling assets to the company

Extracting cash from your company can be a streamlined and relatively straightforward process by selling assets to your business. However, to ensure a smooth transaction and minimize potential tax liabilities, it's essential to understand the types of assets you can sell, determine their appropriate prices, and safeguard your interests.

In essence, you can sell any tangible or intangible asset to your company as long as you possess full ownership and your business's Memorandum of Association allows for such transactions. Examples of assets include yachts, motor vehicles, computer hardware and software, furniture, logos, trademarks, antiques, real estate, and shares. Upon completion of the sale, you will receive a cash payment, and the asset will become the property of your business.

One critical aspect of this strategy, closely scrutinized by tax authorities, is determining the selling price. As a general guideline, you can establish a reasonable price by referencing the market value of a similar asset in the same condition. In most cases, you should be able to determine the price independently. However, if you're uncertain, it's advisable to seek the assistance of an accountant for a professional valuation.

When you sell an asset, you will generate either a gain or a loss, depending on whether the selling price exceeds or falls below the initial purchase price. In Cyprus, capital gains tax is not applicable, except when the gain arises from the disposal of immovable property within Cyprus or shares in a company that invests in real estate within Cyprus. Currently, the capital gains tax rate for immovable property is 20%.

Regardless of the future use of the asset, it's important to remember that utilizing business assets for personal purposes incurs tax liability and potentially affects social insurance, especially if you are an employee. The tax liability is calculated based on asset usage and is subject to taxation at your marginal rate as a benefit-in-kind.

Finally, exercise caution when selling saloon cars and real estate to your business, as the associated tax implications may impact you or your business in the long run. Selling a saloon car, for instance, disallows capital allowances and running expenses (such as fuel, insurance, maintenance, road tax, etc.) for corporate tax calculation, regardless of whether the car is used for business or personal purposes. Consequently, this increases the tax base and corporate income tax liability. Conversely, when contemplating selling real estate to your business, carefully consider the alternative of renting the premises to your business, as this may offer a more efficient means of generating additional income.

By adopting a well-informed approach and addressing potential tax considerations, you can effectively leverage asset sales to maximize profits in your owner-managed business.