Capital allowances in Cyprus: turn equipment records into the right tax deduction

Your company buys equipment, pays the supplier and records the invoice. At year-end, someone asks for the fixed-asset register and the capital allowance schedule. The bank payment alone can't answer either.

Depreciation is how the accounts spread an asset's cost over the years you use it. A capital allowance is the deduction the tax calculation permits for it. Keep the two schedules apart and you won't claim the same cost twice, or miss a deduction altogether.

What is a capital allowance?

It's a tax deduction for the wear and tear on business assets. Article 10 of the Income Tax Law sets the framework for deductions for wear and tear of qualifying assets owned and used in the business. Whether an asset qualifies depends on the asset and the rules that apply to it. Paying for it from the company bank account isn't enough on its own.

Start by deciding what the purchase is. Stock bought for resale, a repair to existing equipment and new equipment can each need different treatment. The business-expenses guide explains the wider difference between a business cost and a deductible one.

An invoice with several items may need splitting. One supplier bill can contain equipment, a service subscription and delivery. Look at each part before posting the whole amount to one expense account.

How does it differ from depreciation?

Depreciation follows your accounting policy. The capital allowance follows the tax rules. The accounts spread depreciation over the asset's useful life, under the policy the company chose, while the tax calculation applies the allowance the law permits. Don't copy the depreciation charge into the tax return without checking the difference.

Here's a deliberately simplified example. Say the accounts show €50,000 profit after charging €3,000 depreciation. The tax review finds an allowable capital deduction of €2,000 for the same assets.

The €2,000 is an assumption for this example, not a published allowance rate. Real taxable profit also depends on the company's other adjustments. The point is that depreciation and allowances need separate records.

Which rate should you use?

The one the tax rules give that class of asset, so classify the asset before you look for a percentage. A building, a machine, a computer and a vehicle shouldn't share a rate just because they all sit in the fixed-asset register. Check when the asset was bought, too, and any conditions attached to an accelerated allowance, a higher rate the law allows for assets bought in certain periods.

Keep the legal basis for the treatment you chose in your tax working papers. A percentage copied from another company's financial statements may describe its accounting policy, not the tax allowance open to you.

Take particular care with private cars. Article 10's definition of qualifying machinery and plant excludes private motor vehicles. Don't assume that company ownership or occasional business travel creates an allowance under that category.

Build a register that answers the next question

Give each asset an ID and link it to the purchase evidence. From the register, anyone should be able to find the asset and see its remaining value in the accounts and for tax.

Record the description, the supplier invoice, the dates the asset was bought and first used in the business, the purchase cost and any relevant extra costs. Keep the VAT treatment visible, so VAT you can reclaim doesn't slip into a second deduction.

Add where the asset is or who uses it, the depreciation policy, the tax classification and the allowances claimed. Then update the record when the asset is sold, scrapped, transferred or stops being used in the business.

If a founder pays personally for company equipment, first establish who owns it and record what the company owes them correctly. Our director-loan guide explains why the reimbursement and the purchase itself are separate entries.

What happens when an asset is sold?

You update the accounts, and you work out the tax result separately. Remove or update the asset in the accounting records and keep the sale or disposal evidence. Then calculate the tax result from the allowances already claimed and the disposal rules that apply. Article 10 includes balancing adjustments when qualifying assets are disposed of or cease to be owned and used. A balancing adjustment squares the allowances you claimed with what the asset actually fetched.

An asset that is fully depreciated in the accounts can still produce a tax adjustment. A scrapped item needs a record of what happened to it too. Leave it in the register forever and nobody can tell which assets the company still has.

Check the VAT on the disposal separately. The income tax allowance schedule doesn't decide the VAT treatment of the sale.

How Sumly supports the year-end work

Sumly keeps purchase documents, payments and accounting entries linked, and helps with capital allowances. So the year-end review starts from the real asset purchases and disposals, not a list rebuilt from bank descriptions.

When you move your books to Sumly, bring last year's asset register and tax schedule. Opening balances need the earlier allowance history, not just the original invoice totals. Your year-end checklist should include a review of both additions and disposals.

Common questions