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 cannot answer those questions.

Accounting depreciation describes how the asset's cost is recognised in the accounts. A capital allowance is the deduction permitted in the tax calculation. Keeping both schedules clear avoids claiming the same cost twice or missing a deduction altogether.

What is a capital allowance?

Article 10 of the Income Tax Law provides the framework for deductions for wear and tear of qualifying assets owned and used in the business. Eligibility depends on the asset and the applicable rules. Paying through the company bank account is not enough on its own.

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

An invoice with several items may need splitting. A single supplier bill can contain equipment, a service subscription and delivery. Assess the components before posting the entire amount to one expense account.

How does it differ from depreciation?

The accounts use an accounting policy to recognise depreciation over the asset's useful life. The tax computation applies the permitted capital allowance. Do not copy the depreciation charge into the tax return without checking that distinction.

Consider this deliberately simplified example. Assume the accounts show €50,000 profit after charging €3,000 depreciation. The tax review establishes 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. Actual taxable profit also depends on the company's other adjustments. The example shows why depreciation and allowances need separate records.

Which rate should you use?

Classify the asset before looking for a percentage. A building, a machine, a computer and a vehicle should not share a rate simply because each appears in the fixed-asset register. Check the acquisition period and any conditions attached to an accelerated allowance as well.

Keep the legal basis for the selected treatment in the tax working papers. A percentage copied from another company's financial statements may describe its accounting policy rather than the tax allowance available to you.

Private cars deserve particular care: Article 10's definition of qualifying machinery and plant excludes private motor vehicles. Do not 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 identifier and connect it to the purchase evidence. The register should make it possible to locate the asset and understand its remaining accounting and tax values.

Record the description, supplier invoice, acquisition and business-use dates, purchase cost and relevant additional costs. Keep the VAT treatment visible, so recoverable VAT is not casually folded into a second deduction.

Add the location or user, accounting depreciation policy, tax classification and allowances claimed. Then update the record when the asset is sold, scrapped, transferred or stops being used in the business.

For a founder who pays personally for company equipment, first establish ownership and record the amount the company owes correctly. Our director-loan guide explains why reimbursement and the underlying purchase are separate entries.

What happens when an asset is sold?

Remove or update the asset in the accounting records and retain the sale or disposal evidence. Separately calculate the tax result using the allowances previously claimed and the applicable disposal rules. Article 10 includes balancing adjustments when qualifying assets are disposed of or cease to be owned and used.

An asset that is fully depreciated in the accounts can still produce a tax adjustment. A scrapped item also needs a record explaining what happened. Leaving it in the register forever obscures which assets the company still has.

Check VAT on the disposal separately. The income-tax allowance schedule does not decide the VAT treatment of the sale.

How Sumly supports the year-end work

Sumly keeps purchase documents, payments and accounting entries connected and helps with capital allowances. That lets the year-end review start from the actual asset purchases and disposals rather than a list reconstructed from bank descriptions.

Bring forward last year's asset register and tax schedule when moving the books to Sumly. 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

Are capital allowances the same as depreciation?

No. Depreciation is an accounting charge. Capital allowances are deductions under the applicable tax rules, so the amounts and remaining values can differ.

Can I deduct the whole cost because I paid for equipment this year?

Payment alone does not determine the deduction. First establish the nature of the asset, eligibility, cost basis and applicable allowance treatment.

Do I still need records for a fully depreciated asset?

Yes. It may still be in use, have a different tax value or produce a tax adjustment on disposal. Keep its history and update the register when its status changes.