The rule runs against instinct
| Event | Expectation | Cyprus treatment |
|---|---|---|
| Exchange gain | raises the tax | not taxable |
| Exchange loss | reduces the tax | not deductible |
| Unrealised difference | recognised at the balance sheet date | likewise neutral |
The rule goes back to a 2015 amendment to the Income Tax Law.
The exception: trading in currencies
Companies whose business is trading in currencies or related derivatives do not fall under the neutrality. For them the differences are subject to corporate tax.
According to one of the sources we checked, they can make an irrevocable election to be taxed only on realised differences. That takes the volatility of unrealised valuations out of the tax base but binds permanently.
Anyone occasionally invoicing in dollars or pounds does not fall under it. What matters is that currency trading is the business and not a side effect of it.
You still have to post it
Tax neutral does not mean irrelevant for bookkeeping. Two duties remain:
Convert. Foreign currency transactions have to be converted into euro, and the difference between invoice date and payment date has to be shown separately.
Reconcile. Because the difference changes the accounting result but not the tax result, the two diverge. The difference belongs in the reconciliation to the tax return. The same pattern is described in the guide to the profit and loss account: the P&L result is not the tax base.
The case where it becomes practical: payment providers
Here three amounts come together in a single payout:
| Component | Tax treatment |
|---|---|
| Turnover | taxable |
| Provider’s fee | deductible, plus reverse charge on the fee |
| Exchange difference | neutral |
Anyone booking only the euro amount on the bank account mixes all three into one figure. Then turnover is too low, the fee is missing from the costs, and a tax neutral difference is hidden inside a taxable item. Details in the guide to payment providers.
What we could not substantiate
- The wording and source of the provision. Several overviews describe the rule consistently; we did not inspect the consolidated text of the law on it, and the sources do not give a consistent article number.
- The relevant conversion rate. We found no binding Cyprus requirement. The spot rate on the date of the transaction and a monthly average are both in use.
- Conversion for VAT purposes. That is a separate provision we did not check, and the corporate tax neutrality does not apply there.
- The exact scope of the neutrality. One source describes it for all currency differences, another reads it more narrowly.
Anyone invoicing mostly in foreign currency should have the treatment settled authoritatively once: Cyprus setup from one place.
Bookkeeping: keeping three amounts apart
A payout in foreign currency is not one figure but three.
In Volk Accountant the movements come in as a file through data import rather than being read off a bank statement, Banking shows the payout alongside, and invoices hold the original amount. The reports then show what was turnover and what was exchange.
What shows up in reconciliation is in the guide to bank reconciliation.