The Cypriot government has announced a series of tax reforms aimed at modernizing the tax system, enhancing competitiveness, and ensuring a fairer distribution of the tax burden. The planned changes impact both businesses and individuals, introducing new provisions for the taxation of income, dividends, and corporate profits.
1. Contemplated Tax Reforms for Legal Entities in Cyprus
Corporate Tax Rate Increase from 12.5% to 15%
In alignment with global tax trends and OECD recommendations on Pillar II, the corporate tax rate in Cyprus is set to increase from 12.5% to 15%. While this raises the nominal tax burden, most existing exemptions already applicable in Cyprus shall remain (as expanded below).
Abolition of Deemed Dividend Distribution
One of the most significant changes is the removal of the deemed dividend distribution (DDD) rules, which previously imposed tax obligations on undistributed profits. This abolition simplifies the tax treatment of retained earnings, providing businesses with greater flexibility in managing their capital and reinvestment strategies, and solves a long-standing problem with Cyprus companies, especially those who re-invested their profits.
Retention of Key Tax Incentives: NID, IP Box & Sale of Shares
The intentions are that the Notional Interest Deduction (NID) on new equity and the Intellectual Property (IP) Box regime will continue to be available, maintaining Cyprus's appeal for businesses seeking tax-efficient financing and innovation-friendly tax structures. Therefore, any companies which already benefit from such schemes will continue to enjoy largely the same tax treatment.
Additionally, the profit from the sale of shares will remain exempt from taxation, ensuring that Cyprus continues to offer an attractive environment for investment and corporate structuring.
New Reorganization Framework
A revised corporate reorganization framework is being introduced to provide more flexibility and efficiency in mergers, acquisitions, and restructurings. This aims to facilitate business transformations while ensuring compliance with tax and legal requirements, promoting a more streamlined and transparent process, especially in cases relating to division of family businesses.
Increased Loss Carry Forward, Especially in Green Tech
Companies, particularly those operating in the green technology sector, will benefit from extended loss carry-forward provisions. Under the proposed reform, tax losses can now be carried forward for up to 10 years instead of 5, subject to specific conditions. This measure allows businesses to offset losses against future taxable profits for a longer period, encouraging investment in sustainable initiatives and fostering innovation in environmentally friendly industries. Furthermore, the Group Relief mechanism, which allows for the offsetting of losses within a group of companies, will be retained, providing businesses with flexibility in tax planning and efficient loss utilization.
Increased Capital Allowances for Green Investments
To further support sustainable development, the government is enhancing capital allowances for investments in green technologies and energy-efficient infrastructure. Businesses investing in eco-friendly projects will be able to deduct a higher percentage of their expenses, reducing their taxable income and incentivizing environmentally responsible corporate practices.
Simplification of Stamp Duty Rules
The existing Stamp Duty Law will be reformed to reduce complexity and administrative burden. The proposal includes limiting the application of stamp duty, focusing primarily on transactions related to immovable property and insurance contracts. This targeted approach aims to provide clearer guidelines on when and how stamp duty applies, making compliance easier for businesses and individuals while improving efficiency in legal and financial transactions.
2. Contemplated Tax Reforms for Individuals in Cyprus
Increase in Tax-Free Threshold and Personal Tax Bands
The tax-free income threshold will be raised by €1,000 from €19,500 to €20,500 (the highest in the EU), offering relief to low- and middle-income earners. Additionally, the personal tax bands will be adjusted as follows:
|
Taxable Income € |
Tax Rate % |
Tax Amount € |
Accumulated Tax € |
|---|---|---|---|
|
0 – 20.500 |
0 |
NIL |
NIL |
|
20.501 – 30.000 |
20 |
1.900 |
1.900 |
|
30.001 – 40.000 |
25 |
2.500 |
4.400 |
|
40.001 – 80.000 |
30 |
12.000 |
16.400 |
|
Over 80.000 |
35 |
|
|
This change is intended to increase disposable income and ease the tax burden for individuals, aligning with efforts to support economic growth and consumer spending. The highest tax rate of 35% will now apply to incomes exceeding €80,000, instead of €60,000 under the previous system, in line with global inflationary movements.
Introduction of Family and Child Tax Credit
A new tax credit scheme will be introduced for households with a total gross income of up to €80,000 and two working spouses/partners, the following discounts are proposed:
Under the proposed rules, a tax credit shall be afforded as follows:
- For each child under 19 for females or 21 for males: €1,000;
- For each student child under 23 for females or 24 for males: €1,000;
- Towards the instalments for a serviced first home mortgage: €1,500; and
- For 'Green' renovations of households: up to €1,000 (in the year of the renovation, for up to five years).
New Tax Residency Framework: 183 Days, 60 Days, and Centre of Vital Interests
Cyprus is introducing an updated tax residency framework, adding a new "Centre of Vital Interests" test (similar to the French system). While the 183-day and 60-day rules remain largely unchanged, this new criterion will allow individuals with significant economic and personal ties to Cyprus to qualify as tax residents, even if they do not meet the existing day-count thresholds. The 60-days rules will also be enhanced in order to strengthen their position on cross-border cases.
Retention of the 50% Exemption for High Earners
The existing 50% tax exemption on employment income for individuals earning over €55,000 annually will remain in place. This incentive continues to attract foreign talent and senior executives to Cyprus, reinforcing the country's appeal as an international business hub. What is unclear however, is whether the 20% exemption will also remain, as this was not mentioned.
Reduction of SDC on Dividends
As part of the tax reform, the Special Defence Contribution (SDC) rate on dividends will be reduced from 17% to 5%. This significant decrease aims to enhance Cyprus's attractiveness as a business and investment hub by lowering the tax burden on dividend income. The reform is expected to encourage reinvestment, improve shareholder returns, and strengthen Cyprus's competitive position in international tax planning.
Abolition of Special Defence Contribution (SDC) on Rents
The SDC on rental income (3%) will be abolished, significantly benefiting tax residents, not because of the magnitude of the tax, but due to the reduction in compliance costs for administering the tax, and the complications presented with corporate income tax returns (TD4s).
Employee Stock Options
New framework being examined for a lower tax rate on such benefits received, which are currently taxed at normal rates as per the Benefit in Kind manual, which only provides specific rules for the taxing point.
Retention and Extension of the Non-Dom Regime
The Non-Domiciled (Non-Dom) tax provisions will remain in place under the new tax reform, ensuring that qualifying individuals continue to benefit from exemptions on dividends and interest from Special Defence Contribution (SDC). However, the scheme shall be revised, whereby an annual 'non-dom charge' is being considered, which shall be similar to the UK's old remittance basis charge.
3. Broader Tax and Regulatory Changes
Market Data Adjustment on Salaries
A new framework will be introduced to align salaries with market data, ensuring fairer and more transparent remuneration policies. This adjustment aims to prevent artificial salary structuring for tax optimization and promote a more equitable employment environment.
Introduction of Closed-Company Rules
New rules for closed companies (small, closely held entities) will be implemented to regulate transactions between shareholders and their companies. These rules are expected to prevent potential tax avoidance strategies and ensure that income distribution within such entities is treated fairly under tax law, allowing the tax authorities to disregard the companies and tax the shareholder directly.
KINANIS' CONCLUSION
The tax reform requires further development before completion, with a targeted finalization by late 2025, and is expected to take effect from the 2026 tax year onwards. Following finalization, the measures must undergo legislative procedures, though we note that these proposals may still be revised or excluded from the final text. This ongoing effort preserves Cyprus' competitiveness, preserving its status as one of the most attractive in the EU for foreign investment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
