Cyprus Tax Reform 2026: Key Changes

On 22/12/2025, the House of Representatives approved a comprehensive package of tax amendments representing the most extensive reform of the Cypriot tax system in over two decades. With most measures taking effect from 01/01/2026, the reform reshapes the taxation of individuals, companies, shareholders, and real estate transactions, while significantly strengthening tax administration and enforcement.

The Cyprus Tax Reform 2026 represents a comprehensive recalibration of the country's tax system. It reshapes the way income is taxed, profits are distributed, real estate is treated, and tax compliance is enforced. Importantly, these changes are implemented without dismantling the legal and tax foundations that have long positioned Cyprus as a stable, competitive, and credible EU jurisdiction for business operations, investment structuring, and international relocation.

This article provides a structured and practical overview of the reform, highlighting what has changed, what remains unchanged, and the key planning considerations for individuals and businesses under the new framework.

The Direction and Rationale of the Reform

The legislative package is underpinned by three consistent policy objectives:

1. Targeted social and household support, delivered through higher tax-free thresholds and income-tested allowances rather than broad, non-specific tax reductions.

2. A fundamental overhaul of shareholder taxation, particularly in relation to dividends, through the abolition of deemed dividend distribution on new profits and a significant reduction in the Special Defence Contribution (SDC) on actual distributions.

3. A strengthened compliance and enforcement framework, including expanded filing obligations, increased payment traceability, and enhanced administrative powers for the Tax Commissioner.

These reforms are deliberately balanced by the preservation of Cyprus's core tax architecture, ensuring continuity, predictability, and confidence for long-term investment and planning.

Key Changes Affecting Individuals

1. Revised Personal Income Tax Bands and Higher Tax-Free Threshold

From 01/01/2026, the personal tax-free threshold increases to €22,000, accompanied by a restructured progressive tax scale:

• 0% on income up to €22,000
• 20% on income from €22,001 to €32,000
• 25% on income from €32,001 to €42,000
• 30% on income from €42,001 to €72,000
• 35% on income exceeding €72,000

This revision reduces effective tax burdens across most income levels. Employees and self-employed individuals will see implications for payroll withholding, bonus planning, and net income optimisation, with particular relief for middle-income earners while maintaining progressivity at higher levels.

2. Family and Household Allowances (Income-Based Deductions)

A cornerstone of the reform is the introduction of targeted deductions linked to household income and family composition. These deductions reduce taxable income and apply only where specific income thresholds are satisfied.

Eligibility Thresholds:

Eligibility is determined based on income and family status as at 31 December of the relevant tax year:

• Married couples or cohabiting partners (combined income):
  • Up to €90,000 with no dependent children
  • Up to €100,000 with one or two dependent children
  • Up to €150,000 with three or four dependent children
  • Up to €200,000 with five or more dependent children

• Single individuals: Up to €40,000 annual income

Where eligibility criteria are met, deductions apply to each spouse or partner individually, a structure particularly advantageous for dual-income households.

Types of Allowable Deductions

• Child allowance: Granted per spouse or partner, with increasing amounts for each additional dependent child. Dependent children include students up to age 24, providing relief during higher education years.

• Housing allowance: Up to €2,000 per spouse or partner for either mortgage interest on a primary residence or rent paid for a primary residence, recognising both ownership and long-term renting.

• Green transition allowance: Up to €1,000 per spouse or partner for energy efficiency upgrades or the purchase of a new electric vehicle, aligning tax relief with sustainability objectives.

• Home insurance allowance: Up to €500 per spouse or partner for insurance covering natural disasters, reflecting a policy emphasis on household resilience and risk management.

While these measures provide meaningful support, they also introduce greater technical complexity, increasing the importance of accurate income assessment and proper documentation.

3. Foreign Pension Income

The preferential regime for foreign pension income remains in place, with minor updates. Cyprus tax residents receiving pensions from abroad may continue to elect annually between progressive income tax rates or a flat 5% tax on pension income exceeding €5,000. This regime continues to be a key factor for retirees relocating to Cyprus, particularly when combined with the country's residency rules and extensive double tax treaty network.

4. Termination Payments and Expanded Personal Deductions

The reform clarifies the taxation of ex gratia termination payments. Where payments arise due to termination of employment, an exemption of up to €200,000 applies, with any excess taxed at a flat 20%. This clarification is especially relevant for senior executives and negotiated exit arrangements. In parallel, deductible personal expenses are expanded to include insurance premiums covering permanent or partial disability, in addition to life insurance.

5. Enhanced Capital Allowances for Targeted Sectors

Capital allowances are increased by 20% for expenditure on machinery and installations used in agricultural and livestock production, net of subsidies. This measure supports investment and productivity in capital-intensive and strategically important sectors.

Dividends and Special Defence Contribution (SDC)

1. Abolition of Deemed Dividend Distribution on Post-2026 Profits

A major structural change is the abolition of deemed dividend distribution for profits generated after 01/01/2026. Previously, this mechanism often resulted in tax charges disconnected from commercial reality. Under the new rules, post-2026 profits are taxed at shareholder level only upon actual distribution, restoring alignment between taxation and economic substance. Distinguishing between pre- and post-2026 profit pools is therefore critical for planning.

2. Reduced SDC on Actual Dividends

SDC on dividends distributed from post-2026 profits is reduced from 17% to 5%, significantly lowering the tax cost of profit distributions to Cyprus tax resident individuals and influencing dividend and exit strategies.

3. Hidden Dividends and Anti-Avoidance Measures

To counterbalance the abolition of deemed distribution, a targeted anti-avoidance rule applies to hidden dividends. Where value is transferred to shareholders or connected persons in substance equivalent to a profit distribution, SDC at 10% may apply, reinforcing the importance of arm's length pricing, substance, and documentation.

4. Outbound Dividends to Low-Tax Jurisdictions

A 5% withholding tax is introduced on dividends paid to companies resident in low-tax jurisdictions, aligning Cyprus with EU and OECD anti-avoidance standards and increasing the importance of jurisdictional analysis in group structures.

5. Rental Income: Abolition of SDC

SDC on rental income is abolished, leaving rental income subject solely to income tax. The removal of the "3% on 75%" mechanism simplifies compliance and improves consistency within the tax system.

6. Interest Income and SDC: Simplification

Certain interest categories benefit from reduced SDC rates, and SDC on foreign dividends and interest is now payable in a single instalment upon filing the income tax return. Notably, SDC on interest from EU government bonds and General Healthcare System deposits is reduced to 3%.

7. Long-Term Residence Option for Non-Domiciled Individuals

For non-domiciled individuals who have completed 17 years of Cyprus tax residency, an alternative taxation option allows continued application for two consecutive five-year periods, subject to a lump-sum payment. This formalises long-term treatment while maintaining planning certainty.

Key Changes Affecting Businesses

1. Corporate Income Tax Rate Increase to 15%

From 01/01/2026, the corporate tax rate increases from 12.5% to 15%. Despite the increase, Cyprus remains among the most competitive EU jurisdictions, particularly when combined with the participation exemption, IP Box regime, NID, and the abolition of stamp duty.

2. Extended Loss Carryforward

The loss carryforward period is extended from 5 to 7 years, benefiting businesses with longer investment horizons, including start-ups and capital-intensive projects.

3. R&D Incentives and Business Deductions

The 120% super-deduction for qualifying R&D expenditure on intangible assets is extended until 2030, and the maximum deductible entertainment expenses increase to €30,000.

4. Crypto Assets and Employee Share Schemes

Gains from crypto assets and benefits from approved employee share schemes are subject to a dedicated 8% tax regime, providing long-awaited certainty for modern investment and remuneration structures.

Capital Gains Tax and Real Estate

1. Increased Lifetime CGT Exemptions

Lifetime Capital Gains Tax (CGT) are significantly increased:

• General lifetime exemption: from €17,086 to €30,000
• Agricultural land: from €25,629 to €50,000
• Primary residence: from €85,430 to €150,000

These adjustments reflect increased property values while preserving the system's structure.

2. Property-Rich Companies

The CGT threshold for property-rich companies is reduced from 50% to 20%, tightening the tax net on indirect disposals of Cyprus real estate. Enhanced valuation powers address undervaluation risks.

3. Compliance and Property Transfers

The Tax Commissioner may refuse consent for property transfers where parties are not fully tax compliant, making compliance a critical transactional factor.

Abolition of Stamp Duty

The Cyprus Tax Department has formally confirmed that stamp duty has been fully abolished with effect from 01/01/2026. This follows the entry into force of new legislation that eliminates the stamp duty regime in its entirety. For individuals, investors, and businesses, the abolition represents a meaningful simplification of transactional processes. It removes a long-standing cost and administrative step associated with the execution of contracts, property leases, commercial agreements, and other legally binding documents, while also reducing the euro-denominated costs traditionally incurred when formalising transactions in Cyprus.

1. Documents Executed Before 31 December 2025

The Tax Department has clarified that documents executed on or before 31 December 2025 remain subject to stamp duty under the existing legal framework. Where at least one party signed a document before that date, the provisions of the Stamp Duty Law of 1963–2025 continue to apply in full. Such documents must therefore be properly stamped in accordance with the applicable rules. Failure to do so may still give rise to penalties, interest, or procedural complications during tax audits, registrations, or court proceedings.

2. Sale and Use of Stamp Duty Stamps

Licensed agents authorised to sell stamp duty stamps may continue to sell only the stamps currently held in their existing inventory. These stamps may be used exclusively for documents that remain subject to stamp duty, namely documents executed on or before 31/12/2025. This transitional arrangement allows existing stocks to be gradually exhausted and ensures a smooth shift to the new regime in which stamp duty stamps will no longer be required.

3. Payment of Other Statutory Fees

The Tax Department has further clarified that fees payable under the legislation of other ministries, services, and public departments may, on a temporary basis, continue to be paid using the stamp duty stamps currently in circulation. This transitional measure will remain in place until the relevant authorities introduce new regulatory frameworks and alternative payment mechanisms for the collection of such fees in euros.

The abolition of stamp duty from 2026 marks an important step toward the simplification and digitalisation of administrative procedures in Cyprus. It reduces transaction costs, accelerates contract execution, and enhances Cyprus's overall attractiveness as a destination for investment from both EU and non-EU jurisdictions. For businesses, the change translates into less bureaucracy and greater transactional efficiency. For private individuals, it brings greater transparency and predictability of costs when purchasing or leasing property and entering into commercial or private agreements.

The change is particularly significant in the context of Cyprus's active real estate market and the sustained interest from international investors, as stamp duty had previously been a mandatory cost component in the execution of many property-related and commercial contracts.

Tax Administration, Filing, and Enforcement

Filing obligations and enforcement powers are significantly expanded. All tax residents aged 25 and over must file annual tax returns, partnerships are brought into mandatory filing, and corporate tax filing and payment deadlines are aligned. From July 2026, rental payments above €500 must be made via traceable banking channels. The income threshold for mandatory audited accounts for individuals increases to €120,000.

What Remains Unchanged:

Filing obligations and enforcement powers are significantly expanded. All tax residents aged 25 and over must file annual tax returns, partnerships are brought into mandatory filing, and corporate tax filing and payment deadlines are aligned. From July 2026, rental payments above €500 must be made via traceable banking channels. The income threshold for mandatory audited accounts for individuals increases to €120,000.

Practical Planning Considerations for the year of 2026

The year 2026 marks a clear planning divide. Individuals and businesses should segregate pre- and post-2026 income and profits, reassess dividend and exit strategies, review property-rich structures, and ensure compliance systems are fully aligned with the enhanced enforcement environment.

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.