Cyprus Tax Reform: Key Changes, Implications, and Recommended Actions

Effective 1 January 2026  |  Laws published 31 December 2025

Cyprus has enacted a comprehensive overhaul of its tax framework, introducing substantial changes. After years of incremental adjustments, parliament passed a wide-ranging reform on 22 December 2025, with legislation published in the Official Gazette on 31 December 2025. The majority of provisions took effect on 1 January 2026. The reform seeks to modernise the tax system, increase flexibility, and enhance compliance. Key outcomes include a higher corporate tax rate, restructured personal income bands, new levies on cryptocurrencies and stock options, and a significant revision of the Special Defence Contribution. Some changes create new planning opportunities, while others necessitate prompt action.

Corporate Taxation: The Rate Goes Up

The headline figure is straightforward: corporation tax rises from 12.5% to 15%, in line with the OECD’s global minimum tax. This applies from the 2026 tax year onward.

Two further corporate changes are significant. The definition of a Cyprus tax resident company now includes all companies incorporated under Cyprus law, regardless of residency claims by other jurisdictions. Additionally, tax losses carried forward may be utilised over seven years instead of five, which is particularly relevant for companies with accumulated losses.

Personal Income Tax: New Bands, New Obligations

The individual income tax bands have been updated to better reflect current income levels. The revised structure is as follows:

Several categories of employment income that were previously untaxed will now be subject to income tax:

• Pre-employment incentive payments — benefits offered to attract a candidate before they join;
• Ex-gratia payments linked to retirement, early retirement, or termination of employment. Any amount exceeding €200,000 will be taxed at a flat 20% rate. Importantly, this tax is not deductible by the employer;
• Amounts awarded by a court relating to the above categories of income.

The deemed benefit rate of 9%, previously limited to direct shareholders, now also applies to indirect shareholders. Companies and individuals with complex ownership structures should review their financing arrangements in light of this change.

Personal Deductions: What’s New and What’s Improved

The reform introduces several practical deductions designed to address common financial decisions:

• Primary residence: Interest on loans used to acquire a primary home is now deductible, up to €2,000. Rental payments for a primary residence also qualify.
• Insurance deductions: Premiums for permanent or partial incapacity insurance are now deductible, as are premiums for natural disaster insurance on a primary residence (up to €500).
• Energy efficiency and electric vehicles: Capital expenditure on improving the energy efficiency of a primary home qualifies, as does the purchase of an electric vehicle, up to €1,000.
• Dependent children: Deductions range from €1,000 to €1,500 per child per parent, subject to family income not exceeding €100,000–€200,000 respectively.

Two existing rules have been amended. The 60-day residency rule for individuals has been simplified by eliminating the requirement that a person must not be a tax resident elsewhere. Additionally, income from the cancellation or early termination of a contract is now taxable.

Research & Development: A Meaningful Incentive

Between 2025 and 2030, companies may claim an additional 20% deduction on qualifying research and development and scientific research expenses. Combined with the standard deduction, this provides effective relief of 120% of actual expenditure. However, the additional deduction is not available for expenses already benefiting from the IP nexus regime.

Cryptocurrency and Stock Options: A New Tax Category

Cryptocurrency has finally found its place in the tax code. Profits from the following activities are now taxed at a flat 8%:

• Sale of a crypto asset
• Gifting a crypto asset
• Exchanging one crypto asset for another
• Using a crypto asset as a means of payment

Losses from crypto assets may only be offset against crypto gains realised by the same person within the same tax year. These losses cannot be carried forward or offset through group relief provisions.

Stock options granted under approved employee share schemes are also subject to an 8% tax. There is a lifetime cap of €1 million taxable under this treatment over any 10-year period.

Transfer Pricing: Revised Local File Thresholds

The thresholds triggering local file documentation requirements have been revised upward:

Other Notable Income Tax Amendments

• Entertainment expenses: The deductible limit has risen from €17,086 to €30,000, capped at 1% of gross business income.
• Intangible assets: The useful economic life for amortisation purposes of intangible assets with indefinite life is set at 20 years.
• Cost-of-living payments: Employers may claim a deduction equal to 200% of cost-of-living adjustment payments, subject to specified conditions.
• Group relief: Before a company can draw on losses from fellow group members, it must first exhaust its own carried-forward losses.

Special Defence Contribution: Significant Rate Reductions

The SDC changes are among the most consequential in the reform, particularly for individuals drawing dividend income.

The SDC rate on gross dividends received by Cyprus tax resident individuals drops from 17% to 5%. There is a transitional carve-out: dividends paid from profits earned up to 31 December 2025 and distributed before 31 December 2031 remain subject to the old 17% rate.

Several other SDC changes take effect:

• The Deemed Dividend Distribution rules are abolished from 1 January 2026.
• SDC on rental income is abolished entirely.
• Bonus share issues will be treated as dividends for SDC purposes.
• Interest income: for individuals, interest is now subject to SDC and exempt from income tax; for companies, interest is subject to income tax only.

For non-domiciled Cyprus tax residents, the SDC exemption, typically available for 17 years, may now be extended. Two additional five-year extensions are permitted, each activated by a lump-sum payment of €250,000.

Regarding related-party dividends paid to companies in non-cooperative jurisdictions:

• Dividends paid to companies in blacklisted jurisdictions remain subject to a 17% tax.
• Dividends to companies in low-tax jurisdictions drop from 17% to 5%.

Capital Gains Tax: Higher Exemptions, Wider Definitions

The lifetime CGT exemptions have all been raised:

• General exemption for natural persons: €30,000 (previously €17,086)
• Agricultural land: €50,000 (previously €25,629)
• Primary residence: €150,000 (previously €85,430)

The definition of shares treated as holding Cyprus immovable property has been broadened. Previously, the threshold was 50% of a share’s value derived from Cyprus property; it has now been reduced to 20%. Shares in companies meeting that threshold will now be caught by the CGT rules.

Buildings or plots exchanged for land are now explicitly included in the CGT exemptions. From 2026, rent payments for immovable property in Cyprus must be made exclusively through traceable methods such as bank transfer, card payment, or recognised electronic payment.

Disguised Dividends: A New Concept to Watch

A concept of “disguised dividends” has been introduced. It applies to direct and indirect shareholders who are natural persons, and carries a tax rate of 10%. Two scenarios are caught:

• Private use of a company asset by a shareholder. The taxable amount is calculated using the asset’s initial market value multiplied by the percentage of personal use, with 100% applied where the asset has no business connection. Any subsequent increase in personal use of the same asset results in an additional charge, while reductions do not generate a refund.
• Assets disposed of by the company to a shareholder at below market value. The taxable amount equals the difference between market value at the date of disposal and the consideration received.

The disguised dividend rules do not apply where: assets are donated back to the company by the shareholder, benefit-in-kind provisions already apply, or the distribution occurs in the context of capital reduction, dissolution, or liquidation. Shareholders who benefit from the non-dom regime are also excluded.

Administrative and Compliance Changes

A number of procedural changes came into effect alongside the substantive reforms:

• Stamp duty abolished: The Stamp Duty Law is repealed in full from 1 January 2026.
• Filing obligations extended: All Cyprus tax resident individuals aged 25 to 71 must now file a personal income tax return — regardless of whether they have any income. Those with income must file irrespective of age.
• Revised deadlines: Tax returns for both companies and individuals are due by 31 January of the year following the year after the tax year — effectively 13 months from the tax year end.
• Partnerships: Now required to submit their own tax returns.
• Objection deadline: Extended to 60 days.
• Audited accounts threshold: The annual turnover threshold above which individuals must prepare audited accounts rises from €70,000 to €120,000.
• Director liability: A director remains personally liable for actions or omissions during their tenure, even after resignation, when proceedings are initiated later.
• Enforcement powers: The Tax Commissioner now has the authority to suspend a business’s operations if tax returns remain unfiled, taxes unpaid, or invoices have not been correctly issued.
• Penalties: Fines for late submission have risen significantly, now ranging from €150 to €2,000.

Need Professional Guidance?

The changes described above interact in complex ways that require careful, case-by-case analysis. For those restructuring a corporate group, reviewing dividend policy, or considering residency status, the implications of the 2026 reform warrant thorough professional review.

For personalised advice on how these changes apply to your specific circumstances, contact us.