For the first time in more than two decades, Cyprus is preparing to implement a comprehensive overhaul of its tax system.
The Minister of Finance has described the initiative as a “flagship project” — one designed to ensure a fairer distribution of the tax burden, reinforce support for households and small and medium-sized enterprises (SMEs), and modernise tax administration in line with OECD and EU standards.
On 30 October 2025, the Government submitted six amendment bills to the House of Representatives for debate and approval. Once enacted, the measures are expected to come into effect on 1 January 2026, marking the beginning of a new chapter for both individuals and businesses in Cyprus.
This article outlines the key changes of the reform, explains what remains the same, and provides practical guidance on how to prepare.
Although some elements are still subject to parliamentary refinement, the overall direction of the reform is clear, and planning should start now.
Why Now – The Rationale Behind the Reform
Cyprus’s last major tax reform dates back more than 22 years. The new package reflects a combination of fiscal, social, and global imperatives:
- Redistribution of the tax burden: the reform strengthens the middle class and supports lower-income earners and SMEs.
- International alignment: compliance with OECD BEPS 2.0, EU minimum-taxation principles, and global transparency standards.
- Administrative modernisation: simpler deadlines, stronger enforcement, and more digitalised tax processes.
- Competitiveness: preserving Cyprus’s pro-business framework while enhancing its credibility and long-term stability.
In short, this reform is not just about rates, it’s about structure, fairness, and positioning Cyprus for the next decade.
Key Changes for Individuals
1. Expanded Tax Relief and Family Deductions
The most visible change is the increase of the tax-free threshold from €19,500 to €20,500, combined with new targeted deductions designed to support families, homeowners, and environmentally friendly investments:
- €1,000 per child (or €2,000 for single-parent households);
- €1,000 per student child (in full-time education);
- €1,500 deduction for interest on performing loans or rent for a primary residence;
- €1,000 deduction for energy upgrades or electric-vehicle purchases.
Eligibility for these deductions applies to households with annual family income below €80,000, large families below €100,000, and single individuals below €40,000.
According to Government estimates, around 55% of employees will pay no income tax, and many households will effectively enjoy a tax-free level exceeding €24,500 once deductions are factored in.
2. Deductions for Insurance and Home Protection
The scope of allowable deductions has been expanded:
- Insurance premiums covering permanent or partial disability may now be deducted (in addition to life insurance).
- Home insurance premiums against natural disasters qualify for a deduction up to €500 per year.
These incentives aim to encourage social protection and household risk management.
3. Voluntary-Retirement Lump Sums
The tax-exempt ceiling for voluntary-retirement or “golden-handshake” payments increases significantly — from €20,000 to €200,000 — providing greater flexibility for employers and employees managing retirement schemes.
Amounts exceeding €200,000 will be taxed at a flat rate of 20%.
4. Stock-Option Taxation (8% Regime)
A new 8% special taxation method applies to benefits from stock options granted under an approved employer plan, subject to specific limits:
- The benefit taxed at 8% may not exceed twice the employee’s annual remuneration; and
- A €1,000,000 lifetime cap applies over a 10-year period.
This introduces much-needed clarity and competitiveness for equity-based remuneration schemes.
5. Mandatory Filing Obligation for Residents Aged 25+
All Cyprus tax residents aged 25 and above will be required to file an annual tax return, even if they have no taxable income. This broadens the compliance base, ensures transparency, and facilitates verification of residency and deductions.
6. Dividend and SDC Treatment for Individuals
Following the abolition of the deemed-dividend distribution rule for profits earned from 1 January 2026, SDC will now apply only to actual dividends relating to those profits and at a reduced rate of 5% (down from 17%).
Non-Domiciled individuals will remain fully exempt from SDC on dividends and interest, preserving one of the most attractive features of Cyprus’s personal tax framework.
7. Foreign Pension Income Regime Updated
The special regime for foreign pensions has been modernised to further support retirees relocating to Cyprus.
Tax residents receiving pension income from abroad may continue to choose annually between:
- Inclusion of the pension in ordinary income taxed at progressive rates; or
- A flat 5% tax on pension income exceeding €5,000 per year (previously €3,420).
This adjustment provides additional relief and simplifies compliance for foreign retirees, reinforcing Cyprus’s status as a leading European destination for pensioners.
Key Changes for Businesses
1. Corporate Income Tax (CIT) Increases to 15%
The corporate income-tax rate will rise from 12.5% to 15%, effective for tax years beginning 1 January 2026.
This adjustment brings Cyprus closer to international standards while preserving its favourable participation exemptions, Non-Dom regime, and absence of withholding taxes on outbound dividends and interest.
Even at 15%, Cyprus will remain among the lowest corporate-tax jurisdictions in the EU.
2. Simplification of Dividends and Special Defence Contribution (SDC)
Major structural changes simplify the taxation of dividends and rental income:
- Abolition of the deemed-dividend distribution rule for profits earned from 1 January 2026 onward;
- Reduction of the SDC on actual dividends (for profits earned after 2026) from 17% to 5%;
- Abolition of SDC on rental income altogether.
Additionally, a 5% withholding tax will apply on dividends paid to companies resident in low-tax jurisdictions, in line with EU anti-avoidance standards.
These reforms eliminate long-standing distortions between retained and distributed profits, simplifying cash-flow management and improving investment planning for shareholders.
3. Crypto-Assets, Loss Carry-Forward, and R&D Incentives
- Crypto-asset disposals will be subject to a flat tax rate of 8%, with same-year losses offsettable against crypto gains.
- The loss carry-forward period extends from five to seven years, improving planning flexibility for start-ups and cyclically profitable businesses.
- The 120% super-deduction for research and development (R&D) expenditure related to qualifying intangible assets is extended until 2030, reinforcing Cyprus’s innovation ecosystem and alignment with IP Box incentives.
- Increased capital-allowance rates for energy upgrades and green investments are likewise extended until 2030.
4. Deductibility Enhancements and Expense Reforms
- The maximum deductible amount for entertainment expenses rises from €17,086 to €30,000.
- Initial listing costs on a recognised stock exchange are now deductible up to €300,000, with unused amounts carried forward for up to three years under a de minimis aid framework.
- Insurance and agricultural incentives:
- Businesses investing in machinery and facilities for agricultural or livestock production may now claim 20% increased capital allowances after deducting any subsidy.
These measures support productivity, transparency, and market expansion for Cypriot enterprises.
5. Transfer Pricing and Cross-Border Rules
To streamline compliance and reduce administrative burden, the thresholds for exemption from maintaining a Cyprus Transfer Pricing (TP) Documentation File have been significantly increased:
- Financial transactions: €10 million;
- Purchase/sale of goods: €5 million;
- Other transactions: €2.5 million.
Further, anti-avoidance amendments clarify that:
- Interest deductions for the acquisition of 100% subsidiaries are abolished (with transitional relief until 2027 for investments made before 31 December 2025).
- Profits of permanent establishments (PEs) located in non-cooperative jurisdictions are no longer exempt from Cyprus income tax.
- Legal entities incorporated or registered in Cyprus are deemed Cyprus tax residents, codifying an existing practice.
These measures enhance transparency and bring Cyprus’s corporate framework into full conformity with international tax-governance standards.
6. Compliance and Administrative Upgrades
The reform also modernises the administrative framework:
- Company tax-return and payment deadline moved to 31 January of the following year;
- Audit threshold for individuals raised to €120,000 gross income;
- Mandatory employer declarations for all employees, regardless of income;
- Digital filing, extended data retention (8 years), and enhanced Tax Commissioner powers for audits;
- Introduction of a general anti-abuse rule (GAAR) to combat aggressive tax planning;
- Updated administrative fines to encourage voluntary compliance.
Together, these measures strengthen enforcement, simplify reporting, and align Cyprus’s tax administration with modern EU and OECD frameworks.
What Remains the Same
While these reforms introduce important changes, several cornerstones of the Cypriot tax framework remain firmly in place — ensuring continuity and predictability for investors and residents alike.
1. Worldwide Income Rule
Cyprus tax residents will continue to be taxed on their worldwide income, subject to relief under double-tax treaties. This remains a key element of Cyprus’s international tax architecture.
2. Non-Dom Regime and Employment Incentives
The highly popular Non-Domiciled (“Non-Dom”) regime — granting exemption from SDC on dividends and interest for up to 17 years — remains in force.
Likewise, the first-employment incentives (such as the 50% income exemption for new residents earning above €55,000 annually) are unaffected by the reform and continue to apply under the existing rules.
3. Tax Residency Tests
Both the 183-day and 60-day rules for determining individual tax residency remain unchanged, maintaining one of Cyprus’s most flexible and attractive residency frameworks in the EU.
4. Capital Gains on Securities
The scope of Cyprus Capital Gains Tax (CGT) remains unchanged.
CGT applies only to gains arising from the disposal of immovable property located in Cyprus, or to shares of companies holding such property.
Gains from the sale of listed or unlisted securities (e.g., shares, bonds, funds, derivatives) remain exempt from CGT, continuing one of Cyprus’s key investment advantages.
6. Other Core Features
- The standard VAT rate remains at 19%, with no proposed changes to reduced or zero rates.
- The Notional Interest Deduction (NID) on qualifying new equity remains available, calculated at the relevant 10-year government bond yield plus 5%, capped at 80% of taxable profits.
- The IP Box regime — offering an 80% exemption for qualifying IP income — continues unchanged.
- The participation exemption on dividends from qualifying subsidiaries and the absence of withholding tax on outbound dividends and interest to non-residents also remain intact (subject to existing anti-abuse rules).
How to Prepare
With the reform due to take effect on 1 January 2026, both individuals and companies should act now:
- Assess your exposure: compare your current tax position against the proposed framework.
- Segment income and profits: separate “pre-2026” and “post-2026” amounts to determine future SDC treatment.
- Recalculate CIT and distribution forecasts: incorporate the 15% corporate rate and the reduced SDC.
- Review your investment, dividend, and crypto policies: ensure structures are optimised under the new rules.
- Stay informed: track parliamentary updates and official guidance from the Cyprus Tax Department once the bills are enacted.
How Polycarpos Philippou & Associates LLC Can Help
At Polycarpos Philippou & Associates LLC, our Tax and Corporate team assists both individuals and international groups in navigating this evolving landscape. We provide:
- Tailored tax diagnostics and impact assessments under the 2026 framework;
- Dividend and holding-structure optimisation in line with new SDC rules;
- Crypto and fintech tax alignment with the 8% regime;
- Non-Dom and personal-tax advisory for relocation and retirement planning;
- Compliance readiness and calendar adjustments for new filing deadlines.
We combine legal precision with strategic insight — ensuring that you remain compliant, competitive, and ahead of change.
Conclusion
The Cyprus Tax Reform 2025–2026 marks a turning point in the island’s fiscal evolution. Beyond headline adjustments such as the 15% corporate tax and 8% crypto levy, it represents a structural shift toward simplicity, fairness, and modern governance.
Crucially, the reform maintains the foundations that have long made Cyprus a trusted international hub: Non-Dom stability, flexible residency, no capital gains on securities, and a clear, predictable environment for investors and businesses alike.
Now is the time to prepare.
Our team at Polycarpos Philippou & Associates LLC is ready to help you interpret the upcoming legislation, adjust your strategy, and seize the opportunities this new framework presents, with confidence and clarity.
1. When will the Cyprus tax reform come into effect?
The new tax framework is expected to enter into force on 1 January 2026, following Parliament’s approval of the six amendment bills submitted on 30 October 2025.
Some measures may include transitional provisions, but the effective date for most changes is the start of the 2026 tax year.
2. What is the new corporate income-tax rate in Cyprus?
The corporate income-tax (CIT) rate will increase from 12.5% to 15% for tax years beginning on or after 1 January 2026.
Even after the change, Cyprus will remain among the lowest-tax jurisdictions in the EU, as most Member States apply corporate tax rates above 20%.
3. Will the deemed-dividend distribution (DDD) rule still apply after 2026?
No. The deemed-dividend distribution rule will be abolished for profits earned from 1 January 2026 onward.
Only actual dividends relating to such profits will be subject to the Special Defence Contribution (SDC) at a reduced rate of 5% (previously 17%).
Profits earned up to 31 December 2025 remain subject to the existing DDD regime and 17% SDC rate.
4. What happens to the Special Defence Contribution (SDC) on rental income?
The SDC on rental income will be abolished entirely under the reform.
From 2026 onwards, rental income will be taxed only under the normal income-tax rules applicable to individuals or companies.
5. Will Cyprus introduce a withholding tax (WHT) on dividends to low-tax jurisdictions?
Yes. From 2026, a 5% withholding tax will apply on dividends paid to companies resident in low-tax or non-cooperative jurisdictions, in line with EU and OECD anti-avoidance standards.
All other outbound dividends to non-resident shareholders in cooperative jurisdictions will remain exempt from WHT.
6. How will crypto-asset gains be taxed in Cyprus?
A flat 8% tax rate will apply to profits from the disposal of crypto-assets, with same-year losses offsettable against crypto gains.
Gains from crypto will not fall under Capital Gains Tax (CGT) but will be treated as a separate income-tax category, ensuring clarity for investors and fintech businesses.
7. What are the main tax benefits for individuals under the new reform?
The reform introduces expanded tax relief and deductions, including:
A tax-free threshold increase from €19,500 to €20,500;
– €1,000 per child (€2,000 for single parents);
– €1,000 per student child;
– €1,500 deduction for interest or rent on a main residence;
– €1,000 deduction for energy upgrades or electric-vehicle purchases.
These measures are expected to exempt roughly 55% of employees from paying income tax.
8. How will foreign pensions be taxed under the new regime?
From 2026, Cyprus tax residents receiving pension income from abroad may choose annually between:
– Taxation under the normal progressive income-tax rates, or
– A flat 5% tax on pension income exceeding €5,000 per year (previously €3,420).
This change modernises the pension regime and strengthens Cyprus’s appeal for retirees relocating to Cyprus.
9. How are voluntary-retirement (“golden handshake”) payments taxed?
Under the 2026 reform, voluntary or termination-related lump-sum payments are tax-free up to €200,000.
Any excess amount is taxed at 20%.
This major increase (from €20,000 to €200,000) provides flexibility for both employers and employees managing retirement schemes.
10. What is the new rule for stock-option benefits?
Benefits from stock options granted under an approved employer plan will be taxed at a special 8% rate, up to:
– Twice the employee’s annual remuneration, and
– A lifetime cap of €1,000,000 over ten years.
This measure improves the competitiveness of equity-based remuneration and aligns Cyprus with global tech-sector incentives.
11. Are there any new filing requirements for individuals?
Yes. From 2026 onwards, all Cyprus tax residents aged 25 and above must file an annual tax return, even if they have no taxable income.
This measure broadens the tax base, enhances transparency, and facilitates compliance tracking for the Tax Department.
12. What about Non-Dom and expatriate incentives — are they affected?
No. The Non-Domiciled (Non-Dom) regime remains intact, providing up to 17 years of exemption from SDC on dividends and interest.
Likewise, the 50% income-tax exemption for first employment in Cyprus (for annual income above €55,000) continues without changes.
13. Do the 183-day and 60-day tax-residency tests still apply?
Yes. Both residency tests remain fully valid and unchanged, continuing to offer exceptional flexibility for individuals establishing Cyprus tax residency while maintaining global mobility.
14. How does the reform affect Capital Gains Tax (CGT)?
No change. Capital Gains Tax remains limited to disposals of immovable property located in Cyprus, or to shares in companies holding such property.
Gains from securities — including shares, bonds, funds, ETFs, and derivatives — remain exempt from CGT, preserving a core benefit of Cyprus’s tax regime.
15. What is the new loss carry-forward period for companies?
The loss carry-forward period is extended from five to seven years, giving businesses greater flexibility to offset future profits and manage cyclical performance.
16. What deductions and incentives are available for businesses?
Key improvements include:
– 120% super-deduction for R&D expenses extended to 2030;
– Increased capital allowances for energy upgrades until 2030;
– Entertainment expenses cap raised to €30,000;
– Stock-exchange listing costs deductible up to €300,000;
– 20% additional capital allowances for agricultural and livestock investments.
These measures enhance productivity, innovation, and sustainability in Cyprus’s business ecosystem.
17. What are the new Transfer Pricing (TP) thresholds?
The thresholds for exemption from maintaining a Cyprus TP Documentation File have increased to:
– €10 million for financial transactions;
– €5 million for purchases/sales of goods;
– €2.5 million for other transactions.
This simplification reduces administrative burden while maintaining transparency.
18. What are the new compliance and administrative rules?
– Corporate return and payment deadline: 31 January of the following year
– Audit threshold for individuals: €120,000 gross income;
– Data retention: 8 years after submission;
– Employer declarations: mandatory for all employees;
– General Anti-Avoidance Rule (GAAR): introduced to combat aggressive tax planning;
– Updated fines: to promote voluntary compliance.
19. Will VAT rates change under the new tax framework?
No. The standard VAT rate remains 19%, with all existing reduced and zero rates preserved.
20. Does the Notional Interest Deduction (NID) still apply?
Yes. The NID regime continues unchanged.
The deduction is calculated at the 10-year government bond yield of the country where the funds are employed, plus 5%, capped at 80% of taxable profits.
This allows investors to reduce taxable profits through equity financing rather than debt.
21. Is the Cyprus IP Box regime still valid after the reform?
Yes. The IP Box regime, granting an 80% exemption on qualifying IP income under OECD “nexus” principles, remains in full effect, supporting innovation and tech-driven enterprises.
22. How can businesses prepare for the 2026 tax reform?
Practical steps to take now include:
– Conducting a tax-impact assessment under the 15% CIT rate;
– Segregating pre-2026 vs post-2026 profits for SDC planning;
– Updating accounting and audit calendars for the new 31 January filing deadline;
– Reviewing dividend, crypto, and investment structures;
– Seeking professional tax and legal advice to ensure a seamless transition.
23. Is Cyprus still a tax-efficient destination for retirees and expats?
Absolutely. With a flat 5% tax on foreign pensions above €5,000, no tax on worldwide capital gains, a stable Non-Dom regime, and one of the lowest personal and corporate tax rates in the EU, Cyprus remains among Europe’s most attractive and transparent relocation hubs for retirees and professionals alike.
24. How can Polycarpos Philippou & Associates LLC assist with the new tax framework?
Our firm provides:
– In-depth tax-impact and compliance reviews;
– Dividend and SDC restructuring strategies for 2026 profits;
– Crypto-asset and fintech tax alignment under the 8% regime;
– Residency and Non-Dom advisory for expatriates and families;
– NID and IP Box planning for investment structures;
– Continuous legislative monitoring and client updates.
Contact us today to ensure your tax structure is fully optimised for 2026 and aligned with the new Cyprus
