The Cyprus Tax Reform – Key Points

The Cyprus Tax Reform – Key Points

On the 22nd of December 2025, the Cyprus parliament voted the tax reform which aims to reshape the tax system and provide greater flexibility, efficiency, economic growth while simultaneously enhancing tax compliance.

The laws were published in the Official Gazette of the Republic on 31 December 2025. Majority of the changes are effective as of 1 January 2026.

Income Tax:

• One of the most important changes approved, is the increase of Corporation tax from 12.5% to 15% commencing from 2026
• The definition of a Cyprus tax resident company was also amended to include companies which have been incorporated under the Cyprus Companies Law, irrespective of whether another country also considers them as tax residents in that country
• Tax losses carried forward have been extended from five years to seven years
• Individual tax bands were also revised as are as follows to meet more current market conditions:

• The below forms of employment income will now be taxable:
  1. Benefits provided as incentive for an employee to accept employment prior to employment commencement;
  2. Ex-gratia payments in relation to retirement (including early retirement) or termination of employment (including early termination). Any amount exceeding €200,000 will be taxed at a flat rate of 20%. This tax is not deductible for employer;
  3. Any amounts adjudicated by a court with respect to income taxable under the aforesaid articles
• Extension of 9% deemed benefit to indirect shareholders as well. It is important now for companies and individuals to carefully assess financing arrangements.
• An additional 20% deduction on R&D expenses and scientific research applies in respect of expenses for tax years 2025-2030. This deduction cannot be claimed on expenses related to an asset benefiting from the provisions of the IP nexus regime.
• Cryptocurrency profits will be taxed at a flat rate of 8% on the below sources of profit:
  • The sale of a crypto asset;
  • Gift of a crypto asset;
  • Exchange of a crypto asset with another crypto asset;
  • Use of a crypto asset as means for making payments

Losses from crypto assets can only be offset against gains from other crypto assets of the same person, of the same year and cannot be carried forward or offset through group relief

• Stock options granted under approved employee schemes will also be taxed at 8%. The maximum amount taxable under this scheme is €1M over a 10-year period
• Thresholds for local file have been revised as follows:
  • Financing transactions –€10M
  • Sale of goods transactions –€5M
  • All other transactions – €2.5M
• Tax deductible entertainment expenses increased from €17,086 to €30,000 capped at 1% of the gross income of the business
• It has been clarified that useful economic life of intangible assets with indefinite life, for amortisation purposes, will be 20 years
• A deduction equalling to 200% of the Cost-of-Living adjustment payment made by an employer to its employees is granted provided certain conditions are met
• For the purposes of group relief, a company must first offset any taxable income against its own losses being carried forward before can utilise any losses of other companies belonging to the safe group for group relief purposes through the group relief provisions;

Personal income tax amendments/deductions:

• Dependent children/university students. Deductions range from €1,000 per child to €1,500 per child per parent assuming family income does not exceed €100,000 – €200,000 respectively
• Under the revised 60-day rule for individuals, the condition for an individual not to be a tax resident in another state for him/her to be a Cyprus tax resident, is removed;
• Income from cancellation or early termination of a contract would be taxable;
• Tax deductions are introduced for interest on loans used from the acquisition of primary residence (up to €2,000) or rental expense of an individual's primary residence
• Tax deductions will now include insurance premiums for permanent or partial incapacity
• Tax deductions will be provided for capital expenses made that increase the energy efficiency of a primary residence and also for the purchase of an electrical vehicle (up to €1,000)
• Tax deductions up to €500 will be provided for insurance of primary residence against natural disasters
• Abolishment of minimum tax paid by insurance companies

Social Defence Tax (SDC) main amendments

• Reduction of SDC rate from 17% to 5% on gross dividends received by Cyprus tax resident individuals. Dividends received from Cyprus tax resident companies out of profits earned up to 31 December 2025 remain taxed at 17% if received before 31 December 2031.

These rates apply to Cyprus tax resident individuals receiving dividends from Cyprus tax resident companies

• Abolishment of Deemed Dividend Distribution rules from 01 January 2026 by Cyprus tax resident companies
• Payment of SDC on rental income is abolished
• In case of bonus issue of shares, the amount capitalised will be treated as a dividend
• The exemption of SDC for Cyprus tax resident non-domiciled individuals may be extended beyond the 17 years with the payment of a lump sum of €250,000 per period for an additional two periods of 5 years each
• Interest income: Interest accruing to individuals will be subject to SDC and be exempt from income tax law while interest earned by or accruing to companies will be subject to the provisions of income tax only
• The rules for dividends paid to related companies in Blacklisted Jurisdiction (BLJ) and Low Tax Jurisdictions (LTJ) that were updated in April 2025 with effect 1 January 2026 have now commenced. The rate of SDC on dividends paid to related companies in:
  • BLJs remains at 17% tax on the gross dividend
  • LTJs is reduced from 17% tax on the gross dividend to 5%

Capital Gains Tax Law

• The definition of shares that directly or indirectly own immovable property situated in Cyprus has been amended to include shares which derive 20% (as opposed to the previous 50%) of their value from immovable property situated in Cyprus
• Lifetime Capital Gains Tax exemptions:
  • General exemptions for a natural person has increased to €30K from €17,086
  • Agricultural land exemption has increased to €50K from €25,629
  • Primary residence exemption has increased to €150K from €85,430
• Buildings/plots in exchange for land has been included in the exemptions from capital gains tax
• To increase transparency and proper documentation of rental transactions within Cyprus, rent payment for immovable property located in Cyprus must be made exclusively through one of the following methods:
  • Bank Transfer
  • Debit or Credit card payment
  • Any other recognised electronic payment method
• The concept of \u201cdividend received\u201d has widened to include the below:
  • Company assets distributed to the shareholder upon capital reduction, dissolution, liquidation, redemption of shares
  • Increasing a company's issued capital by capitalisation of distributable reserves. The dividend will be the amount of increase of share capital

These apply to Cyprus tax resident individuals and Cyprus tax resident companies receiving dividends from Cyprus tax resident companies and non-Cyprus tax resident companies only in cases where a normal dividend received would have been subject to SDC.

Introduction of the "Disguised" Dividend concept:

The concept of disguised dividend is introduced for direct and indirect shareholders who are natural persons. A tax rate of 10% applies to the below cases:

• Private use of a company asset by the shareholder. Amount of disguised dividend is calculated as follows:
  • The initial market value of the asset used for personal use, multiplied by the percentage of personal use (if asset is not connected to the business, then percentage of personal use is 100%)
  • The market value of the asset at the time of any increase in percentage of personal use
  • Reductions in the percentage of personal use do not result in any refund of SDC
• Assets disposed by the company to a shareholder at a consideration that is below fair market value

The amount of disguised dividend is determined as the market value of the asset on the date of disposal less the amount of consideration. The dividend is reduced by any amount of disguised dividend already captured under the above private use provisions.

The disguised dividend does not apply in the below scenarios:

• Assets donated to the company from the private use shareholder
• Any scenario where benefit in kind provisions apply
• When the distribution is in the context of capital reduction, dissolution or liquidation

The above rules apply to Cyprus tax resident shareholders receiving disguised dividends from Cyprus tax resident companies unless the shareholder benefits from non-dom regime.

Other points to consider:

• Abolishment of Stamp Duty – Stamp duty law is fully abolished as from 01 January 2026;
• All tax resident individuals from the age of 25 to the age of 71 have an obligation to file a personal income tax return irrespective of whether they have income or not while all Cyprus tax resident individuals who have income will have an obligation to file a return irrespective of their age;
• Deadline for submission of tax returns by both companies and individuals with be the 31 January of the year that follows the subsequent year to the tax year (i.e. 13 months from the tax year-end date);
• Partnerships will also have an obligation to submit tax returns;
• The deadline to submit an objection is extended to 60 days;
• The threshold for annual turnover for individuals to have an obligation to prepare audited accounts is increased from €70,000 to €120,000;
• A director will continue to be liable for actions or omissions that have taken place during his/her term despite that at the time proceedings will commence he/has already resigned;
• Power has been given to the Commissioner of Taxation to suspend operations of a business if the taxpayer has not submitted its tax returns for pre-determined period, failed to pay taxes due to a pre-determined amount, has not issued/issued incorrect invoices/receipts;
• Penalties for late submission and fines have been materially increased ranging from €150 to €2,000

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.