Proposals for Cyprus Tax Reform 2025

In February 2025, the Economics Research Centre of the University of Cyprus unveiled a comprehensive tax reform proposal aimed at modernizing the nation's fiscal framework, promoting economic growth, and ensuring alignment with international tax standards.
These proposals are currently under public consultation and, following approval by the Council of Ministers and the House of Representatives, are anticipated to be enacted by 2026.

Key Proposed Changes:

Corporate Tax:

• Rate Increase: The corporate income tax rate is proposed to rise from 12.5% to 15%, applicable to all companies operating in Cyprus.
  
• Residency Criteria: Enhancements to corporate tax residency criteria based on "management and control" are under consideration to prevent tax avoidance.
  
• Retained Incentives: Beneficial provisions such as the Notional Interest Deduction (NID), Intellectual Property (IP) Box Regime, and Tonnage Tax Regime will remain unchanged, preserving Cyprus's appeal as a business-friendly jurisdiction.
  

Special Defence Contribution (SDC):

• Dividend Tax Reduction: A reduction of the SDC rate on dividends from 17% to 5% is proposed for individuals who are both tax residents and domiciled in Cyprus.
  
• Abolition of Deemed Distribution Rules: The current deemed distribution provisions, which mandate companies to distribute and tax profits under SDC, are set to be abolished, simplifying tax obligations for corporations.
  
• Elimination of SDC on Rental Income: The 3% SDC on rental income for both companies and individuals is proposed to be removed, reducing the tax burden on property owners.
  

Personal Income Tax:

• Increased Tax-Free Threshold: The tax-free income threshold is set to increase from €19,500 to €20,500 per annum, providing relief to lower-income earners.
  
• Revised Tax Bands: Adjustments to tax brackets include:
  
  • €20,501 – €30,000: 20%
    
  • €30,001 – €40,000: 25%
    
  • €40,001 – €80,000: 30%
    
  • Above €80,000: 35%

This restructuring aims to balance the tax burden more equitably across income levels.

• Additional Allowances: New deductions are proposed for:
  
  • Families with children or students, based on income criteria.
    
  • Mortgage interest and rent payments for primary residences.
    
  • Households investing in "green" upgrades, such as energy-efficient systems.
    

These measures aim to support families and promote sustainability initiatives.

• Non-Domiciled Status: The existing non-domiciled tax status will be retained, with the option to extend the applicable 17-year period upon payment of an annual fee, maintaining Cyprus's attractiveness to expatriates and investors.
• Residency based on 60 days: Definition of “residency” based on the "60-days rule" to be expanded, to include individuals whose centre of business interests is in Cyprus, regardless of physical presence.

Other Notable Changes:

• Stamp Duty: The scope of stamp duty will be significantly reduced, applying only to agreements related to immovable property, banking, and insurance transactions, thereby simplifying commercial dealings.
  
• Tax Loss Carry forward: The period for carrying forward tax losses is proposed to extend from 5 to 10 years, subject to conditions, providing businesses with greater flexibility in tax planning.
  
• Stock Options: Consideration is being given to taxing stock options at a lower rate upon exercise, subject to specific conditions and anti-abuse rules, to encourage employee participation and retention.
  
• Ex-Gratia Payments: Such payments to employees will be tax-exempt up to a certain amount, while employers will have the right to claim the full amount as a tax-deductible expense, balancing benefits between employers and employees.
• Insurance companies: abolition of the 1.5% insurance premium tax.

Next Steps:

These proposals are currently under public consultation and will undergo further discussions and refinements. Subsequently, they will require approval by the Council of Ministers and the House of Representatives. If enacted, the new tax measures are expected to take effect from 2026.

Overall, the proposals seem to be in the right direction and are expected to further strengthen the competitiveness and attractiveness of the Cyprus tax system, while at the same time ensuring fairer distribution of the tax burden and redistribution of wealth.

Businesses and individuals are advised to stay informed about these developments to assess the potential impact on their financial planning and operations.

PGE&Co remains at your disposal for any clarifications and for further assistance that might be needed on this or on any other matter.