In an attempt to enhance the efficiency of tax policies in Cyprus, on February 26th of 2025, the President of the Republic of Cyprus, in cooperation with the Economic Research Centre of the University of Cyprus, presented a tax reform proposal which is expected to have a strong fiscal impact both on physical persons as well as legal entities who are tax residents in the country. The reform proposal shall initially undergo public consultation which shall be followed by the elaboration of the relevant legislation, which shall then be submitted to the House of Representatives by the Ministry of Finance for voting. Once approved, the legislation shall enter in vigour, partly as of 2025, while in whole it is expected to be in full effect in 2026.
The main elements of the proposals include
but may not be limited to the following:
The first, most striking amendment introduced, is the increase of the corporate income tax rate from the famous 12.5 to 15% for all legal entities. Such measure was suggested in an attempt to align Cyprus taxation with the other EU member states and the OECD’s global tax guidelines.
Furthermore, companies shall be able to follow through with procedures of tax losses incurred within a timeframe of 10 fiscal years instead of the current five-year period allowance. This amendment can turn out to be very beneficial for the legal entities, as the mechanism enables such losses to be offset against future taxable income or even profits of another company belonging to the same group of companies, provided that all legal entities involved are tax residents of the Republic of Cyprus.
In addition, the 1.5% insurance premium tax is expected to be abolished, while new anti-abuse rules are expected to apply for close-structured legal entities.
Profits derived from cryptocurrency trading shall also be taxed in the event that they are perceived as revenues.
On the other hand, the reform proposal does not suggest any amendments in departments of tonnage tax regime within the shipping domain, dividend exemptions, exemptions on sales of shares and/or other securities, notional interest deduction rules on corporate quite and provisions on the IP Box regime.
The reform proposal suggests an increase in the tax-free threshold which would be at the rate of 20.500 euros per annum, as opposed to the current 19.500-euro rate. Moreover, the current scale of progressive taxation on personal income which can reach a maximum level of 35% and currently applies to sums exceeding the 60.000 euros would hereinafter apply to sums exceeding the 80.000 euros of personal profits. On the other hand, progressive taxation rates of 20%, 25% and 30% would apply to intermediary bands in the following manner:
|
Taxable income
|
Tax rate
|
|
Up to €20,500
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0%
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€20,501 — €30,000
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20%
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€30,001 — €40,000
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25%
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€40,001 — €80,000
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30%
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|
Over €80,000
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35%
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Eligibility for personal allowances that would benefit specific categories of individuals such as:
- Families with dependent minor children or non-emancipated children who are students, provided that certain conditions are fulfilled;
- Physical persons with a housing loan on their primary residence or payments of rents;
- Families who would proceed to green-household upgrades of their residences.
Further taxation benefits would concern the following cases:
- Lower taxation rates for stock options, subject to certain conditions and anti-abuse rules;
- Ex gratia payments, such as voluntary payments of an employer to their employees, would be taxable if exceeding a threshold amount, while the employer would benefit from a full deduction of such expense;
Considerable payments of employer to desired recruits, such as the “golden hellos” or otherwise known as “handshake amounts” would be subject to taxation to the employees, while for the employer such amounts would be considered as deductible expenses;
Cultural donations shall also be subject to deductions;
The 60-day tax residency rule of Cyprus would become more flexible in terms of including physical persons whose centre of business interests is located in the Republic of Cyprus, regardless of their physical presence on the territory;
No amendments are expected to be made to the 50% tax exemption on employment income for first employment in the Republic of Cyprus.
The current provisions of the legislations, which refers to the sale of real estate property in the Republic of Cyprus or the sale of companies which directly or indirectly own real estate properties in the country, shall remain in vigour but modernizations shall be applied.
- Special Defense Contribution (SDC):
The current legislation would be amended in the following manner:
- Abolition of the SDC on rental income;
- SDC rate on dividends would be reduced from the current 17% to 5% for tax residents and individuals domiciled in the Republic of Cyprus;
- Lifting of corporate veil. Anti-abuse rules are expected to be introduced for disguised dividends, as tax authorities may reclassify shareholder income as direct business income;
- The non-dom status for physical persons would remain for a timeframe of 17 fiscal years, while an extension of such time period might be offered with the imposition of an annual fee.
With the new legislation stamp duty is expected to be limited to agreements regarding immovable property, banking and insurance undertakings.
- Incentives regarding Green Transitions and Digital Transformations:
The newly proposed tax reform presents several measures for investments into the green transition and digital transformation sectors accordingly:
- Significant tax deductions on expenses and/or capital allowances;
- Important tax deductions for upskilling and retraining corporate staff;
- Accelerated depreciation for eco-friendly and high-tech investments;
- Deficits produced by the aforementioned measures would be extended without restrictions. Specifications are expected to be presented in the following months.
The new tax reform proposal is expected to be finalized by the end of 2025. Some of the new tax initiatives which shall be adopted may have a retroactive effect and apply from the beginning of the fiscal year 2025, while others are expected to enter in vigor from the beginning of the fiscal year 2026.
The present article is for informational purposes only and does not, under any circumstances, constitute legal advice. For further information on the subject, please contact our law firm and one of our attorneys shall be glad to assist you.
Nika Kalifatidou
Advocate – Legal Consultant
Managing Partner
T.K. & Associates Law Firm
