Cyprus has approved a comprehensive tax reform package, representing the most significant update to the country’s tax system in over two decades, with most changes being effective from 1 January 2026.
The tax reform package was introduced to modernize the tax regulatory framework, cover gaps and ensure alignment with international standards, specifically with the OECD’s global minimum tax rules. At the core of the reform are notable changes to the taxation of both individuals and legal entities, designed to balance tax relief for individuals and families whilst sustaining a competitive climate for investment and business operation in Cyprus.
In this article, we highlight the most significant changes affecting individuals and legal entities.
Main Changes Affecting Legal Entities
1. Corporate Income Taxation. Increased from 12.5% to 15%, whilst the participation framework and key incentives remain intact, including the IP Box regime and the Notional Interest Deduction.
2. Special Defence Contribution (SDC). SDC has seen several amendments which reduce taxation on profit distribution and investment income, including:
- Actual Dividend Distribution: SDC decreased from 17% to 5% for profits generated after 1 January 2026 for Cyprus-resident and domiciled individuals. Noting that non-domiciled Cyprus tax residents are exempt from SDC on dividends.
- Deemed Dividend Distribution: Abolished for profits earned from 1 January 2026 onwards.
- Hidden Profit Distribution: SDC of 10% is applicable for disguised dividend distributions, ie when value is transferred to shareholders who are natural persons in ways other than formal dividend payments but they essential represent distribution of profits.
- Rental Income: SDC abolished.
3. Defensive Witholding Tax (WHT) on Dividends to Low-Tax/ Blacklisted Jurisdictions.
- 5% WHT applies to dividends paid to companies resident in low-tax jurisdictions.
- 17% WHT applies to dividends paid to companies resident in EU blacklisted jurisdictions.
- If both apply, 17% prevails.
4. R&D Super-Deduction. The 120% R&D super-deduction is extended until 2030.
5. Loss Carry Forward Timeframe. Extended from 5 years to 7 years.
6. Entertainment Expenses Deduction: Increased from €17,086 to €30,000.
Main Changes Affecting Individuals
1. Income Tax. The tax-free income threshold has increased to €22,000 from €19,500, and the income tax bands have been modified shifting more income into lower bands allowing individuals to keep more net income. From 1 January 2026, the effective income tax bands are as follows:
Income (€) | Tax (%) |
0 – 22,000 | 0 |
22,001 – 32,000 | 20 |
32,001 – 42,000 | 25 |
42,001 – 72,000 | 30 |
Over 72,000 | 35 |
2. Stock Options. Gains from approved employer schemes shall be subject to a flat 8% tax rate. This is subject to (i) a cap of twice the employee’s annual remuneration and (ii) a maximum lifetime benefit of €1 million over 10 years.
3. Ex Gratia Payments. These are tax free up to €200,000, with a 20% flat tax rate applied on amounts over and above.
4. Enhanced Support to Families. New deductions apply per dependent child or student up to 24 years of age, subject to the household’s total income (indicatively €100k for 1–2 children, €150k for 3–4 children, €200k for 5+ children).
- €1,000 for the first child/student
- €1,250 for the second child
- €1,500 for the third and each additional child
- €2,000 per child for single parent families.
5. Housing Relief.
- Rent & Mortgage Relief. Individuals can claim up to €2,000 per year for rent (expense) or mortgage interest paid on their primary residence.
- Green Incentives. Up to €1,000 deduction is available for energy upgrades, photovoltaic installations and electric vehicle purchases.
- Home Insurance Deductions. Up to €500 deduction per person for natural disasters.
6. Annual Tax Return Submission. As of 1 January 2026, individuals aged 25 and over must submit an annual income tax return, even if their total income falls within the tax-free threshold.
Main Changes Affecting Both Individuals and Legal Entities
1. Cryptocurrency Tax. Gains are subject to a flat 8% tax rate. Losses are ring-fenced to crypto gains of the same year (no carry-forward and no group relief).
2. Stamp duty. The relevant legislation has been repealed and stamp duty has been abolished for all transactions as of 1 January 2026.
3. Capital Gains Tax (CGT). Increased exemptions for CGT purposes providing relief on qualifying assets, including an increase to the exemption on primary residence disposal from €85,430 to €150,000.
4. Rental Payments. As of 1 July 2026, rents exceeding €500 must be paid electronically.
5. Tax Commissioner Powers. Enhanced powers are afforded to the Tax Commissioner in cases of non-compliance, including the power to (i) request tax-related information from Cyprus banks on the non-compliant person, (ii) suspend business operations and seal premises for non-compliance, issuance of inaccurate invoices or obstruction of audits (after 3 written warnings), (iii) freeze shares for tax debts exceeding €100,000 and (iv) impose a further 5% levy if payment remains two months past due.
Conclusion
This significant overhaul of the Cyprus tax system is designed to:
- offer more tax relief and make tax burdens fairer for individuals by providing more beneficial tax bands, as well as housing and family incentives and exemptions;
- ensure Cyprus remains a competitive, attractive and desirous international business hub, by significantly lowering dividend taxation, increasing tech incentives and extending the loss carry forward timeframe, among others; and
- provide for a transparent tax system, which includes anti-avoidance and anti-abuse measures and greater powers to the Tax Commissioner.
Businesses and individuals should become aware and understand these changes early to ensure proactive tax planning, timely compliance with their obligations and strategic decision-making.
The information contained in this article is provided for informational purposes only and should not be relied upon or construed as legal advice on any matter. The information provided is valid as at the time of publishing and may not reflect the most current legal developments. Should you require legal advice, please contact us directly.
