Cyprus tax reform: key points of the proposal

Cyprus tax reform: key points of the proposal

On 26 February 2025, the University of Cyprus’ Economics Research Centre unveiled its proposed tax reform plan to important stakeholders, such as business leaders, industry associations, and professional groups. The proposal will be subject to public consultation. After the consultation phase concludes, the Ministry of Finance will review the proposal and then be submitted to the House of Representatives for approval. Once endorsed, the draft legislation will be introduced to the Parliament, where the Finance Committee will evaluate it prior to its presentation to members for voting. Some of the suggested tax changes could be implemented as early as the 2025 tax year, while others are anticipated to take effect in 2026.

Key Points of the Proposal for Legal Entities in Cyprus

1. Corporate Tax

• The corporate income tax rate will be increased from 12.5% to 15%.

2. Special Defense Contribution (SDC)

• The current rules on deemed distribution of profits to be abolished.
• The existing SDC on rental income to be abolished
• the SDC rate on dividends to be reduced from 17% to 5% for natural persons who are tax residents and domiciled in Cyprus.
• The Non-Dom period status of 17 years will not change, although an option for extending the period will be provided with the imposition of an annual fee.

3. New Reorganization Framework

• This framework will be improved to provide more flexibility and efficiency in merger and acquisition (MAA) transactions and restructurings.

4. Green Transition and Digital Transformation

The proposal includes the following with regards to green transition and digital transformation expenditures:

• Super deductions for expenses/capital allowances
• Accelerated depreciation
• Deductions for upskilling and staff retraining
• Losses generated from the above measures will be carried forward without restrictions

5. Capital Gains Tax

• The current scope of the law, which is restricted to sale of immovable property located in Cyprus and sale of companies that directly or indirectly own such property, will be retained but modernized.

6. Stamp Duty

• The Stamp Duty law will be simplified to reduce complexity and administrative burden. The proposal suggests stamp duty to be limited only to agreements related to immovable property, as well as banking and insurance transactions.

7. 60-day Tax Residency Rule will be extended to include individuals whose center of business interests is in Cyprus, irrespective of their physical presence.

8. The allowable period for carrying forward tax losses will be extended from five to ten years, although loss utilization after five years will be limited to a percentage of the company’s taxable profit for the year.

9. Profits from trading in cryptocurrencies will be taxed if considered to be of revenue nature.

10. The 1.5% insurance premium tax will be abolished.

11. Ex gratia payments (e.g., voluntary payments from an employer to an employee) will be taxed above a threshold amount, while the employer nay claim the full amount as a tax-deductible expense.

12. Golden Handshakes will be entirely taxable for employees, while remaining deductible for employers.

No Changes

Existing favorable tax provisions such as the below will not be affected:

• Non-Dom Tax Status for individuals,
• 50% deduction for first employment in Cyprus under the Cy non-Dom regime,
• Tonnage tax regime for shipping sector,
• Notional Interest deduction rules on corporate equity,
• Dividend exemption rules,
• Exemption on sale of shares and other securities,
• Rules regarding IP Box regime.

Key Points of the Proposal for Individuals in Cyprus

1. Increase to the Tax-Free Threshold and Personal Tax Band

• The tax-free income threshold will be raised from €19,500 to €20,500, offering relief to low-and middle-income earners.
• The top tax band of 35% would apply to emoluments exceeding €80,000 (instead of the current threshold of €60,000).
• Intermediary bands would be progressively taxed at rates of 20%, 25% and 30%, as per the table below:

2. Personal Allowances

• Parents with dependent children based on income criteria
• Parents with children who are students based on age and income criteria
• Individuals in respect of housing loans for their primary residence or rent payments
• Families making environmentally friendly improvements to their house

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