TaxLegi 30.01.2026

• On 31 December 2025, Cyprus enacted significant tax reform measures aimed at stimulating economic growth and enhancing tax compliance, with most changes effective from 1 January 2026.
• The corporate income tax rate will increase from 12.5% to 15%, while the deemed distributions rules are abolished (subject to transitional rules).
• The tax-free band for individuals is raised from €19.500 to €22.000 while the tax brackets are revised resulting in a lower personal income tax for individuals.
• The reforms introduce new dividend withholding tax rates, special rules for cryptocurrency profits and stock options, increased penalties for noncompliance, and expand the scope of capital gains tax, all requiring companies to reassess their tax planning and compliance processes.
• Affected entities should review the implications of these changes in their operations, ensure readiness for the new tax landscape, and make adjustments accordingly to comply with the updated regulations.

Executive summary

On 22 December 2025, the House of Representatives approved several tax bills. The amendments aim to stimulate economic growth, enhance tax administration and improve tax compliance by providing additional audit and collection powers to the tax authorities, and to achieve social cohesion by fostering a more equitable tax system.

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

Overview of changes

Income Tax Law

The most significant changes are:

• As of 2026 tax year, the corporate income tax (CIT) rate has increased from 12.50% to 15%.
• The definition of tax residency for companies is expanded to include the incorporation test, unless a double tax treaty provides otherwise.
• Tax losses may be carried forward for seven years (instead of five years).
• Exit taxation provisions are amended to provide that the tax basis of assets should equal their fair value when a company establishes tax residency in Cyprus from a non-European Union (EU) country. The current provision in the law restricted this tax-basis rule to transfers from EU countries.
• Tax imposed under Qualified Income Inclusion rule and Qualified Undertaxed Profits rule (Global Minimum Tax) will not be creditable.
• The exemption on profits of a foreign permanent establishment will not apply if the permanent establishment is in a jurisdiction that is included on European Union (EU) list.
• As of 2031, the redemption of units in funds that are set up in a corporate form will be considered a dividend, as opposed to being treated as a disposal of securities, which is the current treatment.
• The changes clarify that assets contributed to the capital of a company qualify for capital allowances provided that the fair value of the asset is substantiated to the satisfaction of the tax authorities (this has been the practice over the years). Further, the changes clarify that intangible assets that have an indefinite useful economic life are eligible for capital allowances over a period of 20 years.
• Enhanced capital allowances relating to green expenditure (e.g., energy efficiency of buildings, renewable energy systems, electric energy storage systems, electric vehicles) has been extended until 2030.
• Increased capital allowances at the rate of 25% per annum are introduced for agricultural and livestock farming assets.
• A deduction of up to €50k per tax year is introduced for donations and contributions made to cultural institutions.
• A deduction of up to €300k may be claimed for expenditures incurred for listing shares on a recognized stock exchange.
• The additional “super” 20% deduction for research and development is extended to 2030. This change is also relevant to tax year 2025, because the existing provision applies to tax years 2022-2024.
• An additional deduction will be available to employers that pay a Cost-of-Living Allowance (COLA) as per the relevant trade unions agreement, which will be equal to two times the expense incurred in paying COLA in the preceding tax year.
• The amount that may be claimed as a tax deduction for entertainment expenses is increased to €30k. The deduction is calculated as the lower of (i) 1% of turnover or (ii) €30k.
• The interest expense deduction available for interest incurred for the acquisition of wholly owned (100%) direct and indirect subsidiaries will not be available if the subsidiary is (i) tax resident in a jurisdiction included on the European Union (EU) list (Annex I) of noncooperative jurisdictions for tax purposes, or (ii) is incorporated or registered in a jurisdiction included on the Annex I list and not considered to be tax resident in another jurisdiction that is not on the list.
• 60 days tax residency: the condition for an individual not to be tax resident in another state for him/her to be Cyprus tax resident, is removed.

The individual tax bands have been revised as follows:

• The scope of taxation regarding other income from employment has been significantly expanded to capture income derived from employment, such as ex gratia payments, termination payment, “golden handshake” payments, and other employment related income.
•  Specific provisions are introduced regarding ex-gratia payments. Ex-gratia payments above €200.000 will be taxed at a fixed rate of 20%; ex-gratia payments include payments upon retirement (including early retirement), payments on termination of employment, and compensation for termination of employment.
• Ex-gratia payments made to employees will not be tax deductible for the employer.
• Family-based allowances have been introduced depending on the size and income of the household.
• Cryptocurrency profits (including gains of capital nature) will be taxed at a flat 8% rate. Tax losses from cryptos are ring-fenced as they can only be set off against cryptocurrency profits of the same person, while any unused tax losses are wasted. Several conditions apply.
• Stock options granted under approved employer schemes will also be taxed at 8%. The maximum amount taxable under this scheme is €1m over a 10-year period. Several conditions apply. For existing schemes, employers must apply to the Tax Department within six months (until 30 June 2026) seeking the approval of the tax authorities.  
• The insurance premium tax (1.5% on gross premium income), which was a form of minimum tax, is abolished.

Withholding taxes

• Withholding tax on dividend payments made to Cyprus tax resident and domiciled individuals is reduced from 17% to 5%. New constructive dividend rules apply if a shareholder is a Cyprus tax resident and domiciled individual. The withholding tax rate for constructive dividends is 10%.
• Withholding tax on dividend payments made to associated companies in low-tax jurisdictions decreases from 17% to 5%.

Stamp Duty

The Stamp Duty Law was abolished with effect from 1 January 2026 relating to contracts executed on or after 1 January 2026.

Transfer pricing

Transfer pricing documentation thresholds will increase for:

1. Goods (€5m)
2. Financial transactions (€10m)
3. Other transactions (€2.5m)

Special Contribution for the Defence Fund of the Republic (Defence Tax)

The most important changes are:

• The deemed distribution rules on profits generated after 31 December 2025 are abolished.
• Companies will no longer be subject to Defence Tax on passive interest income; as of 2026 tax year, interest income will only be subject to Income Tax.
• Rental income will no longer be subject to Defence Tax; as of 2026 tax year, it will only be subject to Income Tax.
• Dividend income received from non-Cyprus tax-resident companies will be subject to 5% Defence Tax (instead of 17%) if the relevant conditions for exemption are not met.
• A general anti-abuse rule is introduced for Defence Tax purposes. 

Capital gains tax

The main changes made to the capital gains tax (CGT) law are the following:

• The threshold for indirect disposal of shares in a company that owns immovable property in Cyprus is reduced from 50% to 20%. Thus, CGT may be triggered if shares are sold in a company that indirectly participates in a company or companies that own immovable property situated in Cyprus and at least 20% (currently 50%) of the fair market value of the shares sold is derived from the immovable property in Cyprus.
• The exception for the sale of shares listed on a “recognized” stock exchange is replaced with an exception for sale of shares listed on a “regulated” stock exchange. However, grandfathering rules are introduced for disposal of shares listed on a recognized stock exchange that were acquired before 1 January 2026.
• No CGT is imposed on the sale of shares listed on a non-regulated stock exchange if the disposal amount does not exceed €50k in a tax year. If the disposal amount exceeds €50k in a tax year, CGT will be imposed accordingly.
• It is clarified that the term “exchange of property”, which is not considered a disposal of property for CGT purposes, also includes the exchange of property with a land developer (as defined) under certain conditions.
• There is an increase in lifetime exemptions for individuals:
  • One-off exemption is increased to EUR 30.000.
  • One-off exemption for agricultural land is increased to EUR 50.000.
  • One-off exemption for sale of primary residence is increased to EUR 150.000.
• The exception for sale of primary residence when such property is sold as part of a loan restructuring procedure is increased to EUR 450.000. This exception shall apply until 31 December 2030.

Tax administration

Several changes were made to the Assessment and Collection of Taxes Law and Collection of Taxes Law. The most salient changes relate to:

• The annual income tax return submission deadline will be 13 months after the end of the tax year (rather than 15 months). For example, the deadline for the 2026 tax year will be 31 January 2028.
• The final payment must be made by tax return deadline. Currently, the final payment is due within eight months from the end of the tax year.
• The statute of limitations is amended to be six years from the date the tax return is submitted or from the date a revised tax return is submitted (currently it is six years from the end of the tax year). The same deadline should apply to the maintenance of books and records.
• Several provisions are introduced to enable the tax authorities to enforce tax collection and combat tax avoidance by having stronger audit and collection powers and to impose increased administrative penalties.

Implications

The enacted legislation represents the most significant tax reform in the last 20 years. As taxpayers navigate this new terrain, understanding the implications of tax reform will be crucial for business planning and decision making. Taxpayers should thoroughly evaluate the impact of the new legislation on their operations and assess readiness to comply with the new requirements.

Contact Information

For additional information concerning this Alert, please contact:

• Philippos Raptopoulos | Head of Tax and Law Leader, Philippos.Raptopoulos@cy.ey.com
• Petros Liassides | Head of Business Tax Services, Petros.Liassides@cy.ey.com
• Petros Krasaris | Head of International and Transaction, Tax Services petros.p.krasaris@cy.ey.com

The need for digital currency

A recent study by the European Central Bank (ECB) using statistical data from regular surveys it performs on the payment attitudes of consumers, suggests that, although there is undeniable decline in the use of cash for transactions, there is high engagement of the younger population with cash for later use, i.e. for safekeeping. The study further highlights that times of geopolitical tension and events giving rise to the sentiment of uncertainty, such as a pandemic or a large-scale cyber-attack, increase the perceived importance of cash among European citizens.

Despite the persistent use of cash, the ECB has committed to adopting the digital euro in response to, among others, the digitization trends in the financial services sector and potentially the 2024 Draghi Report on Competitiveness, which urged the need for diffusing digital technology into the economy. The pre-launch era has, thus, already started with pilot schemes and preparatory work, for the circulation of digital currency in the EU, which is expected to coexist with banknotes and coins, at least in the foreseeable future.

What is the digital euro?

A proposed stable digital currency, and thus not decentralized nor volatile, since its value will be connected to the euro. It will be issued and backed by the ECB and distributed by banks and payment service providers through a digital wallet system, whereby, as an alternative to depositing and exchanging banknotes, persons will be able to hold euros in electronic form and transfer them electronically. The digital euro is being designed to support different payment methods, including online and offline device-to-device transactions, and in this way facilitate widespread usability in everyday life.

The scepticists

The primary concern commonly being voiced on the issuance of central bank digital currency (CBDC) is the impact on the euro payers’ fundamental rights to private life and protection of personal data provided by the respective European Charter. Will we surrender our privacy to the financial intermediaries and a sovereign institution, which will in effect be able to track our mobility through financial monitoring?

Other issues advocating against the viability of CBDC include the potential disruption that may be caused in case of system manipulation by cybercriminals and the use of the digital euro to promote money laundering and terrorism financing.

“When the time is right”

A number of regulatory tools have been preparing the ground for the safe adoption of digital currency in the EU.

Following global challenges in the use and safekeeping of personal information, with the leaking of taxpayers’ lists, investment data and corporate papers, the prudent use of personal data would have to be secured prior to exploring the use of CBDC. As such, we had the enactment of the General Data Protection Regulation (GDPR) in mid-2018 to monitor the legal and proportionate use of personal data.

Additionally, and in hindsight after detrimental cyber-attacks, it became mandatory for financial intermediaries to formalise the fortification of their digital vulnerabilities, so as to further engage in discussions over the digital euro with confidence that its adoption would not risk European market stability and integrity. To this end, the Digital Operational Resilience Act (DORA) came into effect in January 2025, with the target of not merely adopting robust ICT standards and practices, but also effectively monitoring over-reliance on third-party ICT service providers across the EU.

A continuous effort which adapts to the evolving financial and corporate landscape, is the combat against money laundering and terrorism financing. The 5^th and 6^th AML Directives have incorporated procedures corresponding to the use of digital wallets and the rise of cryptocurrencies.

Measures to tackle concerns

Whilst the infrastructure of the digital euro is being created, the ECB is constructively processing feedback received, and several features have already been proposed to comfort future users of the digital euro. Such features include:

• a tiered system of anonymity, where smaller transactions may be conducted with a higher degree of privacy, while larger transactions will require identification in line with the AML / CTF regime; and
• financial intermediaries processing personal data for compliance and customer management, and sending the ECB pseudonymized or aggregate data with which individuals will be unidentifiable.

The verdict

Fintech companies are already offering fast, cheap and secure wallets for cash-less deposits and transactions. Cryptocurrencies are rapidly expanding to the extent that they may even threaten governments’ monetary sovereignty. Countries such as China, have by now recorded transactions with CBDC of over 1trillion euro in value, and they are leading the way with advanced retail CBDC with the aim of getting at the forefront of global trade settlement.

Survey findings of the Bank for International Settlements and the ECB are consistent in that a massive, rather than slow, decline in the use of cash, is an unrealistic maximalist position. Due to the ageing population within which cash has a deep meaning of security, the rising perceived importance of cash during turbulent times, and the use of cash as a store of value even among young people, digital currencies are expected to complement banknotes and not replace them for many years to come.

Any development of the current European payment system must prioritise user privacy to eliminate state surveillance concerns, foster public trust and encourage widespread adoption. Regulatory measures dictated by GDPR, DORA and the updated AML/CFT directive, have embraced digital and technological advancements and paved a secure way for the adoption of CBDC in Europe.

Should a meaningful balance between further integration of digitization in the European payment system and respect to the socioeconomic customary behaviour of European citizens be achieved, it will be reflected in appropriate legislation in 2026 and thereafter in the issuance and use of the digital euro by 2029.

By:

Andria Koukounis | Partner, Head of Financial Services, Funds and Capital Markets, Koukounis, Karaolis LLC | EY Law, Andria.Koukounis@cylaw.ey.com 

As per the announcement issued on 31 December 2025 by the Tax Department Παράταση Δήλωσης Εργοδότη (Ιούλιος 2025 – Νοέμβριος 2025).pdf, the deadline for the electronic submission and payment of taxes and contributions relating to the monthly Employer PAYE Withholding Tax and Contributions Returns for the period from July 2025 to November 2025 has been extended. The submission deadline has been extended to 31st January 2026, without the imposition of interest or penalties.

EY Cyprus is at your disposal for any information and/or clarifications required.

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Παράταση της προθεσμίας υποβολής των μηνιαίων Δηλώσεών Παρακράτησης Φόρου και Εισφορών (PAYE) Εργοδότη για τους μήνες Ιούλιο 2025 – Νοέμβριο 2025

Σύμφωνα με ανακοίνωση του Τμήματος Φορολογίας που εξέδωσε στις 31 Δεκεμβρίου 2025 Παράταση Δήλωσης Εργοδότη (Ιούλιος 2025 – Νοέμβριος 2025).pdf, παρατείνεται η προθεσμία για την ηλεκτρονική υποβολή και καταβολή φόρων και εισφορών που αφορούν τις μηνιαίες Δηλώσεις Παρακράτησης Φόρου και Εισφορών (PAYE) Εργοδότη για την περίοδο Ιουλίου 2025 – Νοεμβρίου 2025. Η προθεσμία υποβολής παρατείνεται στις 31 Ιανουαρίου 2026, χωρίς την επιβολή τόκων ή επιβαρύνσεων.


Η ΕΥ Κύπρου είναι στη διάθεσή σας για οποιεσδήποτε περαιτέρω πληροφορίες ή διευκρινήσεις πιθανό να χρειαστείτε.

For additional information, please contact the following:

• Philippos Raptopoulos Head of Tax and Legal, Philippos.Raptopoulos@cy.ey.com
• Petros Liassides Partner, Direct Tax, Petros.Liassides@cy.ey.com
• Christoforos Socratous Partner, Global Compliance & Reporting, Christoforos.Socratous@ey.com
• Michalis Karatzis Director, People Advisory Services Tax, Michalis.Karatzis@cy.ey.com
• Herodotos Hadjipavlou Senior Manager – People Advisory Services Tax, Herodotos.Hadjipavlou@cy.ey.com
• Katia Argyridou Senior Manager, People Advisory Services Tax, Katia.Argyridou@cy.ey.com
• Ioanna Dimitriou Assistant, People Advisory Services Tax, Ioanna.Dimitriou@cy.ey.com

This is an announcement regarding VAT Circular 2/2025 issued by the Cyprus Tax Department.

Lessors who have not previously submitted Form TD 1220 and wish to opt out of charging VAT on commercial lease/rental arrangements now have an extended window to exercise this option. The deadline for submission has been further extended from 31st December 2025 to 31 March 2026.

This opportunity is subject to the conditions set out in the Circular, including that:

• The opt-out form was not filed in the past,
• VAT has not been charged on the lease/rental, and
• The lessor is compliant with direct tax obligations.

Please be aware that from 1 April 2026 onwards, any new election to opt out will need to be submitted via Form TD 1220 within 30 days from the date the lease/rental agreement is signed.

Given the revised deadline, lessors who wish to opt out for existing lease arrangements are encouraged to proceed without delay to ensure timely submission by 31 March 2026.

We remain at your disposal to assist you with any further information or support you may require regarding the matter.

For additional information, please contact the following:

• George Liasis, Partner, Indirect Tax, George.Liasis@cy.ey.com
• Georgios Pitsillis, Director, Indirect Tax, Georgios.Pitsillis@cy.ey.com
• Maria P. Raspa, Director, Indirect Tax, Maria.Raspa@cy.ey.com
• Elpida Papachristodoulou, Director, Indirect Tax, Elpida.Papachristodoulou@cy.ey.com
• Iacovos Kefalas, Director, Indirect Tax, Iacovos.Kefalas@cy.ey.com 
• Ioanna Drousioti, Manager, Indirect Tax, Ioanna.Drousioti@cy.ey.com