Cypriot government announces tax reform measures

Executive summary

On 26 February 2025, the Economics Research Centre¹ of the University of Cyprus presented its blueprint for tax reform to key stakeholders, including members of the business community, business associations and professional bodies. The blueprint will go through a public consultation process. Once the public consultation process is completed, the Ministry of Finance will prepare the bills that will be submitted to the House of Representatives for voting. Some of the proposed tax measures may take effect as of tax year 2025, while other measures are expected to be in effect as of tax year 2026.

Main points of the blueprint

The main points of the tax reform are summarized below. (Note that this summary is based on the Economics Research Centre's slide presentation to stakeholders and further details on the proposed measures have not yet been released.)

Corporate Tax

The corporate income tax rate would be increased from 12.5% to 15% for all corporations.

New anti-abuse rules would apply for close-structured companies.

Tax losses could be carried forward up to 10 years, rather than the current five-year period, although loss utilization after five years would be limited to a percentage of the company's taxable profit for the year. The current group loss-relief rules would remain unchanged (i.e., no fiscal unity)

The 1.5% insurance premium tax would be abolished.

Tax depreciation on "used" buildings would be determined based on the new owner's purchase cost. There would be a renewal of tax depreciable life for buildings for which there is a green energy upgrade.

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

The company reorganization provisions would be improved.

No changes are proposed for the:

• 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

Special Defense Contribution (SDC)

The proposal would annul the current rules on deemed distribution of profits.

The existing SDC on rental income would be abolished, and the SDC rate on dividends would be reduced from 17% to 5% for natural persons who are tax residents and domiciled in Cyprus. Anti-abuse rules will be introduced for disguised dividends.

The current applicable period (17 years) of non-domicile status for individuals would not change, although an option for extending the period will be provided with the imposition of an annual fee.

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, would be retained but modernized.

Stamp Duty

Stamp duty would be limited to agreements related to immovable property, as well as banking and insurance transactions.

Personal Income Tax

The current tax-free threshold of €19,500 would be increased to €20,500 per annum. The top tax band of 35% would apply to emoluments exceeding €80,000 (up from the current threshold of €60,000). Intermediary bands would be progressively taxed at rates of 20%, 25% and 30%, as per table below:

Personal allowances would be provided to:

• Parents with children/students based on income criteria
• Individuals in respect of housing loans for their primary residence or rent payments
• Families making green-household upgrades

Regarding the 60-day tax residency rule (alternative test in determining tax residency for individuals), the definition would be extended to cover individuals whose center of business interests is in Cyprus, irrespective of their physical presence.

Stock options would be taxed at a lower rate subject to conditions and anti-abuse rules.

Ex gratia payments (e.g., voluntary payments from an employer to an employee) would be taxed above a threshold amount, while a full deduction of the expense would be available for the employer.

Taxation of "golden hellos"/handshake amounts (i.e., substantial payments that employers make to desired recruits) would be taxable to the employee and a deductible expense for the employer.

Cultural donations would be deductible.

No changes to the 50% exemption on employment income for first employment in Cyprus.

Green Transition and Digital Transformation

The blueprint includes a combination of the following measures for expenditures relating to green transition and digital transformation:

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

Green tax reform details will follow in due course, while environmental mitigation measures remain under consultation.

Next steps

It is important to note that the changes highlighted above merely reflect the intentions of the government based on the research and studies conducted by the University of Cyprus, Ministry of Finance and tax experts. For any of the above changes to take effect, the House of Representatives will have to approve the bills with a majority vote. Accordingly, it is important to note that some of the topics described above may not actually be included in the final tax reform measures or may undergo revision before being enacted into law. Stakeholders have acknowledged that there is more work to be done on the project before it is finalized.

The expected timeline to finalize the project is late 2025. As noted above, some tax measures may have retroactive effect and apply as of tax year 2025, but the expectation is that most of the measures will enter into effect as from tax year 2026.

Taxpayers should closely monitor the tax reform process as it is certain that the outcome of the process will have an impact on their business operations and activities.

For additional information concerning this Alert, please contact:

EY Cyprus Advisory Services Limited, International Tax and Transaction Services, Nicosia

• Philippos Raptopoulos
• Petros Liassides
• Petros Krasaris 
• Simos Simou

Ernst & Young LLP (United States), BEPS Tax Desk, New York

• Serafeim Brekoulakis 

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.