Cyprus is preparing to roll out significant tax reforms designed to modernise its tax system while preserving its status as an appealing business destination.
The Economics Research Centre (CypERC) has recently released a Tax Reform Proposal after engaging with stakeholders, policymakers, and experts. These reforms aim to improve tax efficiency, stimulate economic growth, and bring Cyprus into line with international standards. President Nikos Christodoulides has highlighted that the reform will boost Cyprus’ competitive position, strengthen businesses, and assist individuals by making the tax system more transparent and equitable. Below, we examine the main proposed changes and their potential effects.
Planned Corporate Income Tax Increase in Cyprus
One of the key proposals is to raise the corporate income tax from 12.5% to 15% for all corporations. This move brings Cyprus into line with international tax standards, especially the OECD’s initiative for a global minimum tax rate, ensuring compliance while still being competitive.
The increase may have a minor effect on corporate profits, but Cyprus will continue to offer a lower tax rate compared to many European countries. Even with the tax increase, Cyprus remains an appealing location for international businesses due to its wide network of double tax treaties and favourable business regulations.
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Personal Income Tax Adjustments
The reform proposes changes to personal income tax designed to ease the burden on low and middle-income earners while reallocating more tax responsibility to those with higher incomes.
- Tax-free threshold increase: Raised from €19,500 to €20,500, offering tax relief for low-income earners.
- Top tax bracket adjustment: The 35% top tax rate will now apply to incomes exceeding €80,000, up from the previous threshold of €60,000, allowing middle-income earners to enjoy lower tax obligations.
Middle-class earners will see some relief, while high-income individuals will bear a greater tax burden. These changes aim to foster economic growth by promoting a fairer tax system.
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Special Defence Contribution (SDC) Revisions
The Special Defence Contribution (SDC) has seen significant revisions, enhancing Cyprus’s appeal to real estate investors and corporate shareholders alike.
Key changes include the removal of SDC on rental income, which lessens the tax burden for property investors and also a reduction in SDC on actual dividends from 17% to 5% for tax residents and individuals with domicile, making Cyprus a more attractive option for investment structures.
The abolition of SDC on rental income is likely to stimulate property investments, benefiting both local and international investors. The lowered dividend tax will promote corporate investments, further establishing Cyprus as a favourable jurisdiction for investment.
Abolition of Deemed Dividend Distribution
The rules regarding deemed dividend distribution (DDD), which previously taxed undistributed corporate profits, will be entirely eliminated.
This change simplifies corporate taxation by eliminating the administrative complexities associated with deemed distributions. It ensures that tax is only applied when actual distributions take place, enhancing Cyprus’s reputation as a transparent tax jurisdiction.
Stamp Duty Modifications
To streamline taxation, stamp duty will now be applicable solely to immovable property, banking, and insurance transactions. This adjustment alleviates unnecessary administrative burdens for businesses and individuals engaged in other transaction types.
Implications:
- Reduced transaction costs for most business activities.
- Promotes investment in sectors still subject to stamp duty, especially in real estate.
Expansion of the 60-Day Tax Residency Rule
The current 60-day tax residency rule has been broadened to encompass individuals whose centre of business interests is in Cyprus, irrespective of their physical presence.
This provides enhanced flexibility for international entrepreneurs and business owners, positioning Cyprus as an even more attractive destination for digital nomads, investors, and global executives.
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Retention of Key Tax Benefits
To keep Cyprus appealing to businesses and investors, essential tax incentives will stay in place:
- Notional Interest Deduction (NID): This encourages equity financing by allowing deductions on deemed interest from new equity investments.
- IP Box Regime: This supports innovation by providing preferential tax treatment on income from intellectual property.
- 50% First-Employment Tax Deduction: This continues to offer tax incentives for highly skilled professionals moving to Cyprus. Read more about 50% Expatriate Relief in Cyprus.
These measures strengthen Cyprus’s position as a leading destination for multinational companies, startups, and tech firms. Business-friendly policies will remain, ensuring stability for both current and future investors.
Non-Domiciled (Non-Dom) Status in Cyprus
The Non-Dom status, which offers tax exemptions on dividends, interest, and rental income, will stay the same. However, there are ongoing discussions about potentially introducing an annual fee for those who wish to maintain this tax status.
Cyprus continues to be an appealing location for high-net-worth individuals and expatriates. The potential introduction of an annual fee might have a minimal effect on the overall attractiveness of the regime.
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Extension of Loss Carry-Forward Period
The period for businesses to carry forward losses will be extended from 5 to 10 years, enabling companies to offset their taxable income against previous losses for a longer duration.
This change offers businesses more flexibility in their financial planning. It is especially advantageous for startups and cyclical industries that may face variations in profitability.
How will these changes affect you?
The proposed tax reform in Cyprus offers a well-rounded strategy for modernisation, aiming to boost the economy while preserving the country’s reputation as a business-friendly location. These reforms demonstrate Cyprus’ dedication to adhering to international tax standards while providing competitive benefits for businesses and investors.
Although certain sectors may face higher taxes, the continuation of essential incentives and improvements in tax administration ensure that Cyprus remains an attractive option for corporations, entrepreneurs, and expatriates.
IBCCS TAX – we are at your disposal
If you have any questions about how these reforms might influence your personal or business tax situation, don’t hesitate to reach out to IBCCS TAX for expert guidance and customised tax solutions. Please contact us by email on info@ibccs.tax or call our office in Cyprus on +357 222 58 777.
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