Cyprus will raise its corporate tax rate to 15% from 12.5% under a landmark reform package parliament is expected to approve today, ending 23 years without major changes to the country’s tax regime.
The overhaul also lifts the individual tax-free threshold to €22,000, introduces graduated family deductions worth up to €1,500 per child, and grants tax authorities new powers to seal businesses and freeze company shares for unpaid taxes.
The Finance Ministry relied on a University of Cyprus study to prepare the bills, but left out key recommendations including property tax and graduated company fees. AKEL incorporated these in separate proposals that will not pass tomorrow due to lack of majority support.
Corporate rate remains competitive
The 15% corporate tax rate, up from Cyprus’s current 12.5%, takes effect on profits earned after 1 January 2026. The increase comes alongside measures aimed at enhancing competitiveness, boosting state revenues and supporting middle-class families.
For Cypriot businesses specifically, the government will abolish deemed dividend distribution on post-2026 profits and slash special defence contribution on actual dividend distribution from 17% to 5%. Special defence contribution on rental income disappears entirely.
All businesses—local and foreign—will benefit from an extended loss carry-forward period of seven years instead of five, whilst entertainment expense deductions rise to €30,000 from €17,086. The 120% super-deduction for research and development on intangible assets extends to 2030.
Cryptocurrency profits within tax profit face special 8% taxation. Stock options under approved employer schemes will be taxed at a flat 8% rate, whilst gratuity payments face 20% taxation with €200,000 tax-free when granted due to employment termination.
Middle-class families see major relief
Individuals gain a €22,000 tax-free threshold with substantial new family deductions. A family with two children earning €90,000 annually could claim €2,250 in child deductions alone—€1,000 for the first child and €1,250 for the second.
To qualify for additional deductions, annual family income must not exceed €100,000 for one or two children, €150,000 for three to four children, and €200,000 for five or more children. Child and student deductions apply up to age 23 for women and 24 for men.
Homeowners and renters gain €2,000 deductions for loan interest and rent payments. Green home investments and electric vehicle purchases qualify for €1,000 deductions, whilst home insurance against natural disasters brings up to €500 off taxable income.
Steeper brackets for high earners
New tax brackets replace the existing system. Income from €22,001 to €32,000 faces 20% taxation, rising to 25% for €32,001 to €42,000. The rate climbs to 30% for earnings between €42,001 and €72,000, whilst income exceeding €72,001 faces 35% taxation.
Aggressive anti-evasion crackdown
The reform grants tax authorities unprecedented enforcement powers. All individuals aged 25 and over must submit mandatory tax returns, even those without taxable income.
Landlords must collect rent exceeding €500 only through bank transfers or electronic payments—cash payments become illegal. The Tax Commissioner can demand asset and liability statements covering six years and require taxpayers to keep supporting documents for the same period.
Banks must hand over tax records including deposits when requested. The commissioner gains power to seal businesses for three offences: failing to submit tax returns, not issuing legal receipts, or accumulating tax debts. Companies face share freezing for tax debts exceeding €100,000.
Taxpayers retain the right to challenge business sealing decisions in court.
The reforms take effect from 1 January 2026.
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