The upcoming tax reform in Cyprus represents a significant shift designed to benefit the middle class by raising the tax-free threshold to €22,000. However, the Tax Department warns that while the new system is generous, it introduces substantial complexities. The calculation of exemptions is now tied to a sophisticated “family-based” income model, making tax returns for the 2026 fiscal year (to be filed in 2027) a challenging task for most households.
The core of the difficulty lies in the new definition of “family” for tax purposes. Technocrats have spent months drafting scenarios to address modern family structures, including civil unions, cohabitating partners with common children, single parents, and divorced couples with joint custody. To benefit from these deductions, partners (whether married, in a civil union, or cohabitating with common children) must consent to the mutual disclosure of their tax data so the Tax Department can verify that total family income stays within the set limits.
Understanding the Income Thresholds and Personal Deductions
Additional deductions for children, students, mortgage interest, and “green” investments are subject to specific family income caps. Families with incomes up to €100,000 (0–2 children), €150,000 (3–4 children), or €200,000 (5+ children) qualify for these benefits. For single parents living alone (solitary persons), the individual income limit is set at €40,000.
Deductions for dependent children are scaled as follows: €1,000 for the first child/student, €1,250 for the second, and €1,500 for the third and any subsequent children. A “dependent” includes biological or adopted children under 18, high school students under 20, soldiers under 21, and university students under 24. It is important to note that the child deduction is only granted to the biological or legal adoptive parent.
Specific Exemptions for Housing and Green Energy
Beyond child-related benefits, the reform incentivizes home ownership and environmental responsibility. Each spouse or partner can claim up to €2,000 for interest paid on performing primary residence mortgages and €2,000 for rent of a primary residence. Furthermore, a €1,000 deduction is available for energy efficiency upgrades, Renewable Energy Systems (RES), battery storage, and the purchase of electric vehicles.
Implementation and Support for Taxpayers
Tax Commissioner Sotiris Markides has stated that the department is working urgently to ensure a smooth transition. Employers must be informed of their employees’ secondary incomes and eligible deductions via Form T.F.59 starting in January 2026 to ensure correct PAYE (Pay As You Earn) withholdings.
To assist taxpayers, the Tax Department is launching a dedicated online section and a digital tax calculator. This tool will allow individuals to input their data to see their estimated tax liability before and after the reform, as well as their net benefit. The department is also organizing large-scale seminars with professional bodies like the Cyprus Chamber of Commerce and Industry (CCCI) and the Institute of Certified Public Accountants of Cyprus (ICPAC) to educate thousands of professionals on the new regulations.
Practical Examples of the New System
To clarify how these rules apply in real life, the Tax Department provided several scenarios:
Married Couple with 2 Children (€95k Income): Total income is under the €100k limit. Both parents receive a total child deduction of €2,250 each. Additionally, each can claim up to €2,000 for mortgage interest.
Cohabitating Partners (Not in Civil Union) with Common Children: Despite the lack of a legal union, their common children define them as a “family” for tax purposes. They share the child deductions and can split a mortgage interest deduction of up to €3,000 between them.
Single Parent (Unmarried Mother, €80k Income): As a single parent with one child, she falls under the €100k limit. Her child deduction is doubled to €2,000 because she is the sole head of the household, plus she receives the €2,000 mortgage interest deduction.
Blended Family in Civil Union (€140k Income, 3 Children): If one partner has two children from a previous marriage and the couple has one common child, they are a family of five. Since they are under the €150k limit for three children, the parent of the first two children claims €3,750 in deductions, while the other partner claims €1,000 for the common child. Both can claim the rent deduction of €2,000 each.