07 January 2026 Cyprus enacts major tax reform legislation
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. This Alert provides an overview of the most significant tax law changes that affect corporations. Several changes have also been made that affect the taxation of individuals, such as increase in the tax-free threshold, changes in the tax brackets, introduction of family-based allowances, extension of scope of taxation regarding other income from employment and introduction of a special tax regime for ex-gratia payments. 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 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%. The definition of tax residency for companies is expanded to include the incorporation test, unless a double tax treaty provides otherwise. 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. 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. 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. 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. 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 their readiness to comply with the new requirements.
Document ID: 2026-0140 | ||||||
