Cyprus 2026 Tax Reform: Key Changes for Individuals, Families and Businesses

On 22 December 2025 the House of Representatives approved a wide-ranging tax reform package described as the most comprehensive overhaul of the Cypriot tax system in over two decades. The reform, often referred to as the “Φορολογικός Μετασχηματισμός”, combines an increase in corporate taxation with targeted reliefs for households, as well as a modernised framework for investment income, crypto-assets and tax administration.

Most provisions are designed to apply from the 2026 tax year, with important transitional rules, particularly around dividends and deemed dividend distribution, that taxpayers will need to consider when planning for year-end 2025 and beyond.

1. Strategic orientation of the reform

The new framework pursues several parallel objectives:

  • Alignment of corporate taxation with international standards, particularly the OECD/G20 global minimum tax initiative and related EU measures, through an increase of the corporate income tax rate to 15 per cent.

  • Strengthening of the social dimension of the tax system by expanding relief for families and middle-income earners.

  • Simplification and modernisation of certain outdated provisions, including the abolition of deemed dividend distribution for future profits and the abolition of stamp duty.

  • Enhancement of the enforcement and anti-evasion toolkit available to the Tax Commissioner, including wider reporting obligations and new collection powers.

Overall, Cyprus seeks to preserve its position as a competitive, yet compliant, jurisdiction for international business, while redistributing part of the corporate tax uplift to households in the form of increased thresholds and targeted deductions.

2. Personal income tax and family relief

2.1 Higher tax-free threshold and revised bands

For individuals, the most immediate change is the increase of the basic tax-free threshold on employment and pension income to 22,000 euro. New progressive bands then apply:

  • 20 per cent on income from 22,001 to 32,000 euro

  • 25 per cent on income from 32,001 to 42,000 euro

  • 30 per cent on income from 42,001 to 72,000 euro

  • 35 per cent on income above 72,000 euro

This structure is designed to provide meaningful relief to low and middle earners while largely preserving the top marginal rate.

2.2 Child and student deductions

The reform introduces a structured system of deductions for families with children and students up to the age of 24:

  • 1,000 euro deduction for the first child or student

  • 1,250 euro for the second

  • 1,500 euro for the third and each subsequent child

Eligibility is subject to household income thresholds that scale with family size:

  • Up to 100,000 euro annual income for households with one or two children

  • Up to 150,000 euro for families with three or four children

  • Up to 200,000 euro for families with five or more children

This introduces a genuine family-policy dimension into the Income Tax Law, linking relief not only to the number of dependants, but also to household income, in order to focus support on low and medium-income families.

2.3 Housing, green and insurance deductions

Additional targeted deductions are introduced to support housing and sustainability objectives:

  • Up to 2,000 euro in total for loan interest and rent

  • 1,000 euro for “green” home investments, including the acquisition of electric vehicles

  • Up to 500 euro for home insurance against natural disasters

These amounts operate as deductions from taxable income and are expected to interact with existing incentives and subsidy schemes, creating combined benefits where conditions are met.

3. Corporate tax and business measures

3.1 Corporate tax rate increase to 15 per cent

The general corporate income tax rate increases from 12.5 per cent to 15 per cent for tax years beginning on or after 1 January 2026.

This move aligns Cyprus with the global minimum corporate tax framework while keeping the jurisdiction within the lower band of effective rates within the European Union. Existing planning structures will need to be recalibrated in light of the higher headline rate, but the concurrent relief at shareholder level (see below) moderates the overall effective tax burden.

3.2 Abolition of deemed dividend distribution for future profits

A significant structural change is the abolition of the deemed dividend distribution (DDD) regime for accounting profits earned after 1 January 2026.

For profits up to 31 December 2025, the existing DDD rules and associated Special Defence Contribution (SDC) obligations will continue to apply, subject to transitional provisions in the amending legislation. This creates an important turning point for groups that historically retained profits in Cyprus entities without distributing them. Dividend planning around the 2025 and 2026 financial years will be critical.

3.3 Reduction of SDC on dividends and abolition of SDC on rent

For profits generated from 1 January 2026 onwards, SDC on dividend distributions to Cyprus tax resident and domiciled shareholders will be reduced from 17 per cent to 5 per cent.

In parallel, the SDC on rental income is abolished. This simplifies the treatment of real estate income and removes the prior dual layering of income tax and SDC on rents, particularly relevant to individuals who are both resident and domiciled in Cyprus.

3.4 Loss carry-forward and R&D incentives

The reform extends the tax loss carry-forward period from five to seven years. This change will benefit capital-intensive and cyclical sectors, where losses may not be fully absorbed within a shorter time frame.

The existing 120 per cent super-deduction for qualifying research and development expenditure is prolonged until 2030, reinforcing Cyprus as an R&D-friendly jurisdiction and complementing the existing IP-related regimes.

3.5 Other corporate deductions

Further corporate measures include:

  • An increase in the ceiling for deductible entertainment expenses to 30,000 euro (from 17,086 euro)

  • Abolition of stamp duty, subject to details in the amending Stamp Duty Law, with immediate relevance for loan agreements, share purchase agreements and other instruments previously subject to stamp duty

These measures offer partial offsets to the higher corporate tax rate, particularly for businesses with substantial client-facing expenditure and transactional documentation.

4. Crypto-assets, stock options and severance payments

4.1 Crypto-asset gains

The reform introduces a dedicated 8 per cent tax rate on gains from crypto-asset disposals that form part of taxable profits. This rate applies within the corporate tax system and is designed to provide clarity and certainty for businesses operating in or investing in digital assets.

The detailed scope of “crypto-assets”, as well as the interaction with existing capital gains and income tax provisions, will need to be clarified through secondary legislation and administrative guidance.

4.2 Preferential treatment for stock options

Benefits arising from stock options granted under qualifying employer schemes will be subject to a flat rate of 8 per cent, reflecting a policy choice to encourage equity-based remuneration and the development of start-up and technology ecosystems.

This regime exists in parallel with general personal income tax rules, and careful structuring will be needed to ensure that plans meet the conditions for the preferential rate.

4.3 Severance payments

Severance payments made due to termination of employment will be subject to a 20 per cent tax rate, with a tax-free allowance of 200,000 euro.

Compared with the previous framework, this provides greater certainty as to the tax treatment of termination packages, though employers and employees will need to factor the new rate and thresholds into their negotiations and documentation.

5. Administrative measures and anti-evasion powers

5.1 Obligatory tax returns for adults

All individuals aged 25 and above will now be required to submit an annual income tax return, regardless of whether their income is below the tax-free threshold, subject to limited exceptions that may be defined by the Tax Commissioner.

This measure is intended to broaden the information base of the tax authorities and is likely to be accompanied by simplified filing tools for low-income taxpayers.

5.2 Electronic payment of rent

From 1 July 2026, rent payments exceeding 500 euro per month must be made electronically.

This is both an anti-evasion measure and a practical tool for documenting income and expense flows, with implications for landlords and tenants alike.

5.3 Expanded investigative powers

The Tax Commissioner receives significantly enhanced powers, including authority to:

  • Request detailed asset and liability statements for a period of six years

  • Obtain banking records from Cyprus-based financial institutions

  • Seal business premises in cases of persistent non-compliance, such as failure to file returns, issue lawful receipts or settle assessed tax liabilities

Taxpayers retain the right to challenge such actions before the courts, and it is expected that case law will develop around the proportionality and procedural safeguards associated with these powers.

5.4 Enforcement of large tax debts

Where tax debts exceed 100,000 euro, the authorities may impose a freeze on company shares, effectively preventing transfers until the liability is resolved.

This measure reinforces the credit status of the Tax Department and signals a firmer stance on significant arrears, especially within complex corporate groups.

6. Practical implications and next steps for taxpayers

The reform package represents a fundamental recalibration of the Cypriot tax landscape. Some immediate strategic considerations include:

  • Re-evaluating effective tax rates for Cyprus holding, financing, trading and IP structures, taking into account the higher corporate tax rate together with the reduced SDC on post-2026 dividends and the abolition of deemed dividend distribution for future profits.

  • Reviewing group dividend policies, particularly in relation to 2025 profits, in order to manage exposure under the existing DDD regime versus the post-reform environment.

  • Assessing the impact on real estate and rental portfolios in light of the abolition of SDC on rents and the requirement for electronic rent payments over the 500 euro threshold.

  • For technology, fintech and crypto-related businesses, analysing the combined effects of the 8 per cent crypto gains regime, R&D super-deduction and stock option incentives when designing operating models and employee participation schemes.

  • Ensuring that internal accounting, record-keeping and compliance systems are robust enough to cope with the expanded reporting obligations and the more intrusive information-gathering powers of the Tax Commissioner.

Given the breadth of the changes, careful analysis of the amending laws and any subsequent circulars from the Tax Department will be essential in the coming months. Transitional rules and sector-specific guidance are likely to play a decisive role in determining the real-world impact of the reform on particular structures and transactions.

If you would like tailored advice on how the new framework affects your existing or planned Cyprus structures, our Cyprus Lawyers can prepare a detailed review of your position and recommended adjustments to your tax and corporate planning from the 2026 tax year onwards.