Executive Summary
Cyprus is implementing the most comprehensive tax reform in over twenty years, with most measures applying to income and profits earned from 1 January 2026. The reform increases the corporate income tax rate to 15 percent, redesigns personal income taxation, simplifies dividend treatment, introduces clear frameworks for crypto assets and equity compensation, and materially strengthens tax administration and enforcement.
Despite the higher headline corporate rate, the reform removes long-standing distortions. The abolition of deemed dividend distribution and the reduction of Special Defence Contribution on actual dividends to 5 percent significantly improve efficiency for many shareholders. At the same time, core pillars of Cyprus’s tax framework remain unchanged, including the Non-Domiciled regime, participation exemption, IP Box, Notional Interest Deduction, flexible residency rules, and the absence of capital gains tax on securities.
For individuals, the reform raises the tax free threshold, reshapes tax bands, and introduces targeted deductions focused on families, housing, insurance, and sustainability. For businesses, it modernises loss relief, clarifies crypto and stock-option taxation, extends R&D and green incentives, and increases compliance and documentation expectations. The practical outcome is a tax system that is clearer, more defensible, and better aligned with international standards, while remaining competitive. Strategic preparation and structural review are essential to optimise outcomes under the new framework.
| Area | What changes from 1 January 2026 | What remains unchanged |
|---|---|---|
| Corporate income tax | Corporate income tax rate increases to 15%. | Participation exemption and core structuring tools remain available, subject to anti-abuse rules. |
| Dividend taxation | Deemed dividend distribution abolished for post-2026 profits. SDC on actual dividends reduced to 5%. | Non-Domiciled individuals remain fully exempt from SDC on dividends and interest. |
| Individuals | Tax-free threshold increases to €22,000, with redesigned tax bands and targeted deductions. | Residency rules (60-day and 183-day tests) remain unchanged. |
| Crypto assets | All Crypto gains claimed in person are taxed at a flat 8%. | No capital gains tax on securities continues to apply. |
| Equity compensation | Approved stock-option benefits taxed at a flat 8%. | Existing employment and relocation incentives remain in force. |
| Compliance & enforcement | Stronger audits, expanded reporting, GAAR, and enhanced enforcement powers. | Framework remains aligned with OECD and EU standards. |
Why Cyprus is reforming its tax system now
The reform responds to four structural pressures that have reshaped the global tax environment over the past two decades. Cyprus has not carried out a major tax overhaul in more than twenty years. During this period, international tax coordination, transparency requirements, and digital enforcement standards have changed fundamentally.
The reform aims to:
rebalance the tax burden in favour of households and small and medium sized enterprises
align Cyprus with OECD BEPS 2.0 and EU minimum taxation standards
modernise tax administration and enforcement through digitalisation
preserve Cyprus’s long term competitiveness as an international business and relocation hub
This is not simply a rate adjustment. It is a structural recalibration of how income, profits, and compliance are treated within the Cypriot tax system.
Key changes for individuals
1. Personal income tax thresholds and deductions
The tax free threshold increases to €22,000, combined with redesigned tax bands. Beyond the threshold, the reform introduces targeted deductions focused on families, housing, and sustainability, shifting relief toward real household expenses rather than broad horizontal exemptions.
Indicative deductions include:
child and student deductions, with higher relief for single parent households
deductions for primary residence rent or loan interest
deductions for energy upgrades and electric vehicle purchases
expanded deductions for disability insurance and home insurance against natural disasters
Eligibility depends on household income and family composition. As a result, many households will reach an effective tax free income level significantly above the headline threshold. Government estimates indicate that more than half of employees will pay no personal income tax after deductions are applied.
2. Voluntary retirement and termination payments
The tax exempt limit for voluntary retirement or termination payments increases from €20,000 to €200,000. Amounts exceeding this threshold are taxed at a flat 20 percent rate. This change offers greater flexibility for workforce restructuring, retirement planning, and negotiated exits, particularly for senior employees and long serving staff.
3. Stock options and equity compensation
A flat 8 percent taxation regime applies to benefits arising from stock options granted under approved employer plans.
Key limits include:
benefits capped at up to twice the employee’s annual remuneration
a lifetime cap of €1,000,000 over a ten year period
This introduces clarity and competitiveness for equity based compensation, aligning Cyprus with leading innovation hubs and supporting talent attraction for international groups and scale ups.
4. Mandatory tax filing
All Cyprus tax residents aged 25 and above must submit an annual tax return, even if they have no taxable income. This broadens the compliance base and strengthens verification of residency status, deductions, and relief claims. In practice, it also increases the importance of accurate record keeping for individuals who previously fell outside the filing system.
5. Dividends and Special Defence Contribution for individuals
The deemed dividend distribution regime is abolished for profits earned from 1 January 2026 onwards.
Special Defence Contribution applies only to actual dividends, at a reduced rate of 5 percent instead of 17 percent.
Non Domiciled individuals remain fully exempt from SDC on dividends and interest. This cornerstone of Cyprus’s personal tax framework remains unchanged and continues to be one of the country’s strongest relocation incentives.
6. Foreign pension income
The special regime for foreign pension income is modernised.
Tax residents receiving pensions from abroad may continue to choose annually between:
inclusion in ordinary income taxed at progressive rates
a flat 5 percent tax on pension income exceeding €5,000
This adjustment improves clarity, reduces administrative friction, and reinforces Cyprus’s position as a preferred destination for international retirees.
Key changes for businesses
1. Corporate income tax rate
The corporate income tax rate increases from 12.5 percent to 15 percent for profits earned from 1 January 2026. Even at 15 percent, Cyprus remains among the lowest corporate tax jurisdictions in the European Union. Participation exemptions, the Non Dom regime, and the absence of withholding tax on outbound dividends and interest continue to apply, subject to anti abuse rules.
2. Dividends and SDC simplification
Major distortions in dividend taxation are removed.
Key changes include:
abolition of deemed dividend distribution for post 2026 profits
reduction of SDC on actual dividends from 17 percent to 5 percent
abolition of SDC on rental income
A 5 percent withholding tax is introduced for dividends paid to companies in low tax jurisdictions, in line with EU anti avoidance requirements. These changes simplify cash flow planning, remove long standing inefficiencies, and improve capital allocation decisions for shareholders.
3. Crypto assets and loss relief
Profits from the disposal of crypto assets are taxed at a flat 8 percent rate. Losses may generally be offset only against crypto gains of the same tax year. Robust transaction records, valuation methodology, and disposal classification become critical under the new framework. The loss carry forward period for businesses extends from five to seven years, supporting start ups and cyclically profitable businesses.
4. R&D and green incentives
The 120 percent super deduction for qualifying research and development expenditure is extended until 2030. Enhanced capital allowances for green investments and energy upgrades are also extended, reinforcing Cyprus’s innovation ecosystem and sustainability objectives.
5. Transfer pricing and cross-border rules
Transfer pricing documentation thresholds increase significantly, reducing administrative burden for many groups.
Additional measures clarify that:
interest deductions for acquiring 100 percent subsidiaries are restricted, with transitional relief until 2027
profits of permanent establishments in non cooperative jurisdictions are taxable in Cyprus
entities incorporated or registered in Cyprus are deemed Cyprus tax residents
These measures codify existing practice and align Cyprus fully with international tax governance standards
What remains unchanged
Despite the scale of the reform, several foundations remain stable.
the Non Dom regime remains fully in force
the 60 day and 183 day tax residency rules are unchanged
no capital gains tax applies to the disposal of securities
VAT rates remain unchanged
Notional Interest Deduction continues to apply
participation exemptions and no withholding tax on outbound dividends and interest continue, subject to anti abuse rules
How to prepare under the new framework
Preparation should focus on structure, substance, and compliance readiness.
For businesses:
segment profits between pre 2026 and post 2026 periods
update corporate tax and dividend forecasts
reassess holding, financing, and IP structures
review equity compensation plans
strengthen transfer pricing documentation
formalise crypto transaction records
For individuals:
recalculate personal tax position
organise documentation for deductions
review dividend income and Non Dom status
assess foreign pension elections
prepare for mandatory annual tax filing
Early, structured preparation reduces risk and improves long term outcomes.
Final perspective
The Cyprus Tax Reform 2026 represents a structural evolution rather than a disruption. While certain rates increase, the reform removes distortions, simplifies dividend taxation, modernises administration, and reinforces Cyprus’s position within the international tax environment. Those who approach the reform strategically, with a focus on structure, substance, and compliance, will be best positioned to benefit from the new framework.
FAQs
Most measures apply to income and profits earned from 1 January 2026. Certain administrative and compliance provisions may apply earlier or be clarified through circulars issued by the Cyprus Tax Department.
Yes. The corporate income tax rate increases from 12.5% to 15% for tax years beginning on or after 1 January 2026. Even at 15%, Cyprus remains among the lowest corporate tax jurisdictions in the European Union.
No. The reform preserves all core advantages that drive Cyprus’s competitiveness, including participation exemptions, the Non Dom regime, no withholding tax on outbound dividends and interest, the IP Box, and flexible residency rules. The reform improves credibility and long term stability rather than undermining competitiveness.
Yes. The deemed dividend distribution rule is abolished for profits earned from 1 January 2026 onwards. This means shareholders are taxed only when dividends are actually distributed, not automatically after a fixed period.
For profits earned from 1 January 2026:
- Special Defence Contribution applies only to actual dividends
- The SDC rate is reduced to 5%, from 17%
- Dividends relating to pre-2026 profits continue to follow the existing framework
No. The Non Dom regime remains fully unchanged. Non Domiciled individuals continue to be exempt from Special Defence Contribution on dividends and interest for up to 17 years.
The approved framework reflects a €22,000 tax free threshold, combined with redesigned tax bands. In practice, many individuals will benefit from a higher effective tax free income once deductions are applied.
All Cyprus tax residents aged 25 and above must file an annual tax return, even if they have no taxable income. This requirement supports transparency and residency verification.
Benefits from stock options granted under approved employer plans are taxed at a flat 8% rate, subject to remuneration based limits and a lifetime cap. This provides clarity and improves the attractiveness of equity based compensation.
Profits from the disposal of crypto assets are taxed at a flat 8% rate. Losses may generally be offset only against crypto gains of the same tax year. Proper transaction records and valuation methodology are essential.
Yes. The loss carry forward period is extended from five to seven years, improving planning flexibility for start ups and businesses with volatile profitability.
The 120% super deduction for qualifying R&D expenditure is extended until 2030. The IP Box regime remains unchanged, continuing to offer an 80% exemption on qualifying IP income.
Preparation should already be underway. Early action reduces risk and improves outcomes.
Key steps include:
- Separating pre-2026 and post-2026 profits
- Updating tax forecasts and dividend planning
- Reviewing payroll, equity, and crypto structures
- Preparing for stricter filing and audit requirements
