Cyprus Tax Reform 2026: Key Changes and Practical Implications

Cyprus Tax Reform 2026 – Comprehensive Overview of the Approved Changes

Key Takeaways:

Relief for individuals and families:

From 1 January 2026, the tax-free income threshold rises to €22,000, new progressive income tax bands apply, and targeted deductions are introduced for dependent children, housing costs, green investments, and home insurance.

Corporate tax alignment with incentives:

The corporate income tax rate increases to 15%, while deemed dividend distribution is abolished, defence contribution on dividends is reduced to 5%, rental income is exempt from defence contribution, and enhanced incentives apply for R&D, crypto-assets, and employee share option schemes.

Stronger compliance and transparency:

Mandatory tax return filing for all individuals aged 25 and over, electronic rental payments from July 2026, and expanded enforcement powers introduce a more robust tax compliance framework.

Cyprus has approved a major reform of its tax system following the adoption of the relevant legislation by the House of Representatives. Most measures will come into force on 1 January 2026, with certain compliance-related provisions applying from 1 July 2026.

The reform aims to modernize the tax framework, provide targeted relief to individuals and families, enhance Cyprus’s investment attractiveness, and ensure closer alignment with international tax standards.

Below is a detailed overview of the approved changes.

Corporate Taxation

• The corporate income tax (CIT) rate will increase from 12.5% to 15%, applying to all companies operating in Cyprus, whether domestic or foreign.

• The deemed dividend distribution rules will be abolished for profits generated from 1 January 2026 onwards, allowing companies greater flexibility in retaining profits and simplifying dividend planning.

The abolition of Deemed Dividend Distribution (DDD) will primarily benefit companies owned by Cyprus tax-resident and domiciled shareholders, as it eliminates the automatic imposition of SDC on undistributed profits.

This change allows such companies to retain earnings without triggering deemed dividend taxation, improving cash flow flexibility and dividend planning, and contributes to a more balanced tax treatment between companies by reducing disparities that previously favored non-domiciled ownership structures.

Companies owned by Cyprus tax-resident but non-domiciled shareholders within their 17-year non-domicile period will not be materially impacted by this change, as dividend income received by such individuals is already exempt from SDC under the existing non-domiciled regime.

The SDC rate on actual dividend distributions to resident and domiciled individuals will be reduced from 17% to 5%.

• The 3% SDC on rental income will be abolished entirely.

• The period for carrying forward tax losses will be extended from five to seven years, providing additional relief to businesses with fluctuating profitability.

• The 120% super-deduction for qualifying R&D expenditure, including expenditure relating to intangible assets, is extended until 2030.

• Profits arising from the disposal of crypto-assets will be subject to a special flat tax rate of 8%, subject to conditions set out in the relevant legislation.

• Income derived from approved employee stock option schemes will be taxed at a flat rate of 8%, enhancing Cyprus’s competitiveness for attracting and retaining skilled employees.

• The maximum deductible amount for entertainment expenses will increase to €30,000 per tax year.

• Stamp duty will be abolished for most transactions and contracts, subject to specific statutory exclusions, including certain real estate, banking, and insurance-related documents.

Personal Income Taxation

The personal income tax-free threshold will increase from €19,500 to €22,000, reducing the tax burden for low- and middle-income earners.

The revised progressive income tax structure will as from 2026 apply as follows:

Revised Personal Income Tax Bands (from 2026)

Up to €22,000-0%
€22,001 to €32,000-20%
€32,001 to €42,000-25%
€42,001 to €72,000-30%
Above €72,000-35%

Dependent-Related Deductions

New deductions will apply per parent for dependent children and students, subject to annual household income limits:

• Up to €100,000 for families with 1–2 dependents
• Up to €150,000 for families with 3–4 dependents
• Up to €200,000 for families with 5 or more dependents

The deductions are structured as follows:

• €1,000 for the first dependent
• €1,250 for the second
• €1,500 for the third and each additional dependent

Housing and Green Incentives

Additional deductions include:

• Up to €2,000 for interest on serviced loans or rental payments relating to a primary residence
• Up to €1,000 for green investments, including electric vehicles and home energy upgrades
• Up to €500 for home insurance covering natural disaster risks

The following illustrative ranges reflect the estimated annual income tax savings for an average family with two dependent children, a housing loan on a primary residence, and home insurance, under the revised Cyprus tax framework effective from 1 January 2026.

The estimates assume that both parents are employed and that dependent-related, housing, and insurance deductions are applied on a per-parent basis, subject to the applicable household income thresholds.

The above ranges are illustrative only and assume that both parents are employed and eligible for dependent-related, housing, and insurance deductions. Actual tax savings will vary depending on income distribution between parents, utilization of available deductions, and individual circumstances.

Strengthened Compliance and Reporting Measures

Mandatory Tax Return Filing

All individuals aged 25 and over will be required to submit an annual income tax return, regardless of income level.

Electronic Rental Payments

From 1 July 2026, rental payments exceeding €500 must be made electronically (e.g. via bank transfer), increasing transparency and traceability.

Enhanced Enforcement Powers

The Tax Commissioner will be granted expanded powers to access banking and asset information. In cases of serious or repeated non-compliance, enforcement measures may include temporary sealing of business premises and freezing of company shares where tax debts exceed €100,000.

What Should Taxpayers Do Now?

Although most of the new measures will take effect from 1 January 2026, early preparation is recommended to ensure compliance and optimize tax outcomes under the revised framework.

Individuals and families should:

• Review expected income levels for 2026 to assess the impact of the new tax bands and the increased tax-free threshold.

• Evaluate eligibility for family-related deductions, including dependent children or students, and ensure supporting documentation is properly maintained.

• Consider housing, green investment, and insurance-related deductions when planning major expenses over the coming years.

• Employees must provide accurate and timely personal and dependent-related information to their employers to ensure correct PAYE deductions

Business owners and investors should:

• Reassess corporate structures in light of the increase in the corporate tax rate and the abolition of deemed dividend distribution.

• Review dividend policies and remuneration strategies, including the potential use of employee share option schemes.

• Evaluate the extended loss carry-forward period and enhanced R&D incentives when planning future investments or expansions.

• Assess the tax treatment of crypto-asset transactions under the new 8% regime.

• Update payroll systems and procedures to reflect the new tax bands and deductions, ensuring accurate PAYE calculations and compliance

All taxpayers should:

• Prepare for mandatory annual tax return filing requirements, including ensuring accurate record-keeping and timely reporting.

• Familiarize themselves with increased compliance obligations, including electronic payment requirements for rent.

• Seek professional advice to identify planning opportunities and ensure a smooth transition to the new tax environment.

Early review and strategic planning will allow taxpayers to adapt efficiently and make full use of the reliefs and incentives introduced by the Cyprus Tax Reform 2026.

Conclusion

The Cyprus Tax Reform 2026 represents a major evolution of the country’s tax framework, combining international alignment with meaningful reliefs and incentives. While new compliance requirements are introduced, the reform also creates important planning opportunities.

It is hoped that this reform will stand as a long-term and resilient framework-much like the 2003 reform-and remain sufficiently flexible to adapt to future developments, including artificial intelligence, digitalisation, and technology-driven business models.