Comprehensive Update on Proposed Tax Reforms in Cyprus

Comprehensive Update on Proposed Tax Reforms in Cyprus

The Economics Research Centre of the University of Cyprus has recently presented a series of proposed tax reforms that could significantly impact businesses and individuals. These changes, expected to be implemented by the end of the 2025 tax year (pending parliamentary approval), should take full effect in 2026.

Key Highlights of the Proposed Tax Reforms

Corporate Income Tax (CIT) Rate

One of the most notable changes is the proposed increase in the Corporate Income Tax (CIT) rate from 12.5% to 15%. This adjustment will have broad implications for corporate tax planning and profitability, requiring businesses to reassess their financial strategies.

Special Defence Contribution (SDC)

Major modifications are suggested for the Special Defence Contribution (SDC), including:

• The abolition of SDC on rental income.
• A significant reduction in the SDC rate on dividends for natural persons who are tax residents and domiciled in Cyprus, from 17% to just 5%.

Personal Income Tax Adjustments

Proposed changes to the personal income tax system include:

• An increase in the tax-free threshold from €19,500 to €20,500 per year, easing the tax burden on lower-income earners.
• The top tax band of 35% will now apply to emoluments exceeding €80,000, instead of the current €60,000 threshold.

The revised tax brackets are as follows:

Stamp Duty

Stamp duty to apply to agreements related to immovable property, banking, and insurance transactions, streamlining administrative processes.

Further Considerations

Additional key provisions in the reform blueprint include:

• A ‘super deduction’ for expenses related to Green Transition and Digital Transformation to encourage investment in these areas.
• The extension of the loss carry-forward period from five to ten years (subject to conditions).
• Personal Income tax deductions to parents with children and students, green household updates and individuals getting a loan for their primary residences or rent payments.
• Potential lower tax rates for stock options at the time of exercise, subject to specific conditions.
• Employee ex-gratia payments to be subject to a capped tax-free amount, while employers can claim the full amount as a deductible expense.
• "Golden Hellos" or "Handshake" bonuses to be fully taxable for employees while remaining a deductible expense for employers.
• Culture-related donations and contributions to be tax-deductible based on recommendations from the Deputy Ministry of Culture.
• The 60-day tax residency rule to be expanded to include individuals whose primary business interests are in Cyprus, regardless of physical presence.
• Insurance Premium Tax provisions to be annulled.

Preserved Tax Benefits

The proposed reforms will not negatively impact the following beneficial aspects of the Cypriot tax system:

• Notional Interest Deduction: This allows companies to deduct a notional interest expense on equity, reducing their taxable income.
• Intellectual Property (IP) Box Regime: This offers a reduced tax rate on income derived from qualifying IP assets.
• Group Loss Relief: This allows companies within a group to offset losses against profits, reducing the overall tax burden.
• Shipping Regime: This provides favorable tax treatment for shipping companies operating in Cyprus.
• 50% / 20% Deduction for First Employment: This allows individuals taking up employment in Cyprus for the first time to deduct 50% of their income.
• Non-Domiciled Status: This offers tax advantages to individuals who are tax residents but not domiciled in Cyprus.

Impact and Recommendations

Businesses and individuals must prepare, in case the aforementioned proposed changes take effect, by assessing their exposure and adjusting their tax strategies accordingly. Consulco is ready to assist with compliance and strategic adaptation, ensuring a seamless transition to the new tax regime.

Next Steps

• The Ministry of Finance will review the proposals before submission to the Council of Ministers.
• Once approved, draft bills will be filed with the House of Representatives (HoR) for evaluation by the Finance Committee before a plenary vote.

For further guidance on these developments and how they may affect you, feel free to reach out to enquiries@consulco.com