Cyprus is preparing tax reform: what will change for businesses?

With the beginning of 2025, Cyprus has entered a phase of radical changes in the tax environment. Against the background of a global review of international taxation rules, the country has chosen a course to update its own tax policy in order to remain an attractive jurisdiction for business, while meeting modern standards of transparency. The announced reforms, according to the government, should change the balance between fiscal benefits for foreign investors and long-term stability of the economy.

In this article, we will analyze in detail what tax changes await international businesses in Cyprus, what companies and investors should pay attention to now, and how the new rules may affect the future architecture of business structures in this jurisdiction.

Key changes for business

The planned tax reform in Cyprus provides for a number of important innovations that will directly affect companies operating in this country or using Cypriot structures in their business models. Given that the innovations concern a large number of aspects, as well as touching on various areas of taxation and corporate governance, we propose to dwell in more detail on those innovations that are of the greatest importance for international business, affecting corporate taxation, taxation of individuals, as well as the status and benefits for foreign investors and the structuring of companies in Cyprus.

Changes in corporate taxation:

Increasing the corporate tax rate from 12.5% to 15%. It is worth noting that in practice, the choice of jurisdiction for business registration and further operation largely depends on the level of corporate taxation. The current 12.5% corporate income tax rate is one of the lowest in Europe.

However, one of the most significant changes envisaged by the Cyprus reform is the increase in the basic corporate income tax rate to 15%. This step will bring Cyprus in line with the minimum global rate recommended by the OECD and with EU tax policy (we reviewed the global minimum tax in an article, which you can read here).

Tax losses: extension of the carryover period. One of the positive innovations of the tax reform in Cyprus is the extension of the period during which a company has the right to carry forward its tax losses to future tax periods to reduce taxable profit. Thus, if previously the period of such carry forward was 5 years, then after the implementation of the reform, companies will be able to use their uncovered losses to reduce future profits for 10 years.

In practical terms, this means that a business that has encountered difficulties or had losses in certain years will receive additional opportunities to optimize the tax burden in the future, which, as a result, is a certain support for businesses in a changing economic environment.

Abolition of the imputed dividend rule (Deemed Distribution). According to the legislation of the Republic of Cyprus, the currently applicable Deemed Distribution regime is a special tax mechanism under which companies registered in Cyprus are required to conditionally consider a part of their undistributed profits as distributed in the form of dividends and pay a special defense contribution (SDC) from this amount, even if the actual payment of dividends to shareholders has not taken place.

That is, if a Cypriot company accumulates profits and does not pay dividends, after 2 years, 70% of the amount should be taxed at 17% SDC (provided that the ultimate owner is a Cypriot domicile).

However, with the introduction of the tax reform, this regime is abolished, which means that undistributed profits can be kept on the company’s balance sheet without time limits and without additional taxation. At the same time, we note that the final mechanism for abolition and transitional provisions should be detailed in the final law.

Changes in personal taxation:

Update of the progressive personal income tax scale:

• 0% – income up to до 500 EUR;
• 20% – from 20 501 EUR to 30 000 EUR;
• 25% – from 30 001 EUR to 40 000 EUR;
• 30% – from 40 001 EUR to 80 000 EUR;
• 35% – over 80 000 EUR.

Thus, considering the update of the progressive school thresholds, we can conclude that two significant changes have been introduced. First, the tax-free minimum is increased from EUR 19,500 to EUR 20,500 per year, which is one of the highest thresholds in the EU. This means that most low-paid workers will not pay tax at all, and the tax burden on the middle class will be lower.

Secondly, the tax burden on middle-class incomes is reduced: if previously the maximum rate of 35% was already applied to incomes over EUR 60,000, now the range from EUR 60,001 to EUR 80,000 will be taxed at a lower rate of 30%.

Reduction of the SDC rate for residents. Thus, as of today, Cypriot law provides for a Special Defence Contribution (SDC) on dividends paid by persons who are both tax residents of Cyprus and have domicile status. Under Cypriot law, a domicile is considered to be any person who is a tax resident of Cyprus, unless he has non-domiciled status. The SDC rate for such domicile residents is currently 17% of the dividends actually received.

However, according to the announced tax reform, the SDC rate for tax residents-domicile will be reduced from 17% to 5%. The reduction applies to dividends actually paid and will affect only those who fall under the SDC taxation regime (i.e., residents-domicile). For foreign investors and individuals with “non-dom” status, the tax regime will remain unchanged — they will still not pay SDC on dividends.

What remains valid?

It should be noted that despite significant changes to tax legislation, some benefits and regimes that were in effect previously remain relevant, in particular:

1. IP Box (tax regime for income from intellectual property) – will remain in force; the effective rate of around 2.5% on qualified IP income will continue to encourage IT and innovative companies to remain in Cyprus.
2. Exemption from capital gains tax on the sale of shares – also remains in force. Profits from the disposal of shares will continue to be tax-free (with certain exceptions for real estate), making Cyprus attractive for holding companies and investment funds.
3. Benefits for highly qualified foreigners – remain in force. Cyprus maintains one of the most attractive tax regimes for foreign professionals. For several years now, there has been a benefit here that allows exempting 50% of annual income from taxation for employees with an annual salary of over 55,000 EUR who came to Cyprus under an employment contract. This tax advantage will remain in force – foreign professionals can pay taxes on only half of their income for a certain period (usually up to 17 years), significantly reducing the overall tax burden.
4. Non-dom status will continue to apply. Foreigners who move to Cyprus and obtain non-dom status are exempt from paying SDC on passive income (dividends, interest) for a period of up to 17 years. The reform confirms the preservation of this regime as a key factor in investment attractiveness. Moreover, the possibility of extending the period beyond 17 years is currently being considered – subject to payment of a special annual fee.

When will these reforms come into effect?

The date from which the tax reform is scheduled to be implemented, in particular regarding the increase in the corporate tax rate from 12.5% to 15%, the reduction in the SDC rate to 5%, all new provisions regarding personal income tax, and the extension of loss carryforwards to a 10-year period, is January 1, 2026.

In other words, 2026 will be the first tax year under the new rules for most companies and individuals, so you need to be ready for these changes now.

The impact of tax reform on business structures

The introduction of tax reform in Cyprus certainly raises some concerns among business representatives, as some of the changes may be perceived as increasing the tax burden or complicating procedures. However, if we evaluate the innovations as a whole, taking into account the comprehensive impact on the corporate structure, transparency, and long-term stability of the jurisdiction, we can note the positive aspects of the reform.

Firstly, the harmonization of the Cyprus tax system with international standards will increase the trust in Cypriot companies from partners, banks, and investors, which may simplify opening accounts, attracting financing, and concluding international contracts.

Secondly, the update of tax policy, in particular by increasing the corporate tax rate in Cyprus, may have a direct positive impact on the tax planning of Ukrainian beneficiaries using Cypriot companies in their international structures. For example, at a rate of 12.5%, the profits of controlled foreign companies (CFCs) registered in Cyprus did not fall under the criteria for sufficient taxation under Ukrainian legislation.

Recall that the adjusted profits of CFCs are exempt from taxation if the CFC is registered in a country with which Ukraine has an agreement on the avoidance of double taxation or exchange of tax information and if such CFCs are subject to taxation at an effective rate of not less than 13%. At the same time, with an increase in the rate to 15%, Cypriot companies will be able to meet the requirements for a sufficient level of taxation, which will allow avoiding taxation of undistributed profits of CFCs at the level of Ukrainian beneficiaries. This, in turn, increases the efficiency of using Cypriot structures in international business and reduces tax risks for owners.

In addition, changes in reporting and disclosure will minimize the risks of future tax disputes, as well as reduce the likelihood of Cyprus being included in the so-called “black” or “grey” lists of jurisdictions. This, in turn, will provide stability for long-term planning and business operations.

Necessary steps for Cypriot company owners

It should be noted that the tax reform in Cyprus is not only a challenge for business, but also a real opportunity to increase the efficiency, transparency, and competitiveness of its international structure. In this regard, in order to make the most of the new rules and avoid unnecessary risks, we recommend now:

1. Conduct an audit of the corporate structure and tax burden, taking into account future changes.
2. Update tax planning, assess the possibility of carrying losses into future periods.
3. Explore opportunities for using tax benefits and regimes.
4. Engage professional legal support — both to analyze the consequences of changes and to structure the business under new conditions.

Early planning and professional support will minimize risks, adapt to reform, and ensure business stability in Cyprus even in times of change.