Tax Reform in Cyprus

On 22 December 2025, the House of Representatives of the Republic of Cyprus enacted a landmark legislative package for comprehensive tax reform. These amendments encompass corporate and personal income tax, alongside new procedural frameworks and anti-avoidance measures. The following overview highlights the primary tax changes for businesses, effective as of 1 January 2026.

Increase of Corporate Tax Rate to 15%

For tax years beginning on or after 1 January 2026, the corporate income tax rate in Cyprus will be 15% (previously 12.5%). 

Despite the increase, Cyprus will remain a jurisdiction with one of the lowest corporate tax rates in the EU.

Withholding Tax on Dividends Paid to Low-Tax Jurisdictions

Starting 1 January 2026, a 5% withholding tax will apply to dividend payments made by Cypriot companies to entities in low-tax jurisdictions. Jurisdictions are considered “low-tax” if their corporate tax rate is less than 50% of the Cyprus corporate tax rate.

This measure applies only to dividends and does not include interest or royalties. However, starting 1 January 2026, limitations on expense deductions for the payer company will apply to interest and royalties paid to recipients in low-tax jurisdictions.

A 17% withholding tax remains in place for dividends and interest paid to “non-cooperative” jurisdictions on the EU blacklist (Annex 1).  

For all other jurisdictions, the general rule remains that no withholding tax is levied on payments to non-residents. Consequently, the withholding tax on dividends paid by Cyprus companies to non-residents will be tiered as follows:

Recipient jurisdiction	Withholding tax rate
Non-cooperative jurisdictions (EU Blacklist)	17%
Low-tax jurisdictions	5%
All other jurisdictions	0%

Changes to the Special Defence Contribution (SDC) Rules

The Special Defence Contribution (SDC) is levied (withheld) on dividend, interest, and rental income earned by Cyprus tax residents.

Change	Details
Abolition of the Deemed Dividend Distribution Rule	This rule provided that a portion of a Cyprus company's undistributed profits was deemed distributed to its individual shareholders, provided they were tax residents of Cyprus and domiciled in Cyprus, and was subject to SDC on that basis. If a company did not distribute its after-tax profits within two years from the end of the tax period in which they were earned, 70% of such profits were considered distributed (minus any actual dividends paid) and taxed at an SDC rate of 17%. Deemed dividend distribution has now been abolished for profits earned on or after 1 January 2026.
Reduction of SDC on Actually Distributed Dividends	The SDC rate on dividends actually paid to an individual who is a Cyprus resident, from profits earned after 1 January 2026, has been reduced to 5% (previously 17%). The SDC is withheld by the company making the payment.
Abolition of SDC on Rental Income	The SDC on gross rental income is abolished (previously withheld at a rate of 3%).
Anti-Avoidance Provision Against Disguised Dividends	If shareholders or related parties receive a benefit from the company that essentially constitutes a distribution of profit, an SDC rate of 10% may be applied.

Transfer Pricing

Effective 1 January 2026, the thresholds for Cyprus companies to maintain transfer pricing documentation (local file) have been increased. Taxpayers are exempt from the mandatory preparation of a local file if the total value of their controlled transactions per year (for each category) does not exceed the following thresholds:

Category of transactions	Transfer pricing documentation threshold
Financial transactions	€10 million (previously €5 million)
Sale and purchase of goods	€5 million (previously €1 million)
Services and other transactions	€2.5 million (previously €1 million)

Capital Gains Tax 

Capital Gains Tax (CGT) at a rate of 20% applies to income derived from the disposal of immovable property located in Cyprus (provided it is not subject to income tax), as well as from the disposal of shares in companies that own such property, or where such property accounts for at least 50% of the market value of those shares.

The amendments reduce the 50% threshold for indirect ownership of immovable property to 20%, thereby expanding the scope of CGT. This tightening applies to transactions involving the indirect sale of immovable property held through corporate vehicles.

Other Tax Changes in Cyprus from 2026

• Loss Carry-Forward: The maximum period for which tax losses can be carried forward has been extended to 7 years (previously 5 years).
• Disposal of Crypto-Assets: Income derived from the sale of crypto-assets will now be taxed at a flat rate of 8%.
• Entertainment Expenses: The limit for deductible entertainment expenses is increased to €30,000 (previously €17,086).
• R&D Tax Incentives: The 120% “super-deduction” for qualifying R&D expenditure on intangible assets is extended until 2030.
• Abolition of Stamp Duty: Previously, this duty was levied on specific documents related to Cyprus-based transactions or assets (including contracts and powers of attorney). The elimination of this long-standing duty is expected to simplify the execution of business documentation and accelerate transaction closures.

Anti-Avoidance Rules and Tax Administration

• Corporate Tax Residency: Entities incorporated (registered) in Cyprus are now considered Cyprus tax residents by default, codifying existing practices. Historically, the “management and control” test in Cyprus was the primary criterion for determining residency. For individuals, the residency rules remain unchanged (the 183-day or 60-day rules).
• General Anti-Abuse Rule (GAAR): This rule aims to combat aggressive tax planning involving cross-border schemes that lack commercial substance. Such schemes may specifically target the avoidance of withholding taxes or the improper deduction of expenses.
• Mandatory Tax Returns for Individuals: All Cyprus tax residents aged 25 and over are now required to file an annual income tax return, regardless of whether they have generated taxable income.
• Rental Payments via Bank: Starting 1 July 2026, rental payments exceeding €500 must be made only through traceable methods, such as bank transfers or electronic payments.

What will remain unchanged?

The tax reform will not affect a number of key benefits for companies in Cyprus, including:

• No tax on dividends received from Cypriot or foreign companies.
• No withholding tax (WHT) on dividend payments abroad (except for payments to residents of low-tax or “non-cooperative” jurisdictions).
• An intellectual property tax regime (IP Box) applicable to qualifying intangible assets.
• A Notional Interest Deduction (NID) for equity financing of companies in the form of new share capital contributions.
• Exemption from Capital Gains Tax on the disposal of securities (except for the indirect sale of real estate).
• Exemption from SDC on dividends and interest for non-domiciled resident individuals (Non-Dom regime).
• Maintaining the VAT rate at the current level (19%).

Conclusion

The 2025–2026 Cyprus tax reform seeks to promote fiscal equity while modernizing tax administration in alignment with EU and OECD standards. Simultaneously, the reform is designed to bolster Cyprus’s economic competitiveness and provide a predictable environment for international business. Although this represents the most comprehensive overhaul in over two decades, the core advantages of the Cypriot corporate tax regime remain fully intact.

Note: This material has been prepared for informational purposes only and does not constitute tax or legal advice. For matters regarding corporate or individual taxation in Cyprus, please consult with professional advisors.