Cyprus Tax Framework – Effective 1 January 2026

Cyprus Tax Framework – Effective 1 January 2026

Cyprus Tax Framework–Effective 1 January 2026

1. TheIncome Tax Law

1.1Corporate Income Tax

• Rate increases from 12.5% to 15%; tax base remains unchanged.
• Existing incentives and exemptions remain, including:
   
  • Notional Interest Deduction on new capital (up to 80%)
   
  • IP Box regime (effective  tax rate as low as 3%)
   
  • Exemption of foreign branch profits and profits from disposal of shares/bonds
   
  • No withholding tax on most dividends, interest, and royalties paid abroad, except to EU blacklisted or certain low-tax jurisdictions

Even withthe increase in the Corporate Tax rate, Cyprus continues to rank among the mostcompetitive tax jurisdictions in the EU, preserving its advantage whilealigning more closely with OECD standards and EU Directives, therebystrengthening the robustness and reliability of its tax system.

1.2Notional Interest Deduction (NID):

Equity introduced to a company (new equity) in theform of paid-up share capital or share premium, and others, is eligible for anannual notional interest deduction (NID). The annual NID deduction iscalculated as a percentage (reference rate) on the new equity. The relevantreference rate is the yield of the 10-year government bond (as at December 31of the prior tax year) of the country where the funds are employed in thebusiness of the company, plus a 5% premium (subject to a minimum rate which isthe yield of the 10-year Cyprus government bond as at the same date, plus a 5%premium).

 The NID is equal to the new equity multiplied by therelevant reference rate, and it is subject to a cap equal to 80% of the taxableprofit (as calculated prior to the NID), arising from the new equity.

 It is noted that the above is a notional interest andthus it is deductible only for tax purposes and thus does not triggeraccounting entries, which ultimately may have an impact on the profitsavailable for distribution.

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1.3 TheCyprus IP Box Regime:

According to the IP regime, a qualifying intangibleasset means an asset which was acquired, developed, or exploited by a person inthe course of carrying on a business and which constitutes intellectualproperty. This pertains to activity other than marketing related intellectualproperty associated with promotion (marketing) and which is the result ofresearch and development activities, including an intangible asset for whichthere is only economic ownership.

In calculating the taxable profit, an 80% deemeddeduction applies to the qualifying profit from the exploitation of suchqualifying intangible assets. With a corporate tax rate of 15%, this can resultin an effective tax rate of as low as 3%.

Capital gains arising from the disposal of aqualifying asset are not included in the qualifying profits and are fullyexempt from income tax.

The taxpayer may choose to forego the whole or part ofthe deduction in each year of assessment. Where the calculation of qualifyingprofits results in a loss, only 20% of this loss may be carried forward or thegroup relieved.

The capital cost of any qualifying intangible asset istax deductible as a capital allowance.

It is noted that the IP Regime is fully compliant withinternational developments in the tax treatment of IP income and OECD’sguidance. The IP regime has been reviewed by the EU Code of Conduct and hasbeen assessed as fully compatible with EU standards.

1.4 Double Tax relief:

Tax credits fortax payments suffered abroad are permitted in Cyprus.

1.5 Double Tax Treaties:

Cyprus has entered double tax treaties with over 65countries worldwide. This is an extremely attractive factor for multinationaland cross-border transactions.

1.6 Profits from apermanent establishment (PE):

Profits from PEs maintained outside of Cyprus areexempt from  taxation in Cyprus, subjectto conditions.

1.7 Profits on the disposal of shares:

Capital gains from the disposal of securities, such asshares, bonds etc. are fully exempt from taxation in Cyprus, unless the sharesbeing sold are linked to an immovable property situated in Cyprus

1.8 Foreign exchange (FX) gains:

FX gains with the exception of FX gains arising fromtrading in foreign currencies and related derivatives, are fully exempt fromtaxation in Cyprus.

1.9 Audiovisualindustry Incentives:

Profits from the production of films, series, andother related audiovisual programs in Cyprus can be exempt from CorporateIncome Tax (CIT).

1.10 Shipping Industry:

Shipping companies are exempt from all direct taxes inaccordance with the provisions of the Merchant Shipping (Fees and TaxingProvisions) Law and are subject to tonnage tax, on the net tonnage of the shipsthey own, charter, or manage.

1.11 LossCarry-Forward

• Business losses can now be carried forward for up to 7 years, compared to the previous 5-year limit, bringing the rule more in line with commercial realities.

1.12R&D Super-Deduction

• 120% deduction for R&D expenditure on intangible assets extended until 2030. A positive outcome as it provides incentives for real R&D activities.

1.13Cryptocurrency

• Profits are taxed at 8%, and while losses may be offset against gains within the same year, they cannot be carried forward. Previously, such profits were  taxed at 12.5% for legal entities, compared to 20%–35% for individuals.

1.14 StockOptions

• Approved employer schemes taxed at 8%, subject to conditions.

The 8% taxrate applies only to the portion of the benefit that does not exceed twice theemployee’s or director’s annual employment remuneration in the year of vesting(excluding the benefit itself). Any excess is taxed at the standard income taxrates.

To qualify,the rights must meet the following conditions:

·       Have a minimum vesting period of three years,starting from the date the scheme is approved by the Commissioner of Taxation;

·       Be non-transferable;

·       Relate to shares of the employer company (orits direct or indirect holding company) and carry the same rights as ordinaryshares, except for voting rights; and

·       Have a minimum strike price of at least 50% ofthe share value at the time the scheme is approved.

Additionally,the total benefit eligible for the 8% rate is capped at €1 million over aten-year period of employment.

The abovedoes not apply where the rights are granted to an individual considered arelated party under Article 33 of the Income Tax Law.

1.15Gratuity Payments

• Subject to 20% tax, with €200,000  tax-free if due to employment termination.

1.16Entertainment Expenses

• Deductible limit increased from €17,086  to €30,000; 1% of gross income limit still applies.

1.17 Costof Living Allowance (ATA)

• Employers paying ATA under trade union agreements may claim double the expense as a deduction.

1.18Donations & Share Listing Expenses

• Deduction of up to €50,000 for donations to cultural institutions
• Deduction of up to €300,000 for costs of  listing shares on recognized stock exchanges

1.19Interest Deduction Rules

• Interest linked to non-business assets (excluding private vehicles) remains restricted beyond 7 years. As of 31  December 2025, the restriction applied for 7 years.
• Interest deduction for wholly-owned subsidiaries (Direct/Indirect) is disallowed if the subsidiary is:
      a) a tax resident in a jurisdiction included on the EU list in respect to non-cooperative jurisdictions for tax purposes; or
      b) is incorporated/registered in a jurisdiction included in the list and not considered to be a tax resident in another jurisdiction that is not  included on the list.

1.20Individual Taxation

• Tax-free threshold increased from €19,500 to €22,000
• Additional deductions available for:
   
  • Dependent children (including students up to 24 years old)
   
  • Rent or loan interest on primary residence
   
  • Insurance against natural disasters
   
  • Electric vehicle purchase
   
  • Energy efficiency expenses

1.20.1  Income Limits for Eligibility:

• Family income thresholds are as follows  (based on the income as of 31 December of the tax year):

o  Up to€100,000 with 0–2 dependent children.

o  Up to€150,000 with 3–4 dependent children.

o  Up to€200,000 with 5 or more dependent children.

• For single-parent families, the threshold is €40,000.

1.20.2 DependentChild Deduction:

• €1,000 for the first child, €1,250 for  the second child, and €1,500 for the third and each subsequent child.
• For single-parent families, or when one  parent has full custody, the deduction amount is doubled.

1.20.3 Interestor rent on Primary Residence:

• Up to €2,000 per spouse or per individual may be claimed for interest or rent.
• The deduction applies only if the primary residence in the Republic is owned by at least one of the spouses/partners or by the individual, and the loan is in the name of at least one of the spouses/partners or the individual.
• Any grant, subsidy, allowance, or similar  payment received from a public fund by the individual will reduce the deductible amount of the expense.

1.20.4 Energyefficiency and Electric cars deduction:

• Up to €1,000 for each spouse or partner,  or for a single individual (up to two).

1.21 TaxBrackets for individuals (from 1 Jan 2026)

Taxable Income / Rate / Cumulative Tax

Up to €22,000 / 0% / €0

€22,001 – €32,000 / 20% / €2,000

€32,001 – €42,000 / 25% / €4,500

€42,001 – €72,000 / 30% / €13,500

Over €72,001 / 35% / As applicable

1.22Attractive Personal tax regimes, especially for non-Cypriot tax residentstaking up employment and residency in Cyprus.

a.    Exemptionin accordance with Article 8(23A) which calls for a 50% tax exemption fromIncome Tax, for remuneration from employment whichis exercised in the Republic by a person who was resident outside the Republicfor a period of at least 15 consecutive years before the commencement of theiremployment in Cyprus, and provided that their remuneration exceeds €55.000 onan annual basis. The exemption applies for 17 years, starting from the firstyear of employment.

Practical example:

To demonstrate, we assume an individual with an annualincome of €100.000 gross. Without the 50% exemption, a €100.000 income wouldresult in a taxation of €20.250 and a net income of €71.036, after factoringthe various social insurance contributions. However, should the 50% exemptionbe utilized, taxation will only be €4321, resulting in a net pay €86.964. Effectivetax rate of 4.32%.

b.    Exemptionin accordance with Article 8(21A), which calls for 20% tax exemption or €8.550,whichever is the lower, for remuneration from first employment in the Republicby a person who for three (3) consecutive years prior to the commencement ofhis employment in the Republic was employed outside the Republic for anemployer not resident in the Republic. Exemption is granted for a period ofseven years following the year of employment.

c.    Exemptionin accordance with Article 8(21B) as Published in the Official, Gazette on 6March 2026 with a retroactive effect as of 1 January 2025. This new taxincentive is designed to encourage skilled professionals and experiencedemployees who have worked abroad to return and contribute to the local economy.The new measure allows eligible returnees to benefit from a 25% tax deductionwith a cap of €25.000 on their income from employment or business activities inCyprus on income exceeding €30.000 per annum.

The rulesunder Article 8(21B) apply to both employees and self-employed individuals,in contrast to Articles 8(21A) and 8(23B), which cover employment income only.

All of the above, combined with the recent rise of the tax-free thresholdto €22,000 and updated income tax brackets, Cyprus now offers a highlyattractive personal tax framework.

1.23 Other Taxfacts:

• From 2031 onwards, redemptions of units in funds will no longer be considered capital gains (i.e., profit from the  sale of securities) and therefore will not be tax-exempt. Instead, they     will be treated as dividend distributions and will be subject to Special     Defence Tax.
• The exemption for foreign pensions     increased from €3,420 to €5,000 per annum. For sums over €5,000 the taxpayer has the right to choose either to be taxed at a rate of 5% or  under the normal rates if there is any further source of income.
• Indefinite-life intangible assets amortized over 20 years
• Corporate tax residency now includes incorporation test, meaning that the condition for a company not to be tax resident in another State for it to be treated as a Cyprus tax resident no     longer applies, unless the double tax treaty between the contracting States says otherwise.
• Individual tax residency 60-day rule: no longer requires non-residency elsewhere, which was one of the conditions as of 31 December 2025.
• The exemption on profits of a foreign permanent establishment will not apply if the permanent establishment is in a jurisdiction that is included on the Common EU List of 3rd country     jurisdictions for tax purposes.
• Transfer pricing thresholds have increased (Goods: €5m, Financial: €10m, Other: €2.5m)

2. SpecialContribution for the Defence Law (SDC)

The persons liable for Special DefenceContribution include:

• Cyprus tax resident companies
• Individuals who are both tax resident and domiciled in Cyprus

Before 16 July 2015, all Cyprus taxresident individuals were subject to the Special Defence Contribution. However,from 16 July 2015 onwards, the charge applies only to individuals who are bothCyprus tax residents and domiciled in Cyprus.

For this purpose, an individual isconsidered domiciled in Cyprus if they have a domicile of origin under theWills and Succession Law (subject to certain exceptions), or if they have beentax resident in Cyprus for at least 17 out of the 20 tax years preceding theyear of assessment. Anti-avoidance rules also apply. As of 1 January 2026, theexemption can be extended as noted below.

2.1 Nondomiciled individuals are exempt from SDC.

2.1.1 Inthe case of a Cypriot Tax resident but not Cyprus - domiciled, the exemptioncan be utilized for at least 17 years, subject to only 2.65% NHS with a maximumtaxable threshold of €180.000.

Example:A dividend payout of €10.000.000 from a Cyprus Company to an individualshareholder, being a CY Tax resident of Cyprus but Non domiciled, will triggeronly €4770 NHS being €180.000*2.65%.

2.1.2 Inthe case of non-Cypriot tax residents receiving dividends from Cyprus will befully exempt from all taxes in Cyprus, including NHS, however, may be subjectto tax at their place of tax residency.

2.2 Deemed dividend distribution provisions areabolished on post-2026 profits. A significant update for business who wish toretain profits for future developments.

2.3 SDC contribution on actual dividenddistribution is decreased from 17% to 5%. A significant amendment especiallyfor Cypriot Tax residents, domiciled residents.

2.4 Specialdefence contribution on rental income no longer applies.

2.5 Interestincome received by Cyprus Tax resident Companies is no longer subject tospecial defence tax but to Corporate tax (15%).

2.6 Interestincome received by individuals will only be subject to Special defence tax atthe rate of 17% on the gross income. If such income is earned on certainCyprus/EU government/local authority securities or certain listed securities,the Special defence tax rate will be 3%.

 
• It is understood that a person with an annual income of €12,000 or less may be entitled to a refund of Special Defence Tax withheld on interest income exceeding 3%
 
• Non-residents and non-domiciled residents remain exempt under conditions.

2.7 Taxation ofdeemed dividends on capital reduction represented by the difference betweenmarket value of distributed properties and the amount originally paid in forthe capital extended to companies.

2.8 Redemptionsof units in funds, as of 1 January 2031, will no longer be deemed as of capitalnature, but rather as a dividend distribution subject to Special Defence tax.

2.9 In case ofbonus issue of shares, the amount capitalized will be treated as a dividend andtaxed accordingly.

2.10       A 10%Special defence tax rate has been introduced for the taxation of deemeddividends, in the following cases:

 
• The market value of assets owned by a company which is used for private use by its shareholder.
 
• The difference between the market value of an asset transferred by a company to its shareholder and the consideration amount paid for the said transfer.

2.11       Reductionof the Special Defence Contribution on interest from bonds (CSE EmergingCompanies Market) to 3%

2.12       For CyprusTax residents, non-domiciled individuals, the 17-year exemption can be extendedwith the payment of a lump sum of €250,000 per period for additional twoperiods of 5 years each.

3. StampDuties Law

• Stamp duty legislation is abolished as of 1 January 2026. A significant outcome for business and individuals from the burden to stamp all relevant agreements executed in Cyprus.

4. CapitalGains Tax Law

• The lifetime exemptions for the disposal  of immovable property have been increased as follows:
   
  • Disposal of principal private residence: From €85,430 to €150,000
   
  • Disposal of agricultural land: From €26,269 to €50,000
   
  • Other disposals: From €17,086 to €30,000
 
• The definition of shares that directly or indirectly own immovable property has been amended to include shares which derive 20% of their value from immovable property situated in Cyprus, versus 50% applicable as of 31 December 2025.
• Gains from disposal of shares of companies which indirectly own immovable property situated in Cyprus and derive at least 20% of their market value from such property, are taxable under capital gains tax.
• The exemption to capital gains tax on the profits arising from the disposal of shares listed on any Stock Exchange has been amended:
   
  • Exemption now applies only to shares listed on a regulated market of a recognized Stock Exchange.
   
  • Profits on disposal of shares not listed on regulated markets are exempt if they do not exceed €50,000 per annum.
   
  • Profits on disposal of shares not listed on regulated markets as of 31 December 2025 remain exempt.
 
• Exchange of buildings for land is now exempt from Capital gains tax, subject to conditions.
• In the case of immovable property transfers under a qualifying loan, the tax-exempt profit increases from €350,000 to €450,000, applicable up until 31 December 2030 (subject to  conditions).
• Penalties and fines for noncompliance have increased significantly.

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