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Cyprus is set to undergo its first major tax reform in over 20 years, with changes expected to align the system with the country’s evolving economic landscape.
According to Kathimerini's Panayiotis Rougalas, the reform, estimated to have a fiscal impact of €0.5 billion, will bring adjustments for both individuals and businesses, including higher corporate tax rates, an increased tax-free income threshold, and new deductions for households.
Key Changes and Financial Impact
The proposed framework, which aims to take effect in early 2026, has been widely viewed as a step in the right direction by stakeholders. Among the most notable updates:
- Corporate tax will increase from 12.5% to 15%.
- The tax-free income threshold for individuals will rise to €20,500.
- Household tax burdens will be reduced from 63% to 82%.
- Abolition of the deemed dividend distribution tax, replaced by a 5% withholding tax on actual dividend distributions for Cypriot tax residents.
The total impact on government revenues is projected at €220-270 million from higher corporate tax, €80-130 million from other potential taxes, and €50-70 million from VAT refunds and income tax multipliers. Meanwhile, individuals will contribute €150-170 million, with €230-300 million in relief coming from a reduction in the defence levy.
Tax Relief for Middle-Class Households
The reform also introduces new household tax deductions, particularly benefiting families with children, homeowners, and those investing in green upgrades. Families with two working parents and a combined gross income of up to €80,000 will qualify for:
- €1,000 per spouse/partner per child.
- €1,000 per spouse/partner per student.
- Up to €1,500 per spouse/partner for first-home loan installments or rent.
- Up to €1,000 per spouse/partner for energy-efficient home upgrades.
- Single-parent families to be taxed under the most favorable category, similar to two-parent working households.
Additionally, tax reductions will be based on the number of children in a household. Under the new system, a family with two working parents earning €56,184 annually will see their tax burden decrease as follows:
- One child: 37% reduction (€800).
- Two children: 56% reduction (€1,200).
- Three children: 68% reduction (€1,454).
- Four children: 77% reduction (€1,654).
Concerns Over Economic Growth and Green Taxes
While experts generally support the reform, some warn of potential risks. Economist Tasos Yasemidis, Head of Global Compliance Management Services at KPMG Cyprus, acknowledged that the changes reduce the tax burden for individuals and enhance business competitiveness. However, he stressed the need for fiscal impact assessments in case economic growth stalls, as well as further evaluation of green taxes.
“The administrative burden must also be considered, as the Tax Department will need to assess family composition, loans, rentals, and green transition-linked investments,” Yasemidis said.
Need for Further Analysis
Michalis Persianis, President of the Cyprus Fiscal Council (CFC), highlighted a lack of data on the full economic impact of the tax changes, particularly regarding wealth redistribution and its effect on household disposable income. He warned that shifting tax burdens could significantly influence consumption and investment behavior, ultimately affecting overall economic performance.
“When we have full information, we can determine whether fiscal neutrality is maintained in Cyprus,” Persianis said, calling for further analysis before the final version of the tax reform is implemented.
With implementation targeted for 2026, discussions will continue as policymakers refine the plan to ensure it balances economic growth, social fairness, and fiscal sustainability.
