Newsroom
Cyprus is preparing to implement its first major tax reform in over two decades, aiming to modernize the tax system, boost competitiveness, and align with international standards. While the government’s proposals have been broadly welcomed by businesses, the plan has also sparked controversy over its perceived shortcomings, particularly regarding low-income households and income inequality.
Modernizing the Tax System
According to Kathimerini's Dorita Yiannakou, the reform process, which began in September 2023, is set to be completed by August 2025, with legislation expected to take effect in early 2026. The new framework aims to simplify the tax code, correct long-standing distortions, and increase the state’s tax collection capacity. Key changes include an increase in corporate tax rates, adjustments to individual income tax brackets, and the abolition of the controversial deemed dividend distribution.
Finance Minister Makis Keravnos said the reform was shaped after extensive consultations with more than 50 stakeholders, reflecting the government's social liberal approach. President Nikos Christodoulides emphasized that the new framework is designed to strengthen the economy, attract quality investments, and boost citizens’ disposable income.
Corporate Tax Increase: A Necessary Step?
One of the most debated aspects is the rise in corporate tax from 12.5% to 15%. While this aligns Cyprus with global minimum tax rules and helps shed the country’s reputation as a tax haven, business leaders have mixed feelings. Savvas Klitou from Baker Tilly Cyprus described the increase as a positive signal to foreign investors, indicating that Cyprus seeks long-term partnerships rather than opportunistic investment.
However, Ernst & Young Cyprus' Philippos Raptopoulos warned that the hike could deter some investors despite the country still offering one of the lowest corporate tax rates in the Eurozone. He suggested the increase be offset by abolishing deemed dividend distribution and introducing countervailing measures that benefit shareholders.
Impact on Households
The framework promises to ease the tax burden on families, especially those with children. However, Deloitte’s Antonis Taliotis criticized the proposed benefits, arguing that offering allowances outside the tax code would be more effective. He also warned that the system’s complexity mirrors pre-2000 practices, which Cyprus previously abandoned to simplify taxation.
Economic analyst Pambos Papageorgiou highlighted three key flaws in the framework. First, low-income earners—roughly half the population—are excluded from direct tax relief. Second, the framework does not address inflation-driven income erosion. Third, the system disproportionately favors high earners, offering more benefits to those making over €60,000 per year.
Business Perspective
Despite concerns, major accounting firms like PwC and KPMG have generally welcomed the reform. PwC's Marios Andreou praised the framework for boosting business competitiveness and aligning with best practices from other EU countries. KPMG’s George Markides added that the reform bridges the tax gap between local and foreign investors without discouraging foreign capital.
However, Markides noted that the framework overlooks incentives for digital transformation and technological upgrades—key drivers of business growth in the modern economy.
Political Reactions
Political parties have offered mixed reactions. The ruling government claims the reform will stimulate growth and ensure fairer wealth distribution. Opposition parties like AKEL argue the measures fall short of the President's election promises, leaving vulnerable groups without meaningful support.
Meanwhile, centrist parties such as EDEK and the Democratic Alignment (DISY) have cautiously welcomed the proposals, particularly the increased tax-free income threshold and the restructuring of tax brackets.
Looking Ahead
Public consultation on the framework is expected to iron out contentious issues in the coming months. The government aims to finalize the reform by early autumn, with legislation passing through Parliament soon after.
While the tax overhaul represents a significant step towards a more equitable and modern system, critics argue that without further adjustments, the reform risks widening income inequality and overlooking the needs of the most vulnerable citizens.
*This article was translated and summarized from its Greek original. To read more of Dorita Yiannakou's article and gain full access to in-depth reports (in Greek), subscribe now to Kathimerini's print edition and stay informed with comprehensive coverage on this and more!
