The fate of Cyprus’ long-awaited tax reform now lies with Parliament, following the Cabinet’s approval on Wednesday of six amending bills that make up the government’s fiscal overhaul package.
Given the strong reactions from professional bodies and organised groups in recent weeks, attention is now turning to how MPs will proceed - whether by approving the entire package at once or by phasing in individual bills. Some parties favour a step-by-step approach due to the tight legislative calendar, which includes the 2026 state budget debate, while others anticipate potential delays amid pressure from the business sector.
Higher tax-free threshold
Under the bills which remain broadly unchanged from the version presented in February, the tax-free thresholdwill rise from €19,500 to €20,500, one of the highest levels in the European Union, Finance Minister Makis Keravnossaid after the Cabinet meeting.
Families and individuals with annual incomes below specific thresholds €80,000 for couples, €100,000 for large families, or €40,000 for single persons, will receive a range of tax deductions:
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€1,000 per child;
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€2,000 per child for single-parent families;
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€1,000 per student;
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€1,500 for mortgage interest or rent on a primary residence;
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€1,000 for home energy upgrades or the purchase of an electric vehicle.
Business taxation
For businesses, the reform introduces sweeping changes. The deemed dividend distribution rule will be abolished for profits earned after 1 January 2026, and the defence contribution on actual dividend distributions will drop from 17% to 5% for profits generated after 1 October 2026. The defence tax on rental income will also be scrapped.
At the same time, the corporate tax rate will increase from 12.5% to 15%, aligning with global minimum tax standards. Profits from the sale of crypto-assets will be taxed at a flat rate of 8%.
Adjustments following consultation
Following consultations with stakeholders, the Finance Ministry made several changes before submitting the bills.
An initial proposal allowing the Tax Department to close businesses that fail to issue receipts has been revised. The three-warning system remains, but if violations persist within 30 days, the Tax Commissioner may apply directly to the courts for an order, allowing a judge to decide whether to extend the warning period, impose closure, or take another action.
The controversial clause linking directors’ salaries to the defence levy reduction from 17% to 5% was removed for now, with a new proposal expected in 2026.
Changes were also made to retirement lump-sum exemptions: instead of the first €20,000 being tax-free, the tax exemption now rises to €200,000.
In addition, for Non-Dom companies, the renewal fee for maintaining their status was cut from €250,000 for 17 yearsto €50,000 for five years, in an effort to retain Cyprus’s attractiveness for foreign investors.
'Fairer burden-sharing'
Minister Keravnos described the reform as the first comprehensive overhaul in 22 years, designed to ensure a fairer distribution of the tax burden, provide relief for low- and middle-income groups, and support business competitiveness.
He stressed the social dimension of the reform, citing measures to strengthen family income, assist single parents and young couples purchasing their first home, and promote energy efficiency.
“With the new deductions, the effective tax-free amount in many households will exceed €24,500, while around 55% of employees will pay no income tax at all,” Keravnos noted.
He added that the reform would be fiscally neutral and expressed hope that Parliament would debate and approve the full package in time for implementation on 1 January 2026.