Cyprus tax reform project update

In brief

What happened?

An update on the Cyprus tax reform project was given on February 26 at Cyprus’s Presidential Palace. The President of the Republic, the Minister of Finance, and members of the University of Cyprus Economics Research Centre, which is assisting the government in the project, each presented at the event.  

Why is it relevant? 

The presentation noted that the project needs more work before it can be finalized. The expected timeline to finalize the project extends to late 2025. Although the provisions could be enacted in 2025, enactment in 2026 may be more likely. Once the project is finalized, the legislative process will begin. This will include the Cyprus Parliament’s voting to approve the legislation. Note that some of the proposals may not be included in the final tax reform, or they could be revised before being enacted into law.  

Actions to consider  

Companies should evaluate the proposals and their potential impact. They should also review and adjust financial strategies to align with any new tax rates and incentives.  

Special Defense Contribution (SDC) 

• Abolish the Deemed Dividend Distribution (DDD) provisions.  

Observation: This would modernize the Cyprus tax system.  

• Reduce the SDC rate on actual dividend income from 17% to 5%, with an anti-abuse measure to provide for an SDC rate higher than 5% in cases of ‘concealed dividends.’   

Observation: Dividends are currently subject to SDC when they are the income of: Cyprus tax-resident individuals who are also domiciled in Cyprus, Cyprus tax-resident companies in case the exemption conditions are not met, and companies located in jurisdictions that are included in the EU list of non-cooperative jurisdictions for tax purposes (the so-called EU Blacklist). The reduction in the SDC rate to 5% may not apply to these cases, given the anti-aggressive-tax-planning role of this rule. 

• Abolish the SDC on rental income.   

Observation: Rental income is currently the only type of income taxable to both income tax (personal or corporate) and SDC. Abolishing the SDC on rental income would leave it subject only to income tax (personal or corporate). 

• Retain the exclusion from taxation under SDC of individuals who are not domiciled in Cyprus (non-domiciles). The period of eligibility will increase subject to payment of an annual fee.  

Observation: The non-domicile regime effectively allows eligible individuals to be exempt from taxation in Cyprus on their local and foreign (i.e., worldwide) dividend income and passive interest income. The current maximum eligibility period is 17 years. The presentation did not discuss the length of the proposed extension period (beyond the current maximum of 17 years), nor the amount of the proposed annual fee in the extension period. 

Capital Gains Tax (CGT)  

• Retain the current scope, i.e., applicable only to transactions related directly or indirectly to immovable property located in Cyprus, but with modernization of the law.  

Observation: Retaining the current scope of CGT maintains the long-standing Cyprus approach to the taxation of capital gains, i.e., its application only on immovable property in Cyprus. Details of the proposed modernization of the law were not fully analyzed.