BDO Corporate Tax News

Cyprus enacted a significant tax reform package effective 1 January 2026, introducing a range of measures that will impact businesses operating in the country. Key elements include an increase in the corporate tax rate from 12.5% to 15% to align with global minimum tax standards, enhanced R&D deductions and reductions to the Special Defence Contribution (SDC). 

Below is a summary of the principal changes affecting businesses:

Corporate Income Tax

• The corporate income tax rate is increased from 12.5% to 15%.
• Companies incorporated in Cyprus are now deemed Cyprus tax residents unless an applicable double tax treaty provides otherwise, removing the prior requirement that they not be tax resident in another state.
• The tax loss carry forward period is extended from five to seven years.
• For group relief, companies must first offset any taxable income against their own carried forward losses before they can utilise the losses of other group companies.
• Intangible assets with an indefinite life are now amortised over 20 years (extended from 10 years). 
• A 20% “super tax deduction” is introduced for scientific research and R&D expenses incurred during the period 2025-2030.
• Ex-gratia payments to employees, including retirement, termination, appointment and golden handshake payments, are non-deductible.
• Interest expense on the acquisition of no business assets is disallowed except for private motor vehicles, which remain restricted for seven years.
• The maximum deductible entertainment expenses are increased from EUR 17,100 to EUR 30,000 (subject to a cap of 1% of revenue).
• Expenses in respect of the listing of shares on a recognised stock exchange are deductible up to EUR 300,000 (subject to conditions).
• Premium tax for life insurance companies is abolished.
• The annual thresholds for preparing a transfer pricing local file are increased to:
  • Sale of goods: EUR 5 million
  • Financing: EUR 10 million
  • All other transactions with related parties: EUR 2.5 million
• As from 1 January 2031, gains from the redemption of fund units exceeding the acquisition cost will be treated as dividends and taxed accordingly (previously exempt as profit on shares).
• Interest income received by Cyprus tax resident business companies is now taxed under the corporate income tax law.
• An 8% flat rate tax is introduced on gains from the sale, gift or exchange of crypto assets (excluding mined assets). Losses may only offset crypto gains in the same year and cannot be carried forward or offset through group relief.

Capital Gains Tax

• The threshold for classifying immovable property held directly or indirectly through corporate vehicles is reduced from 50% of the value of the property to 20%.
• The exemption from capital gains tax on the disposal of shares of companies listed on the Cyprus Stock Exchange Emerging Companies Market (that directly or indirectly own Cyprus property) has been abolished, with the exemption applying only to already-listed companies. The exemption now applies to companies listed on a regulated market.

Stamp Duty Law

The stamp duty law has been abolished. 

Special Contribution for Defence

• The SDC applicable on dividends earned by Cyprus tax resident and domiciled individuals is reduced from 17% to 5% in respect of dividends paid out of profits earned as from 1 January 2026.
• The deemed dividend distribution (DDD) provisions on profits earned from 1 January 2026 are abolished. DDD on undistributed profits from 2024 and 2025 remains in effect through 31 December 2027.
• Dividend payments to related companies in “blacklist countries” remain subject to SDC withholding at the rate of 17%; dividends payments to related companies in low-tax jurisdictions are subject to the reduced 5% rate.
• The definition of dividends is expanded to include assets distributed to shareholders through capital reductions, dissolutions, liquidations and redemptions of shares. The taxable dividend equals the difference between the original paid-in capital and the market value of assets received, less any capital gains tax paid on the transfer.
• Amounts capitalised for bonus share issues are treated as dividends and subject to the SDC.
• A 10% tax applies to “disguised dividends,” including:
  • The market value of company-owned assets used privately by a shareholder (unless the assets were donated to the company by the shareholder); and
  • The difference between market value and consideration paid when assets are transferred from a company to a shareholder or related person.
• Interest earned on certain Cyprus/EU government/local authority bonds are subject to a reduced rate of 3%.
• The SDC on rental income is abolished.

Assessment and Collection of Taxes

• Partnerships are obliged to submit tax returns.
• The statute of limitations is now six years from the date of the submission of the tax return. Taxpayers must retain their books and records for this period.
• New powers have been given to the Commissioner of Tax to ensure tax compliance and collection, with increased fines and potentially even the suspension of business and registration of a lien on corporate shares as security for tax owed.
• A director continues to be liable for actions or omissions that have taken place during their term irrespective of the fact that they may have resigned before proceedings commenced.

BDO Take

Taxpayers should review the detailed provisions of the tax reform package to understand the implications for their operations and determine the steps required for full and timely compliance.

Angelos Petrou
Nikos Katsaris
BDO in Cyprus