Cyprus tax reform project update

What happened?

An update on the Cyprus tax reform project was given recently 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 2025and expected enactment is as from 1 January 2026. Once the project is finalized, the legislative process will begin. This will include the Cyprus Parliament’s voting to approve the legislation. We note that some of the below 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.

Below is a summary of the main points presented. The presented items are the current thinking on the way forward.

Corporate income tax (CIT)

• Increase the CIT statutory rate from the current 12.5% to 15%.

Observation: Beyond the anticipated increase of the statutory tax rate, the new law will retain the Cyprus corporate tax base as is and importantly all the deductions, exemptions and other attributes of it, namely:

• Foreign branch profits exemption (with election to disapply such),
• Unilateral FTCs on any foreign withholding taxes,
• Notional Interest Deduction (NID) – up to 80% of otherwise computed taxable income,
• Modified nexus IP Box – up to 80% of qualifying net taxable income (granted concurrently with NID),
• No recapture / clawback of previously claimed annual tax amortization on disposals of intangibles,
• Dividend participation exemption with no percentage holding or holding period requirements,
• Unconditional tax exemption on gains on disposals of shares and other “corporate titles” (e.g., bonds, debentures, options on titles),
• Tax neutrality on FX,
• No withholding taxes on dividend, interest and (most) royalties paid abroad at all times (except where paid to EU Blacklisted jurisdictions).

Further, the Pillar Two implementation of Cyprus which includes amongst other a Cyprus Domestic Minimum Top-Up Tax (DMTT) effective practically as from 2025 is not in any way impacted. As a reminder, the Cyprus DMTT, in the same manner as the QIIR and the QUTPR, includes provisions with respect to the specific allocation of covered taxes incurred by other constituent entities, such as for the so-called ‘push-down’ of Controlled Foreign Company (CFC) e.g., GILTI, Head Office as well as Hybrid Entity taxes unlike a QDMTT does. It also fully respects the safe harbor provisions (such as the Transitional CbCR Safe Harbour).

• Study whether tax losses may be carried forward for 10 years, under conditions or ceilings.

Observation: The current carryforward period for tax losses is five years.

• Maintain the current group relief rules.

Observation: Currently, under 75% relationship conditions, group relief is available for current year tax losses. This is also expected to be maintained.

• Consider more closely aligning the tax depreciation rules on second-hand buildings to the corresponding rules of other types of tangible assets.
•  Improve the tax-qualifying reorganization provisions to facilitate family business splits.
• Retain the current tax rules that relate to the Tonnage Tax regime for eligible shipping income as per the EU secured EU State Aid approval.

Observation: The aim is to modernise and provide more flexibility on certain such provisions of the current law.

• Introduce incentives for green transition and digital transformation that may include:
  • enhanced deductions and tax depreciation,
  • accelerated tax deprecation,
  • deductions for upskilling or reskilling staff,
  • carry forward of related losses without time restriction.

Observation: The exact nature of these incentives was not fully analyzed.

Special Defense Contribution (SDC)

• Reduce the SDC rate on actual dividend income from 17% to 5%, paid to Cyprus tax resident and domiciled individuals; 0% retained in all other cases.

Observation: Dividend tax burden differential between Cyprus tax resident and domiciled individuals is very much narrowed vis a vis the nil taxation of non-Cyprus tax residents and Cyprus tax resident – non domiciles, 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.

Stamp duty

• The scope of stamp duty will be limited to documents relating to transactions involving immovable property of the Financial Sector and Insurance Sector.

Observation: This scope limitation would modernize the Cyprus tax system given that currently a much wider set of transactions fall within the scope of stamp duty.

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.