The main provisions of the six tax reform bills - What is anticipated to change for businesses and households

The six tax reform bills, which have been approved by the Cabinet, have now been submitted to Parliament.

According to the accompanying reports, the aim of tax reform is to ensure a fairer tax system, which would burden different economic strata proportionally, and strengthen tax justice, while simultaneously reducing inequalities.

The six tax reform bills , which were approved by the Cabient on Wednesday 29 October, have been before Parliament since Thursday, 30 October.

According to the accompanying reports, the aim of tax reform is to ensure a fairer tax system, which would burden different economic strata proportionally, and strengthen tax justice, while simultaneously reducing inequalities.

"On Tax Verification and Collection"

With regard to the first bill amending the "Tax Assessment and Collection Laws of 1978 to 2025," the ultimate goal of the proposed amendments is the rationalisation of tax returns and payment of the tax due and the suppression of tax evasion as well as the strengthening of the powers of the Taxation Department to collect taxes due.

The proposed bill also legislates the following, indicatively from 1 January, 2026:

• The threshold for mandatory submission of audited accounts by an individual is increased from €70,000 to €120,000 of gross income,
• The provisions for serving notices to taxpayers in secure ways are being modernised,
• The date for submitting tax returns for legal entities is postponed until 31 January of the year following the tax year and this date will also apply to the payment of corporate tax,
• The submission of a tax return is made mandatory by all natural persons who are residents of the Republic aged 25 years and over, regardless of whether they have taxable income, in order to broaden the tax base and strengthen tax revenues,
• Mandatory submission of tax returns by cooperatives is introduced,
• It is clarified that in the case of a cooperative that is an investment fund, the tax return is submitted by the manager,
• The deadline for submitting a complaint to the Tax Commissioner is extended to 60 days,
• The Tax Commissioner is given the opportunity to request the submission of a statement of assets and liabilities covering a period of eight (8) years and the mandatory retention of data supporting the tax return for eight (8) years, after the actual date of submission of the return,
• An employer declaration is required for all employees, regardless of income level,
• The powers of the Tax Department to require the provision of tax information regardless of banking or professional secrecy are strengthened,
• The possibility of suspending the operation of a business and sealing its premises is introduced, following a relevant decision by the Tax Commissioner and after necessarily having been preceded by three written warnings, in cases where the person carrying out the business in question repeatedly violates his tax obligations or has not issued or has issued a number of inaccurate invoices and receipts or obstructs the conduct of a tax audit,
• Administrative fines and financial charges are amended to enhance voluntary compliance.

Second bill

The second bill, entitled "Income Tax Laws of 2002 to (No. 2) of 2025", includes the following basic provisions:

• For individuals, tax scales are revised and expanded with a horizontal increase in the tax-free amount from €19,500 to €20,500,
• In cases where the family annual income (of spouses/partners) is less than €80,000 or for large families it is less than €100,000 or for singles it is less than €40,000, each spouse or partner is granted the following tax exemptions for:

  (a) each child €1,000 (single-parent families are classified in the most favorable scenario, i.e. €2,000 discount per child)

  (b) each student €1,000,

  (c) interest on a serviced loan for the purchase of a primary residence or for the rental of a primary residence is granted a discount of up to €1,500,

• For energy upgrades of a main residence or for the purchase of a new electric vehicle, a discount of up to €1,000 is granted.
• The corporate tax rate increases from 12.5% ​​to 15 %,
• A special method of taxation of profits from the disposal of cryptocurrencies is introduced with a horizontal rate of 8% (any losses from disposal can be offset against profits within the same year),
• The loss carryforward period is extended from 5 years to 7 years,
• The 120% super-deduction for research and development expenses of an intangible asset is extended until 2030,
• The maximum limit for entertainment expenses deductible from taxable income is increased to €30,000 from €17,086,
• The cost of initial listing on a recognised stock exchange is deductible for tax purposes up to the amount of €300,000 (any unused amount based on a de minimis plan may be used within 3 years),
• A special taxation method of 8% is introduced on stock options (up to twice the employee's earnings) based on an approved employer benefit plan, it is noted that the benefit cannot exceed the amount of €1 million within the 10-year period,
• Increased capital allowance rates for expenses related to energy upgrades of businesses are extended until 2030,
• The maximum limits per category of controlled transactions for which taxpayers are exempted from the obligation to maintain a Cyprus Documentation File are being increased. For financial transactions, the limit will be €10 million, for purchases and sales of goods €5 million and for other transactions €2.5 million.
• It is clarified that gratuitous payments paid by an employer in a lump sum (at the beginning or end of employment) are subject to income taxation at a horizontal rate of 20%, after granting a tax-free amount of €200,000 in cases where the gratuitous compensation is given due to termination of employment ,
• The deduction on the taxable income of individuals is extended for insurance premiums for permanent or partial disability coverage, in addition to life insurance,
• Home insurance premiums against natural disaster risks are granted as a deduction of up to €500 on an individual's taxable income,
• Increased capital allowances of twenty percent (20%) are granted for expenses incurred on machinery and facilities used for agricultural or livestock production, after deducting any subsidy amount,
• It is clarified that the interest income of an individual, provident fund, state organisations, local government authorities and General Government entities is exempt from income tax and is subject to an extraordinary defense contribution,
• It is determined that income from interest on a collective investment plan (open or closed type) is subject to income tax and is exempt from the imposition of an extraordinary defense contribution ,
• The special pension regime from the provision of services abroad is amended, where for an amount exceeding €5,000 (instead of €3,420) it will be taxed at 5%,
• It is clarified that from 1 January, 2031, the profit from the redemption of a unit or share in an open-ended or closed-ended collective investment plan constitutes a dividend.

At the same time, measures are being introduced that aim to combat tax evasion and tax avoidance, with the aim of increasing tax compliance and protecting public revenues, the following are indicative:

• It is clarified that legal entities that have been established or registered in the Republic are considered tax residents of Cyprus,
• It is determined that provident and pension funds are normally subject to taxation if they carry on a business or in the case of exploitation of real estate,
• The granting of a deduction for interest on the acquisition of shares of a 100% subsidiary is abolished , with transitional provisions until 2027, for investments made until 31 December, 2025. In cases where the subsidiary is located in a non-cooperative jurisdiction, no deduction is granted,
• It is clarified that the profit of a permanent establishment located in a non-cooperative jurisdiction is not exempt from income tax ,
• The amount of fines is modified in order to strengthen voluntary compliance.

Extraordinary contribution for defence

The third bill amends the " Extraordinary Contribution for the Defence of the Republic Laws of 2002 to (No. 2) of 2025," includes provisions that are the result of the study carried out by an independent person, within the framework of the Republic's commitments regarding milestone 211 of reform 10 (combating aggressive tax planning) of pillar 3.5 (Ensuring Fiscal and Financial Stability) of the Recovery and Resilience Plan (RRP).

The milestone in question, it is reported, is included in the 10th payment installment of €190 million.

According to the introductory report, the study aimed to conduct an in-depth analysis of the tax framework of Cyprus through a detailed analysis of the relevant Laws, as to whether there are relevant provisions that lead legal entities to aggressive tax planning practices.

As stated in the relevant milestone, if the study shows that such provisions exist in the legislation, they should be amended or repealed accordingly within the first half of 2026.

Based on the report accompanying the bill, its main provisions are:

• The deemed dividend distribution on profits acquired after 1 January, 2026 is abolished,
• The rate of imposition of the extraordinary defense contribution on the actual dividend distribution is reduced from 17% to 5%, for profits generated after 1 January, 2026,
• The imposition of an extraordinary defense contribution on rental income is abolished ,
• A 5% withholding tax is imposed on dividends on income paid to a company resident in a low tax jurisdiction,
• The extraordinary contribution withholding tax rate on interest from government bonds of another Member State and on Health Insurance Fund deposits is reduced to 3%,
• The rate of withholding tax on interest earned by a religious, charitable or educational institution of a public nature, as well as companies of the Republic established exclusively for the promotion of art, science or sports, is reduced to 3%.
• It is clarified that interest paid on bonds listed on the New Market of the CSE is subject to an extraordinary defense contribution of 3%,
• An alternative method of taxation for non-residents (Non-Domicile) is introduced after reaching the age of 17 in Cyprus for a period of 5 plus 5 years with the payment of a lump sum of €250,000 for the five-year period,
• The payment of the extraordinary defense contribution for income from foreign dividends and interest is simplified (from two installments to one) and will be paid upon submission of the income tax return.

At the same time, the bill introduces measures aimed at combating tax evasion and tax avoidance, with the aim of protecting public revenues. The following are indicative:

• Anti-abusive measures are foreseen for concealed dividend distribution with an extraordinary defense contribution of 10%,
• It is clarified that the capitalisation of a profit and loss reserve constitutes a dividend distribution ,
• It is determined that from 1 January, 2031, profits distributed by a collective investment plan upon redemption of the share are subject to an extraordinary defense contribution as a dividend,
• It is clarified that for the purpose of granting the relevant exceptions to the Law, a listed company is considered to be one that has been listed on the regulated stock exchange market,
• A general rule against abuse is introduced,
• The amount of fines is modified in order to strengthen voluntary compliance.

Capital gains

Regarding the fourth bill amending the " Capital Gains Law of 1980 to 2025", its main provisions concern:

• The exemption applicable in cases of exchange of real estate is also extended to the consideration of real estate,
• The exemption limits in the Law are being expanded to reflect current circumstances.

At the same time, measures are being introduced aimed at combating tax evasion and tax avoidance, with the aim of protecting public revenues.

The following are indicative:

• The term real estate is amended to reduce the percentage subject to taxation and includes disposals of shares of companies where the market value of the real estate derives indirectly by 20% (instead of 50%) from real estate in the Republic, in order to address tax avoidance phenomena,
• In the case of a disposal of company shares , the market value of which is essentially represented by the market value of the real estate, is defined as the proceeds of disposal of the shares as declared by the parties, adjusted with the market value of other assets and liabilities,
• A provision is introduced whereby the Tax Commissioner may not consent to the transfer of real estate in cases where the testator or the purchaser is not fully compliant with their tax obligations (excluding sales),
• Administrative fines are amended to enhance voluntary compliance.

Fifth bill

With the fifth bill amending the " Tax Collection Laws of 1962 to (No. 2) of 2024", the following are promoted:

• Existing provisions regarding the freezing of bank accounts, movable property and registration of encumbrances on immovable property are strengthened.
• A new provision is introduced to strengthen the collection measures of the Tax Department for the seizure of company shares for tax due,
• A provision is introduced whereby the transfer of property for the benefit of the Republic is accepted (upon request by the taxpayer), in return for the repayment of tax debts , with the aim of providing taxpayers with an alternative method of repaying debts.

"Stamps Law"

Finally, the sixth bill is titled " Stamp Laws of 1963 to 2024 " and the most basic provisions included in it are the deletion of the provisions that make the stamping of documents mandatory, with the exception of :

• contracts in the financial services sector,
• insurance contracts,
• contracts concerning transfers of real estate and leases of real estate valued at more than fifty thousand euros (€50,000).

(Source: InBusinessNew)