Around 20 years ago, Cyprus transitioned its tax system from a dual, “offshore‑friendly” structure with very low corporate tax for international business companies and a separate, higher‑tax domestic regime, to a more unified, EU‑compatible model that helped attract foreign capital to the island.
The move proved highly successful. Tax revenues have risen significantly since then, reaching record highs in 2025. Indicatively, total tax receipts increased to around EUR 8.5 billion, a significant rise from around EUR 3.8 billion in 2005. Registrations of Cypriot companies also rose sharply over the same period - from around 130,000 to around 200,000. While Cyprus’ European Union (EU) and European Economic Area (EEA) accessions contributed to its overall economic development, it was undeniably the island’s tax system that acted as the central catalyst.
Given the tax system’s importance to Cyprus’ economy, one must ask: How crucial is for the tax reform to remain on the right path? Are the upcoming changes heading in the proper direction -or is the island risking the dismantling of what has been carefully built over two decades?
A closer look suggests that the Government’s “tax‑reform mandate” has revolved mainly around two pillars:
- Narrowing the tax gap between locally owned and foreign‑owned (referred to as non-domiciled or “non‑dom”) businesses
- Reducing the overall tax burden on middle‑class taxpayers
The gap between locals and foreigners is most evident among small and medium‑sized trading businesses with physical presence in Cyprus. Consider two similarly sized car dealerships (both incorporated legal entities): one owned by a Cyprus tax‑resident and non‑dom, and the other by a local, “born and raised” Cypriot. For every EUR 100 of profit earned, the foreign owner pays EUR 12.5 corporate tax and zero tax on dividends, while the local owner pays approximately EUR 27 combined (corporate and dividend) tax (ignoring GESY at 2.65% in both cases). One could argue-perhaps rightfully-that this discrepancy grants the foreign investor a competitive advantage, allowing more capital for reinvestment, advertising and negotiating better deals. The proposed changes do narrow this gap. Dividend tax for locals is reduced to 5% (from 17%) and corporate tax is increased to 15% (from 12.5%). Mathematically, this lowers the local owner’s effective tax burden to about 20%, while increasing the non‑dom owner’s burden to 15%. The “gap” therefore does shrink, from around 15% pre‑reform, to 5% post‑reform.
On the middle-class tax burden, Cyprus already imposes one of the lowest effective tax rates in the EU for employees (and self‑employed individuals), complemented by one of the highest tax‑free thresholds in the EU-which is now set to increase further. This raises legitimate questions regarding the true intent or necessity of further reductions, even though the move itself is broadly welcomed.
So why the backlash from tax (and other) professionals? The backlash stems largely from the tax reform’s gradual deviation from its original two‑pillar mandate, since a third pillar seems to have been informally added, broadly perceived as a push by the tax authorities to amend Cyprus’ “aggressive tax planning loopholes” and to combat tax evasion.
Aggressive tax planning mechanisms form a legal and integral part of a jurisdiction’s strategy in the increasingly competitive race to attract foreign investment. While most measures were ultimately left untouched, this occurred only after months of debate, extensive pushback and last‑minute revisions before the amendments were sent to Parliament.
Furthermore, the proposed reforms introduce nothing particularly new or innovative (crypto tax aside). In contrast, during 2015 the then Government demonstrated notable boldness-during a period of severe financial strain-by abolishing dividend tax for non‑doms (the “non‑dom regime”) and introducing tax deductions for equity‑funded companies (the “NID regime”). These measures directly contributed to today’s robust economic performance.
On the issue of tax evasion, black economy is undeniably a serious problem across many countries and must be tackled with well‑targeted measures. Studies consistently show that the primary source of EU tax evasion originates from self‑employed individuals and unreported “side hustles.” Examples include teachers conducting private lessons or tradespeople (plumbers, electricians, etc.) underreporting income and not charging VAT. Yet few-if any-of the proposed reforms directly address this segment. Most anti‑evasion provisions focus instead on legal entities, missing the heart of the problem.
So, is the island risking its biggest economic success?
It is only fair to argue that Cyprus’s (direct) tax system will be improved following the reform, albeit moderately and without any groundbreaking innovations. Cyprus’ Parliament is currently analysing the changes, with an apparent intention to enact them into law before year‑end. With parliamentary elections approaching and the threat of populism looming, it may be more important than ever for Cyprus to get this reform right (the soonest), just as it did 20 years ago.
- By Marios Papageorgiou, Tax Advisor
