Cyprus's tax reform, passed in December 2025, raised the corporate tax rate from 12.5 per cent to 15 per cent from 1 January 2026. Other measures, including a new residency test for Cyprus companies, may have a greater practical impact on existing structures. For most clients, the more important question is whether their structure remains fit for purpose.
What the 15 per cent rate means in practice
Under the Organisation for Economic Co-operation and Development (OECD) Pillar Two framework, multinational groups above the relevant revenue threshold are generally subject to a minimum effective tax rate of 15 per cent. Where a Cyprus subsidiary was taxed at 12.5 per cent, the additional tax could be collected elsewhere in the group through a top-up tax mechanism.
For many groups within the scope of Pillar Two, the overall tax liability may therefore remain broadly unchanged. What changes is which jurisdiction collects the tax.
For groups outside the scope of Pillar Two, the issue was not simply the Cyprus tax rate, but how other jurisdictions treated it.
Many countries apply controlled foreign company (CFC) rules to subsidiaries taxed significantly below the parent company's domestic rate. At 12.5 per cent, the previous Cyprus rate was close to, or below, the relevant threshold in several jurisdictions.
That could mean income being attributed to the parent company, closer audit and due diligence scrutiny, and longer bank onboarding reviews. Aligning the Cyprus rate with the 15 per cent international standard may make these issues less likely.
Other elements of the reform
Several established features of the Cyprus tax framework remain in place:
- Participation exemption: dividend income and gains on the disposal of qualifying shareholdings and other securities remain exempt from tax.
- Intellectual property (IP) box: the 80 per cent deduction on qualifying IP income continues.
- Notional interest deduction: the deduction on qualifying new equity remains available.
- Tonnage tax regime: the existing regime continues to apply.
- Treaty network: Cyprus retains its network of more than 65 double tax treaties.
Non-domicile regime: this remains a key feature of private client planning. Under a new extension mechanism, individuals whose standard 17-year exemption has ended can elect to extend their exemption from special defence contribution (SDC) in five-year blocks at €250,000 each, for up to two blocks: ten additional years at a maximum cost of €500,000. The reform also introduces several changes:
- Deemed dividend distribution: abolished for profits earned from 1 January 2026, with transitional rules for undistributed profits from 2024 and 2025 until the end of 2027.
- Special defence contribution: SDC on dividends paid to Cyprus-domiciled tax residents falls from 17 per cent to 5 per cent for profits earned from 2026 onwards, and SDC on rental income is abolished.
Other measures: stamp duty is abolished, tax losses can be carried forward for seven years, the research and development (R&D) super-deduction rises to 120 per cent of qualifying expenditure until the end of 2030, and the 60-day tax residency route is simplified.
How the new incorporation test changes company tax residency
A less widely discussed change concerns the tax residency of Cyprus companies.
Under the new incorporation test, a company incorporated in Cyprus is treated as Cyprus tax resident unless a double tax treaty provides otherwise. The previous condition, that the company must not be tax resident in another jurisdiction, has been removed. Companies that transfer their registered office to Cyprus are also treated as incorporated there.
For most businesses, this brings greater clarity. Legacy structures may feel it more, particularly Cyprus-incorporated companies managed from another jurisdiction. These companies may now be Cyprus tax resident by default, which can create residency conflicts or additional filing obligations.
Where and how such a company is managed in practice, and whether that is properly documented, has become more important. Groups with Cyprus-incorporated entities managed outside Cyprus should review their position.
What this means for existing Cyprus structures
Cyprus structures are generally set up with a long-term view and should remain effective through changes in ownership, management, advisers and regulation.
The move to 15 per cent aligns the Cyprus rate with the international benchmark of Pillar Two, while the established features of the Cyprus framework remain in place.
The reform also places greater emphasis on substance. A structure should reflect a clear commercial rationale, with appropriate activity, management and governance in Cyprus.
In practice, banks, auditors and counterparties will typically look for:
- Commercial rationale: a clear, documented reason for the entity and its location, consistent with the wider business or family objectives.
- Substance: activity, people and premises in Cyprus that are proportionate to what the company does.
- Management and control: board decisions taken, and properly recorded, where the company is said to be managed.
- Governance: suitably qualified directors, accurate statutory records, and timely accounts and filings.
- Transparency: up-to-date ownership and beneficial ownership information, and documentation that supports banking and due diligence reviews.
How Ascentium Fiduciary can help
The reform creates immediate administrative requirements, including elections, transitional provisions and the treatment of undistributed 2024 and 2025 profits, alongside a wider need to review existing structures.
Our Cyprus team supports clients with reviewing and maintaining their structures against current international standards, including governance, substance and decision-making in Cyprus, statutory records and filings, and the residency implications of the incorporation test. Where tax advice is required, we work alongside clients' own tax advisers.
Our people and local presence remain unchanged. Now operating as Ascentium Fiduciary, we are part of an international group with more than 50 years of experience in fiduciary services across Asia Pacific, Europe, the Middle East and Africa, and the Americas. This means we can support clients whose structures and interests span several jurisdictions through one coordinated team.
Clients with Cyprus entities that have not been reviewed since the reform should do so before their first filing under the new rules.
Contact us to discuss your Cyprus structure: Ascentium Fiduciary
