a series of significant recommendations aimed at strengthening tax policy in Cyprus

The proposed tax reform, presented by the Economic Research Center of the University of Cyprus, includes a series of significant recommendations aimed at strengthening tax policy in Cyprus.

Τhe recommendations are subject to further consultations , suggestions and recommendations and discussions with stakeholders, and any changes will only be implemented after the approval of the relevant bills by the Parliament of Cyprus and their publication in the Official Gazette of the Republic. KPMG in Cyprus will monitor developments and publish the relevant informational bulletins.

1. Changes for Individuals:

• Increase in the tax-free income threshold by €1.000, raising it to €20.500, adjustment of tax brackets, and shifting the highest tax rate of 35% to taxable income exceeding €80.000.

Revised Tax Brackets and Rates:

Current Tax Brackets and Rates:

• Tax deductions applied based on household income criteria, for households with two working partners/spouses with a total gross income of up to €80.000: 
  1. €1.000 for each spouse/partner per child (under 19 (F)/21 (M) years old).
  2. €1,.000 for each spouse/partner per student (up to 23 (F)/25 (M) years old).
  3. Up to €1.500 per spouse/partner for mortgage loan installments or rent for the primary residence.
  4. Up to €1.000 per spouse/partner for green household upgrades in the year the upgrade is made, e.g. up to 5 years (e.g. energy upgrades of homes, installation of photovoltaic systems, heat pumps, electric cars, etc.).
  5. Single-parent families will be classified under the most favorable scenario (as families with two working parents).

2. Retention of Benefits for Cyprus Tax Residents:

• Taxation of worldwide income with exceptions/deductions.
• Deduction of expenses for generating taxable income.
• Notional Interest Deduction (NID).
• Shipping regime and a 50% tax exemption for first-time employment in the Republic.
• Tax Exemption on the profit from the sale of securities 
   

3. Revision of Tax Residency Criteria for Companies:

• Strengthening the tax residency criteria for companies based on control and management.
  
• Implementation of a framework for intangible assets (IP Box).
   

4. Abolition of Deemed Dividend Distribution:

• Complete abolition of the deemed dividend distribution regime.
• Implementation of a 5% withholding tax on actual dividend distributions for Cyprus tax residents who are also domiciled in Cyprus.
• Introduction of an anti-avoidance clause, imposing a higher withholding tax rate than 5% for disguised dividend distributions (Estonian model).
   

5. Increase in Corporate Tax:

• Increase in the corporate tax rate from 12.5% to 15%.
   

6. Measures Against "Closely Held Companies":

• Ability to lift corporate veil and tax shareholders as individuals conducting business.
• Ability to adjust salaries to reflect market rates.
   

7. Strategy for Green Transition and Digital Transformation:

• Proposals for super deductions for expenses/depreciation, accelerated depreciation, and deductions for skill upgrades and employee retraining.
• Losses from these measures can be carried forward without restrictions.
   

8. Strengthening Tax Residency Criteria for Individuals:

• Retention of the 183-day rule and strengthening of the 60-day rule.
• Expansion of the definition to include individuals with a business center of activity in Cyprus (based on the French model).
• Resolution of dual tax residency issues according to the Double Taxation Avoidance Agreement.
   

9. Non-Domiciled (Non-Dom) Regime:

• Retention of the non-dom regime with extensions and the imposition of an annual fee.

• February – March 2025: Drafting the revised legislation
• March – April 2025: Finalisation of Tax Reform Proposal
• July 2025: Final Report
• 1st September 2025: Completion of the Committee Assignment and submission of the proposed revised legislation to the Parliament