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Cyprus Tax Reform 2026: Key Changes for Businesses and Individuals
In 2025, the Cyprus government conducted an extensive review of the tax framework of the country. These reforms came into effect on 1 January 2026. The changes are aimed at aligning Cyprus with the international standards on tax, while maintaining the jurisdiction’s competitiveness.
In this article, we summarise the main points of the tax reform. These reforms are relevant to both, companies and individuals.
Key Measures Introduced
- The corporate tax rate has been raised from 12.5% to 15%
- Deemed dividend distribution no longer applies for profits earned from 1 January 2026 onwards
- Tax losses may now be carried forward for 7 years instead of 5
- The 120% super-deduction for qualifying R&D expenditure related to IP assets is extended to 2030
- Maximum allowance for entertainment expenses has been increased to €30,000
- Special Defence Contribution on dividends has been reduced from 17% to 5% on actual dividend distributions of profits earned from 1 January 2026 onwards
- The 3% Special Defence Contribution on rental income has been abolished
- Gains from the disposal of cryptocurrencies are now subject to tax at 8%
- Stock options granted under an approved employer plan are taxed at 8%
- Ex-gratia termination payments are exempt up to €200,000 and taxed at 20% thereafter
- Stamp duty has been abolished
Overview of the Cyprus Tax Reform 2026
The Cyprus tax reform of 2026 mainly focuses on three important pillars:
- International alignment, mainly with the OECD and EU initiatives
- A fairer distribution of the tax burden
- Incentives are designed to promote investment, innovation and entrepreneurship
Cyprus is making advancements toward a more substance-driven and cash-flow-friendly tax environment. This is done by eliminating outdated concepts such as Deemed Dividend Distribution and refining the Special Defence Contribution rules.
Corporate Tax Changes and Business Implications
Corporate Income Tax Rate Increased to 15%
Effective 1 January 2026, the corporate income tax rate has been raised from 12.5% to 15%. This modification aligns Cyprus with the OECD’s global minimum tax framework and reflects broader international tax uniformity initiatives.
Even with the higher tax, Cyprus still has one of the lowest corporate tax rates in the European Union. It also offers a highly favourable exemption regime for financing and holding activities.
The capital gains exemptions, participation exemptions on dividends and incentives related to intellectual property (IP) remain unchanged. In comparison to other European jurisdictions, the effective tax burden remains competitive for most international groups.
Elimination of Deemed Dividend Distribution
One of the most important changes is that the deemed dividend distribution will no longer apply to earnings made after 1 January 2026.
Previously, companies were forced to pay tax on their undistributed profits if they failed to pay out dividends. This often led to cashflow problems and less retained profits.
Under the new system, companies are no longer penalised for retaining profits rather than paying out dividends. This allows profits to be reinvested, leading to the company’s enhanced value.
This change is especially beneficial for investment holding companies and for businesses which are growing fast.
Extension of the Tax Losses Carry-Forward Period
The carry-forward period for tax losses has been extended from five to seven years.
Businesses can benefit from this change if they have varying levels of profit, high upfront costs or longer-term investing and/or developing objectives.
The additional degree of flexibility will primarily benefit capital-intensive industries (eg tech, energy, infrastructure), startups and R&D-based businesses.
Expansion of Research and Development Incentives
The 120% super-deduction for qualifying R&D expenditure related to intellectual property assets has been extended until 2030.
This renders Cyprus more attractive for technology companies and businesses which are IP-intensive or prioritise innovation.
Enhanced Deductibility of Entertainment Expenses
The maximum deductible amount for entertainment expenses has been raised to €30,000.
This is especially pertinent to professional services firms, client-facing businesses and those operating in industries which value business development and relationship management.
Dividend and Investment Income Reforms
Special Defence Contribution on Dividends Reduced
The rate of the Special Defence Contribution on dividends has considerably decreased from 17% to 5%. This applies to actual dividend payments on profits earned from 1 January 2026 onwards.
This change applies to persons who are both tax-resident and domiciled in Cyprus. This is a major improvement in post-tax dividend income and encourages transparent dividend practices.
Dividends paid to low-tax jurisdictions will also be subject to 5% Special Defence Contribution, while dividends paid to EU blacklisted jurisdictions will attract 17% Special Defence Contribution.
This change introduces a more certain dividend taxation regime and a more attractive environment for investors when coupled with the abolition of the deemed dividend distribution.
Abolition of Special Defence Contribution on Rental Income
The 3% Special Defense Contribution on rental income no longer applies, following the Cyprus Tax Reform 2026. This eliminates a tax which taxpayers were subjected to over and above their regular income tax.
This change makes Cyprus a more attractive place to invest in real estate and increases net rental yields.
Tax on Digital Assets and Cryptocurrencies
Cyprus has introduced a new tax regime for digital assets and cryptocurrencies as part of its Tax Reform 2026. The profit on sale of cryptocurrencies now attracts a flat tax of 8% and you can offset gains and losses within the same year to reduce your tax liability.
This gives businesses and individuals who work with digital assets a clear and straightforward tax regime.
Personal Tax Reforms
Employee Incentives and Stock Options
Stock option benefits granted under approved employer plans will be subject to a preferential 8% tax rate under the new regime.
This metric is particularly beneficial for attracting and retaining personnel in technology-driven companies, startups and international businesses that use equity-based compensation.
Gratuities for Termination
Gratuities received upon termination of employment are now tax-exempt up to an amount of €200,000. Any amount over and above €200,000 is taxed at a flat rate of 20%.
This introduces a tax treatment which is more predictable and transparent for long-serving employees and senior executives.
What the Cyprus Tax Reform Means for Businesses and Individuals
The Cyprus Tax Reform 2026 aims to modernise the tax system, while maintaining the reputation of Cyprus as a favourable location for international business. It is recommended that companies review their dividend policies, investment strategies and structures. It is also advisable that individuals revisit their tax residency, asset holdings and income arrangements.
Through appropriate planning, the full potential of the new tax system can be maximised, while ensuring compliance in 2026.
In Conclusion
Although there have been changes in certain tax incentives, the changes have clarified, simplified and stabilised the system forthe long run. Cyprus remains a very attractive location for businesses, investors and individuals alike, provided they plan well.
If you wish to know more about how the Cyprus Tax Reform 2026 can impact your business or you, contact us.