The Cyprus tax reform that took effect on 1 January 2026 is the most significant overhaul of the island's tax code in over two decades. The headline change is the increase in the corporate income tax rate from 12.5% to 15%, bringing Cyprus into line with the OECD and EU Pillar Two global minimum tax for large groups. But for most owner-managed businesses and resident individuals, the more consequential changes lie elsewhere: a sharp cut in the Special Defence Contribution (SDC) on dividends, the abolition of the deemed dividend distribution regime, a higher personal tax-free band, and longer loss carry-forward.
Crucially, the reform was surgical rather than wholesale. The features that made Cyprus attractive in the first place — the non-dom regime, the IP Box, the Notional Interest Deduction, the participation exemption and the absence of withholding taxes on most outbound payments — were deliberately preserved. This article sets out, section by section, exactly what changed and what stayed the same, with the figures you need to model the impact on a Cyprus company and its shareholders.
Why the reform happened
Cyprus did not raise its corporate rate by choice. The OECD's Pillar Two framework, adopted across the EU, sets a 15% global minimum effective tax rate for multinational groups with consolidated revenue above the agreed threshold. A 12.5% headline rate left Cyprus exposed to "top-up" taxes being collected elsewhere — meaning the difference would simply be paid in another jurisdiction rather than retained in Cyprus. Lifting the domestic rate to 15% keeps that revenue at home while removing the incentive for in-scope groups to be taxed abroad.
The government paired the corporate increase with relief for individuals and smaller businesses, so the reform is broadly revenue-neutral for many domestic structures. The cut in dividend SDC and the abolition of deemed distributions, in particular, offset much of the corporate rate rise once profits flow through to resident shareholders. For a fuller treatment of the company-level mechanics, see our tax advisory service.
Corporate income tax: 12.5% to 15%
The corporate income tax rate increased from 12.5% to 15% on company profits earned from 1 January 2026. Profits earned up to 31 December 2025 remain taxable at 12.5%, so groups with non-calendar accounting periods need to apportion. The increase applies across the board — there is no carve-out for small companies — but the wide network of exemptions that shelter much Cyprus-sourced income remains in place.
The participation exemption continues to apply, so dividends received by a Cyprus company are generally exempt, and there is no tax on gains from the disposal of securities. The IP Box regime also survives, delivering an effective rate as low as 3% on qualifying intellectual property income under the nexus approach — up from 2.5% previously, because the 80% deemed deduction now leaves the remaining 20% taxable at 15% rather than 12.5% — and the Notional Interest Deduction on new equity remains available. In practice, a well-structured Cyprus holding or financing company may still bear an effective rate well below the 15% headline.
The practical work for the 2026 transition is apportionment. A company with a calendar accounting period applies 15% to all profits arising in 2026. A company with a non-calendar period straddling 31 December 2025 must split its taxable result, applying 12.5% to the portion attributable to 2025 and 15% thereafter. Where income is lumpy — a large one-off gain or a year-end accrual — the basis of apportionment matters, and a simple time-based split may not reflect economic reality. Document the methodology in the tax computation so it can be defended on review.
It is also worth distinguishing the position of in-scope Pillar Two groups from that of ordinary domestic companies. For large multinational groups within the scope of the global minimum tax, the 15% domestic rate is what keeps any top-up tax in Cyprus rather than ceding it to another jurisdiction's qualifying rule. For the typical owner-managed Cyprus company that sits well below the Pillar Two revenue threshold, the increase is simply a rise in the headline rate — the Pillar Two machinery never engages, but the 15% rate applies all the same.
| Measure | Until 31 Dec 2025 | From 1 Jan 2026 |
|---|---|---|
| Corporate income tax rate | 12.5% | 15% |
| SDC on dividends (resident & domiciled) | 17% | 5% |
| SDC on rental income | 3% on 75% of rent | 0% (abolished) |
| Deemed dividend distribution | Applied | Abolished |
| Tax loss carry-forward | 5 years | 7 years |
| Stamp duty | Applied to most documents | Repealed for most documents |
The 15% rate is the statutory headline rate. The effective rate borne by many Cyprus companies remains lower once the NID, IP Box, participation exemption and the seven-year loss carry-forward are taken into account. Always model the effective rate, not the headline.
Special Defence Contribution on dividends
The Special Defence Contribution is the tax that has historically applied to passive income — dividends, interest and rent — of Cyprus tax residents who are also Cyprus domiciled. Before the reform, SDC on dividends paid to a resident-and-domiciled individual was charged at 17%. From 2026, on profits earned from 1 January 2026, that rate falls to 5%.
This is a substantial reduction and significantly cushions the corporate rate increase for owner-managers who draw their company's profits as dividends. Non-domiciled residents are unaffected, because they continue to pay 0% SDC on dividends — the non-dom exemption is untouched (see below).
Two points of detail matter for resident-and-domiciled shareholders. First, the 5% rate applies to dividends out of profits earned from 1 January 2026; dividends paid in 2026 but sourced from pre-2026 reserves may fall under the previous treatment, so the reserve from which a distribution is made should be identified. Second, SDC sits alongside the General Healthcare System (GHS) contribution, which continues to apply to dividend income up to the annual cap. When modelling the all-in cost of extracting profit, both the 5% SDC and the GHS charge should be layered on top of the company-level 15%.
A Cyprus company earns €100,000 of taxable profit in 2026 and distributes the after-tax amount to its sole shareholder, a resident-and-domiciled individual. Corporate tax at 15% is €15,000, leaving €85,000. SDC on that dividend at the new 5% rate is €4,250 (plus the usual General Healthcare System contribution). Under the old regime the same €100,000 would have suffered €12,500 corporate tax, then 17% SDC on the €87,500 dividend — roughly €14,875. The combined burden is therefore materially lower in 2026 despite the higher corporate rate.
Abolition of deemed dividend distribution
The deemed dividend distribution (DDD) rules were abolished for profits earned from 1 January 2026. Under the old regime, a Cyprus company that did not distribute at least 70% of its after-tax accounting profits to resident-and-domiciled shareholders within two years was deemed to have distributed them anyway, triggering SDC on the notional dividend.
Removing the DDD is a meaningful simplification. Companies can now retain and reinvest profits without the threat of a deemed distribution charge, and shareholders are taxed only when an actual dividend is paid. This change works in tandem with the lower 5% SDC rate to make profit retention and timing far more flexible than before.
For practitioners, the abolition removes a recurring year-end exercise: there is no longer any need to compute the 70% threshold, track the two-year window, or reconcile actual distributions against the deemed amount to avoid an inadvertent charge. Groups that previously distributed dividends largely to manage their DDD exposure can now set distribution policy on commercial grounds alone. Profits earned up to 31 December 2025 remain governed by the old rules, so a final DDD assessment may still arise on legacy reserves — but for 2026 profits onwards the regime is simply gone.
Personal income tax bands
For individuals, the most visible change is the increase in the tax-free band to €22,000 of annual income, up from the previous threshold. The reform also introduced a revised band structure with a new top marginal rate of 35% above €72,000. The bands apply to an individual's taxable employment, pension and other income subject to income tax.
| Annual taxable income | Rate (from 2026) |
|---|---|
| €0 – €22,000 | 0% |
| €22,001 – €32,000 | 20% |
| €32,001 – €42,000 | 25% |
| €42,001 – €72,000 | 30% |
| Over €72,000 | 35% |
The higher tax-free band reduces the burden on lower and middle earners, while the new top rate captures higher incomes. To see the effect on a specific salary, use our income tax calculator; for the company side, the corporate tax calculator reflects the 15% rate.
Reliefs that continue alongside the bands
The 50% exemption for qualifying new high-earning residents remains available: an individual taking up first employment in Cyprus with remuneration above €55,000 a year can exempt half of that income for up to 17 years. Foreign pensions also keep the 5% flat-rate option on amounts over €5,000, allowing pensioners to elect the more favourable of the flat rate or the ordinary bands.
Tax losses and stamp duty
The period for carrying forward tax losses was extended from five years to seven years. This is a welcome change for capital-intensive and early-stage businesses, which often generate losses in their first years and need a longer runway to absorb them against future profits.
Stamp duty was repealed for most documents. Historically, contracts and agreements above certain values attracted ad valorem stamp duty, creating a compliance and cash-flow cost on routine commercial documentation. Its removal for most documents reduces friction on transactions, although specific exceptions may remain — confirm the position for any particular instrument before relying on the repeal.
Rental income and capital gains
SDC on rental income was abolished, moving from a positive charge to 0%. Rental income remains subject to ordinary income tax in the individual's hands, but the additional defence contribution layer is gone, simplifying the taxation of Cyprus property income for resident-and-domiciled landlords.
On capital gains, the lifetime exemptions for disposals of Cyprus immovable property were increased. The general exemption rose to €30,000, the exemption for agricultural land to €50,000, and the exemption for a primary residence to €150,000. The capital gains tax rate on Cyprus immovable property remains at 20%.
| Capital gains lifetime exemption | From 2026 |
|---|---|
| General exemption | €30,000 |
| Agricultural land | €50,000 |
| Primary residence | €150,000 |
Crypto-asset gains
The reform addressed the treatment of crypto-asset gains, which had previously sat in an uncertain space between trading income and capital gains. In defined cases, gains on crypto-assets may now be taxed at a flat rate of 8%. The precise scope of "defined cases" — turning on factors such as the nature and frequency of activity — should be confirmed for any given investor, as the boundary between an 8%-taxable gain and ordinary trading income remains fact-sensitive. The same 8% flat rate was introduced for benefits arising under qualifying employee share and stock-option schemes, giving employers a simpler basis for incentivising staff.
New household allowances and employment measures
Alongside the higher tax-free band, the reform introduced a set of household tax allowances that reduce an individual's taxable income, subject to income thresholds. The headline reliefs are a deduction of up to €2,000 for interest on a first-home loan or rent paid, up to €1,000 for green and energy-efficiency home upgrades, up to €500 for life and medical insurance premiums, and child allowances of €1,000, €1,250 and €1,500 for the first, second and third (or further) dependent child (doubled for single-parent families). These allowances are subject to family-income ceilings — broadly €40,000 for a single individual and €100,000 for a family, rising for larger families — so higher earners may see them restricted or withdrawn.
On the employment side, ex-gratia and termination payments are now tax-free up to €200,000, with any excess taxed at 20%. Mandatory filing of a personal income tax return now applies from age 25, and the 8% flat rate on qualifying share-scheme benefits noted above sits alongside these changes. To estimate the allowances you can claim and the tax saved, use our 2026 allowances calculator.
| New 2026 measure | Treatment |
|---|---|
| First-home loan interest or rent | Allowance up to €2,000 |
| Green / energy-efficiency upgrade | Allowance up to €1,000 |
| Life & medical insurance premiums | Allowance up to €500 |
| Dependent children | €1,000 / €1,250 / €1,500 (1st / 2nd / 3rd+) |
| Ex-gratia / termination payments | Tax-free to €200,000, then 20% |
| Crypto-asset gains / share schemes | Flat 8% in defined cases |
Domicile determines exposure to the Special Defence Contribution. A Cyprus tax resident who is not domiciled in Cyprus pays 0% SDC on dividends, interest and rent. A resident who is also domiciled in Cyprus pays SDC — now at the reduced 5% rate on dividends. Domicile and residence are separate tests.
What stayed the same: the non-dom regime
The non-domicile regime was preserved without dilution. A qualifying non-dom Cyprus tax resident continues to pay no SDC on dividends, interest or rental income for up to 17 years. After that period, the reform retained the ability to extend non-dom status through two further five-year periods, each available subject to a lump-sum payment — so the practical horizon for non-dom benefits can extend well beyond the original 17 years.
For internationally mobile individuals relocating to Cyprus, this is the single most important continuity in the reform. The 5% dividend SDC change simply does not reach them, because they pay 0% in the first place. Our non-dom advisory service can confirm eligibility and structure a relocation around the residency rules.
What stayed the same: residency and incentives
The 60-day and 183-day tax-residency rules were unchanged. An individual is Cyprus tax resident under the 183-day rule by physical presence, or under the 60-day rule by meeting the combined conditions of presence, no other tax residence, and a Cyprus tie through business, employment or office.
- IP Box regime — retained unchanged in mechanics; the effective rate edges up from 2.5% to 3% on qualifying IP income, simply because the 20% taxable slice is now charged at 15% rather than 12.5%.
- Notional Interest Deduction — retained on new equity, reducing the effective corporate rate for equity-financed companies.
- Participation exemption — dividends received generally exempt; no tax on the disposal of securities.
- No withholding tax on most outbound dividends, interest and royalties, preserving Cyprus's appeal for holding and financing structures.
- 50% exemption for qualifying new high-earning residents, for up to 17 years.
What this means in practice
For owner-managers, the net effect of the reform is often neutral to positive: the corporate rate rose, but the dividend SDC cut and the abolition of deemed distributions usually more than compensate at the shareholder level. The longer loss carry-forward and the stamp duty repeal add further relief. For non-doms, the position is essentially unchanged — the benefits that drew them to Cyprus survive intact.
The practical priorities for 2026 are to apportion profits correctly across the rate change, revisit distribution policy now that the DDD threat is gone, and confirm that any reliance on the IP Box, NID or participation exemption still holds on its own terms. If you would like a structure reviewed against the new rules, get in touch and we will model the before-and-after position for your company and its shareholders.