2026 Cyprus Tax Reform: Key Changes for Companies

This page covers changes affecting Cyprus tax resident companies only. If you are an individual shareholder, business owner, or director looking for information about dividends, deemed distributions, or personal taxation, please visit the Business Owners & Shareholders page.

The 2026 Cyprus Tax Reform introduces 40 distinct changes affecting corporate entities. While the headline change is the Corporate Income Tax (CIT) rate increase from 12.5% to 15%, the reform also introduces enhanced deductions (R&D, green energy, COLA), clarifies technical provisions (group relief, transfer pricing, IP allowances), and implements stricter compliance requirements and penalties.

This guide focuses exclusively on changes effective 1 January 2026. Understanding these changes is essential for corporate tax planning, cash flow management, and compliance.

Changed Corporate Income Tax Rate: 12.5% → 15%

This is the most visible change in the reform and aligns Cyprus with international tax developments, particularly the OECD’s global minimum tax initiative under Pillar Two. While Cyprus moves from one of the lowest CIT rates in the EU, the 15% rate remains competitive and below most major European jurisdictions.

What This Means for Your Company

• Cash flow impact: Higher tax payments will affect working capital planning
• Profitability: Net profit margins will be compressed by approximately 2.5 percentage points (assuming no other changes)
• Group structures: Companies in multinational groups should review transfer pricing and profit allocation strategies
• Tax planning: Enhanced deductions (R&D, NID) become more valuable at higher rate.

New Tax Residency – Incorporation Test Added

The definition of a Cyprus tax resident company has been expanded to include an incorporation test alongside the existing management and control test.

Who is Affected

• Companies incorporated in Cyprus (regardless of where managed/controlled)
• Companies that have transferred their registered office or legal seat to Cyprus
• Holding companies and special purpose vehicles incorporated in Cyprus

Important Exception

Double tax treaty override: Companies deemed tax residents of another country by reference to an applicable double tax treaty are NOT Cyprus tax residents under the incorporation test.

This exception is critical for internationally structured groups where treaty provisions may override domestic law residency rules.

Clarification on Transferred Entities

The law explicitly clarifies that companies which have transferred their registered office or legal seat to Cyprus are considered as being incorporated in Cyprus for tax residency purposes. This provides certainty for entities that relocated to Cyprus.

Implications

• Tax residency certainty: Cyprus-incorporated companies have clear tax residency status
• Treaty planning: Companies must carefully review double tax treaties to understand residency tie-breaker rules
• Substance requirements: Even with incorporation test, companies should maintain adequate substance to support treaty positions and avoid challenges

Increased Loss Carryforward Period: 5 Years → 7 Years

The extension from 5 to 7 years brings Cyprus closer to commercial reality and international norms, providing companies with greater flexibility to utilize tax losses.

Practical Impact

• Loss preservation: Companies have 40% more time to utilize carried-forward losses
• Startup benefit: Particularly valuable for startups and growth companies with initial loss periods
• Economic cycles: Provides buffer through longer economic downturns
• Restructuring: More time to restructure and return to profitability while preserving tax benefits

Changed Interest Income – No Longer Subject to Defence Tax

This change brings welcome clarity and, in most cases, a significantly improved tax position for companies earning interest income. The ability to deduct expenses and the lower effective tax rate (15% on net vs. 17% on gross) represents substantial tax savings.

Comparison of Tax Treatment

Key Advantages

• Expense deductibility: Can now deduct financing costs, operational expenses, and other costs against interest income
• Lower effective rate: 15% on net is typically much lower than 17% on gross
• Loss utilization: Interest income can be offset against carried-forward tax losses
• Simplified compliance: Single tax regime (CIT only) instead of dual regime (SDC + CIT)

Exceptions – Entities Exempt from CIT

For specific categories of entities whose interest income is exempt from CIT, the interest remains subject to SDC:

• Religious, charitable, or educational institutions of a public nature
• Eligible companies established for the promotion of art, science, or sports

For these entities:

• SDC rate: 17% on gross interest received/credited
• Reduced rate: 3% for interest on certain Cyprus/EU government/local authority securities or certain listed securities

Blacklisted Jurisdiction (BLJ) Exception

Interest earned from Cyprus sources by related companies in blacklisted jurisdictions remains subject to SDC at 17% on gross interest earned. This anti-avoidance measure ensures that interest payments to BLJ-related parties continue to bear appropriate taxation.

Changed Rental Income – No Longer Subject to Defence Tax

This removes the previous anomaly where rental income was taxed twice – once under SDC and again under CIT. The change significantly improves the after-tax economics for companies holding property portfolios.

Impact on Property-Holding Companies

• Effective tax rate: Reduced from combined SDC+CIT burden to CIT only at 15%
• Expense deductibility: All rental-related expenses (maintenance, management fees, financing costs) deductible against rental income for CIT purposes
• Improved economics: Makes property ownership through corporate structures more attractive
• Loss offset: Rental income can be offset against other losses in the company

Planning Considerations

Companies with both rental income and other business activities can now more effectively utilize group structures and loss planning. The simplified treatment also reduces compliance burden and potential for errors in dual-tax calculations.

Changed Foreign Dividends – Exemption Retained with 5% Rate for Non-Qualifying

General rule: Foreign dividends received by Cyprus tax resident companies remain EXEMPT from taxation in Cyprus.

This maintains Cyprus’s attractiveness as a holding company jurisdiction. The participation exemption continues to apply to most foreign dividend receipts.

Exception – When Foreign Dividends are Taxed

Foreign dividends are NOT exempt (and subject to 5% SDC) when BOTH of the following conditions apply:

1. More than 50% of the paying company’s activities result directly or indirectly in investment income, AND
2. The foreign tax burden on the paying company is less than 50% of the Cyprus tax burden

Rate Reduction for Non-Exempt Dividends

When foreign dividends do not qualify for exemption, the SDC rate has been reduced from 17% to 5% on the gross dividend amount. This represents a 70% reduction in the tax rate for non-qualifying dividends.

Practical Application

The “investment income” test requires careful analysis of the paying company’s activities. Investment income typically includes:

• Interest income
• Dividend income
• Royalty income
• Rental income from passive holdings
• Capital gains from investment portfolios

The “foreign tax burden” test compares the foreign company’s actual tax rate to Cyprus’s CIT rate. This is an anti-avoidance measure targeting dividends from low-taxed, passive investment companies.

Changed Inter-Company Dividends (Cyprus to Cyprus)

General rule: Dividends paid from one Cyprus tax resident company to another Cyprus tax resident company remain EXEMPT from SDC.

This maintains the efficiency of Cyprus corporate group structures and allows tax-free movement of profits within wholly Cyprus-resident corporate groups.

Transitional Exceptions – When Inter-Company Dividends are Taxed at 17%

Inter-company dividends are subject to 17% SDC if received in the following scenarios:

1. In 2026 or 2027 – from profits earned in the year ended 2024
2. In 2027 – from profits earned in the year ended 2025
3. Indirectly received more than 4 years after the end of the tax year in which the profits were earned (applies until 31 December 2031, for pre-2026 profits only)

Critical Condition for Taxation

These transitional taxation rules ONLY apply if the dividend-receiving company is directly or indirectly owned by:

• Non-Cyprus tax residents, OR
• Cyprus tax resident individuals who benefit from the non-dom regime

If the receiving company is owned by Cyprus tax resident, domiciled individuals: The dividends remain EXEMPT even during the transitional period.

Anti-Abuse Rule

The anti-abuse rule has been updated for companies that are interposed to receive dividends instead of individuals. This applies when a company holds more than 50% of the capital, profit participation, or voting rights and is inserted primarily to avoid individual-level SDC taxation.

Planning Implications

• Timing of distributions: Consider delaying distributions of 2024/2025 profits until after transitional period expires
• Ownership structure: Review whether receiving companies are owned by non-residents or non-doms (exempt) vs. Cyprus-resident doms (triggers tax)

Changed Dividends to Blacklisted and Low-Tax Jurisdictions

Cyprus imposes withholding tax on dividends paid to recipients in certain jurisdictions to align with international anti-avoidance standards.

Blacklisted Jurisdictions (BLJ)

BLJs are jurisdictions on the EU list (Annex I) of non-cooperative jurisdictions for tax purposes. The 17% rate remains unchanged as a strong deterrent against profit shifting to these jurisdictions.

Low Tax Jurisdictions (LTJ)

LTJs are jurisdictions where the effective corporate tax rate is significantly lower than Cyprus. The reduction from 17% to 5% makes distributions to these jurisdictions less punitive while maintaining some level of taxation.

General Rule – No Withholding Tax

Dividends paid from Cyprus companies to non-resident recipients in cooperative, adequately-taxed jurisdictions continue to benefit from zero withholding tax. This maintains Cyprus’s attractiveness as a holding company jurisdiction.

Changed Foreign Permanent Establishment Exemption – Blocked for EU Blacklist

Previously, profits of foreign PEs were generally exempt from Cyprus taxation regardless of the PE location. The new restriction aligns Cyprus with EU anti-avoidance standards.

Impact on Companies with Foreign PEs

• EU Blacklist jurisdictions: PE profits will now be taxable in Cyprus at 15% CIT (no exemption)
• Cooperative jurisdictions: PE exemption continues to apply normally
• Treaty relief: Companies may still be able to claim foreign tax credits under double tax treaties

Action Required

Companies with foreign PEs should:

1. Check the current EU Blacklist to verify PE jurisdiction status
2. Review applicable double tax treaties for credit mechanisms
3. Consider restructuring PEs out of blacklisted jurisdictions
4. Model the tax impact if PE profits become taxable in Cyprus

Extended Research & Development (R&D) Super Deduction

The R&D super deduction is one of the most valuable incentives in the Cyprus tax system, effectively reducing the net cost of R&D investment by 18% (120% × 15% CIT rate = 18% tax benefit).

What Qualifies as R&D

• Scientific research expenses undertaken by the company
• Research and development expenses as recognized under International Financial Reporting Standards (IFRS)
• Both current and capitalised expenses on which capital allowances are granted

The company must have the economic ownership of the intangible asset that results (or may result) from the R&D activities.

What Does NOT Qualify – Important Exclusions

• Property, plant, and equipment: Expenses for acquisition of buildings, machinery, or equipment (even if used for R&D)
• Employee residences: Expenses for acquisition of employee housing
• IP Box assets: Expenses relating to assets benefiting from the Cyprus IP Box regime (to prevent double benefit)

These exclusions prevent double-dipping where assets already benefit from other tax incentives (capital allowances, IP Box reduced rate).

Election and Flexibility

The super deduction is optional and can be claimed:

• In full: Claim the entire 20% super deduction
• Partially: Claim only a portion of the available super deduction
• Not at all: Forgo the super deduction entirely

This flexibility allows companies to manage their taxable income strategically – for example, a company might choose not to claim the super deduction in a loss year, preserving the benefit for future profitable years.

Interaction with IP Box

The law explicitly clarifies the interaction with the Cyprus IP Box regime. The R&D super deduction:

• Cannot be claimed on R&D expenses that relate to intangible assets which will benefit from the IP Box reduced rate (80% exemption)
• Can be claimed on R&D expenses for intangibles that will not be placed under the IP Box regime

Companies developing intellectual property should plan carefully to determine whether IP Box or R&D super deduction (or a combination) provides better tax outcomes.

Extended Green Energy & Efficiency Capital Allowances

The extension provides companies with certainty for long-term green investment planning and aligns with Cyprus’s environmental commitments.

Qualifying Green Expenditure

• Energy efficiency of buildings: Insulation, efficient HVAC systems, smart building controls, energy management systems
• Renewable energy systems: Solar panels, wind turbines, geothermal systems, biomass installations
• Electric energy storage systems: Battery storage, grid-connected storage, backup power systems
• Electric vehicles: Company cars, vans, trucks, charging infrastructure

Benefits

• Accelerated depreciation: Faster tax relief than standard asset classes
• Reduced carbon footprint: Environmental benefits alongside tax savings
• Future-proofing: Prepares companies for stricter environmental regulations
• Operating cost savings: Lower energy costs complement tax benefits

Companies planning significant capital investments should prioritize qualifying green expenditures to maximize tax relief during the 2026-2030 period.

New Agricultural & Livestock Assets – 25% Accelerated Depreciation

Qualifying Assets

• Machinery for agricultural operations
• Facilities for livestock farming
• Agricultural processing equipment
• Farm buildings and structures

Exception – Irrigation Not Included

Important: The accelerated depreciation does NOT apply to machinery and facilities relating to irrigation systems.

Tax Benefit

At 25% per annum, qualifying agricultural assets are fully depreciated over 4 years (compared to longer periods for standard assets), providing faster tax relief and improving cash flow for agricultural businesses.

New Cost-of-Living Allowance (COLA) – 200% Super Deduction

This is one of the most valuable new deductions in the reform, effectively subsidizing COLA payments at 30% (200% × 15% CIT rate).

How It Works

1. Year 1 (e.g., 2025): Company pays €100,000 COLA to employees per trade union agreement
2. Year 2 (e.g., 2026): Company claims €200,000 tax deduction (2 × €100,000)
3. Tax benefit: €30,000 (€200,000 × 15%)
4. Net cost: €70,000 after tax benefit

Conditions for Claiming

• Trade union agreement: COLA must be paid pursuant to relevant trade unions agreement (not discretionary bonuses)
• Documentation: Maintain records of trade union agreement and COLA calculations
• Timing: Prior year payments generate current year deduction

Strategic Considerations

• Cash flow planning: Tax benefit received one year after COLA payment
• Employee negotiations: COLA becomes significantly less expensive for employer (effective 70% cost)
• Competitiveness: Helps employers provide inflation protection to employees at reduced net cost
• First year limitation: No super deduction available in first year of COLA implementation (requires prior year payment)

Increased Entertainment Expenses – €17,086 → €30,000

Calculation Method

The deduction is calculated as the lower of:

• (i) 1% of gross income of the business, OR
• (ii) €30,000

The 1% benchmark remains unchanged – only the maximum cap increased from €17,086 to €30,000.

What Qualifies as Entertainment

• Business meals with clients or prospects
• Corporate hospitality events
• Client entertainment
• Business conferences and seminars

Who Benefits Most

Companies with gross income exceeding €3,000,000 can now claim the full €30,000 entertainment deduction (1% of €3,000,000 = €30,000). Companies with lower gross income are still limited by the 1% threshold.

New IPO Expenses – €300,000 Deduction

Qualifying Expenses

Expenses must be directly related to the listing process, typically including:

• Legal and professional fees
• Underwriting costs
• Stock exchange listing fees
• Prospectus preparation
• Due diligence costs
• Regulatory compliance expenses

Conditions

The deduction is subject to conditions which will be specified by the Tax Department. Companies planning to list should:

• Maintain detailed records of listing-related expenses
• Segregate listing costs from general operating expenses
• Consult with advisors on qualifying expenses before incurring them

Strategic Value

At the 15% CIT rate, the €300,000 deduction provides €45,000 in tax savings, reducing the net cost of going public and making public markets more accessible for Cyprus companies.

New Cultural Donations – €50,000 Per Tax Year

Qualifying Recipients

Donations must be made to cultural institutions – the specific definition and list of qualifying institutions will be determined by the Tax Department. Typically this would include:

• Museums and galleries
• Theaters and performing arts organizations
• Cultural heritage organizations
• Arts education institutions

Annual Limit

The €50,000 limit applies per tax year, allowing companies to make annual contributions that qualify for tax relief.

Documentation

Companies should obtain and retain:

• Receipts from cultural institutions
• Confirmation of institution’s qualifying status
• Documentation of donation purpose and amount

New Group Relief – Order of Operations Clarified

Required Order

1. Step 1 – Own Losses First: Company must offset its taxable income against its own tax losses being carried forward from prior years
2. Step 2 – Group Losses Second: Only after utilizing all own losses can the company then utilize losses of other companies in the same group through group relief provisions

Why This Matters

Previously, the order was unclear, potentially allowing companies to strategically choose which losses to utilize first. The new clarification:

• Prevents cherry-picking: Cannot bypass own losses to claim other group members’ losses
• Preserves loss life: Forces use of company’s own losses first, which may have shorter remaining carryforward periods
• Simplifies compliance: Clear rules reduce disputes with Tax Department
• Affects planning: Impacts intra-group profit allocation and restructuring strategies

Impact on Group Structures

Groups should review their loss utilization strategies to ensure compliance with the mandatory ordering. This may affect:

• Transfer pricing and profit allocation between group companies
• Decisions on which entities should earn profits vs. incur expenses
• Timing of group restructurings
• Long-term tax planning for groups with multiple loss-making entities

Increased Transfer Pricing Documentation Thresholds

The thresholds for local file preparation requirements have been increased, reducing compliance burden for smaller transactions while maintaining documentation requirements for larger cross-border dealings.

What is a “Local File”

A local file is detailed transfer pricing documentation that demonstrates how related-party transactions comply with the arm’s length principle. It typically includes:

• Description of the business and related-party transactions
• Functional analysis (functions, assets, risks)
• Economic analysis and comparability data
• Transfer pricing method selection and application

Impact

• Reduced burden: Smaller transactions exempt from full documentation requirements
• Focus on material: Allows companies to focus resources on documenting larger, more material transactions
• Limited practical impact: Given minimum documentation requirements still apply, the practical relief may be limited

Planning Considerations

While thresholds increased, companies should still:

• Maintain contemporaneous documentation for all related-party transactions
• Ensure arm’s length pricing regardless of documentation thresholds
• Review transactions annually to determine if thresholds are exceeded
• Prepare documentation proactively rather than reactively to tax audits

New IP Capital Allowances – Fair Value Basis Clarified

For intangible assets acquired in exchange for the issuance of new shares in the share capital of a company, the law now provides specific rules for calculating capital allowances.

The Rules

• Valuation basis: Capital allowances calculated on capital expenditure which cannot exceed the fair market value (FMV) of the intangible asset at the time of acquisition
• Substantiation required: FMV must be substantiated to the satisfaction of the Tax Department
• No allowances without proof: If FMV is not adequately substantiated, NO capital allowances will be granted

Why This Matters

This clarification addresses a previously unclear area and ensures that:

• Companies cannot claim excessive capital allowances on inflated share issuances
• Independent valuations are required for significant IP-for-shares transactions
• Tax relief is limited to genuine economic value transferred

Practical Requirements

Companies acquiring IP in exchange for shares should:

1. Obtain independent valuation: Engage qualified valuation experts
2. Document methodology: Maintain detailed valuation reports showing methodology and assumptions
3. Substantiate to Tax Department: Provide comprehensive evidence of FMV if requested
4. Maintain records: Keep all documentation for potential future audits

New Intangible Assets with Indefinite Life – 20-Year Amortization

What This Covers

Intangible assets that do not have a predetermined finite useful life, such as:

• Certain trademarks and brands
• Some licenses and rights
• Goodwill-type assets
• Other intangibles without clear expiry

Tax Treatment

• Amortization period: 20 years for tax purposes (regardless of accounting treatment)
• Annual deduction: 5% per annum (1/20th)
• Timing differences: May create deferred tax assets/liabilities if accounting treatment differs

Interaction with Other Provisions

This applies alongside the IP capital allowances clarification above. Companies must:

• First, establish the FMV of the intangible asset
• Then, amortize over 20 years for tax purposes

Changed Exit Taxation – Extended to Non-EU Countries

Exit taxation provisions have been amended to provide a more comprehensive approach to assets entering the Cyprus tax system.

The Change

• Previous rule: Tax basis of assets = fair value only for transfers from EU countries
• New rule: Tax basis of assets = fair value when company establishes Cyprus tax residency from any country (including non-EU)

Impact

This extension brings consistency regardless of origin country and ensures:

• Fair value basis for all incoming assets (not just EU origins)
• Prevents tax on pre-Cyprus appreciation
• Simplifies rules for companies relocating from non-EU jurisdictions
• Aligns with international tax principles

Related Provision – Asset Valuation

The law now explicitly determines the value of assets entering the Cyprus tax system through:

1. Outright transfer of assets to a Cyprus company
2. Transfer of tax residence of a company to Cyprus
3. Creation of a permanent establishment in Cyprus

This provides comprehensive coverage for all scenarios where assets enter Cyprus tax jurisdiction.

New Global Minimum Tax (Pillar Two) – QIIR/UTPR Not Creditable

What This Means

Under the OECD Pillar Two framework, large multinational groups (revenue >€750m) are subject to:

• QIIR (Qualified Income Inclusion Rule): Top-up tax in parent jurisdiction if subsidiary jurisdiction has effective rate below 15%
• UTPR (Undertaxed Profits Rule): Backstop mechanism allowing jurisdictions to impose top-up tax

Non-creditability: If Cyprus entities in a group trigger QIIR/UTPR top-up tax in other jurisdictions, that tax CANNOT be credited against the Cyprus CIT liability.

Practical Impact

• Effective rate monitoring: Groups must carefully monitor effective tax rates to avoid triggering Pillar Two top-up taxes
• Tax attribute management: Deductions, exemptions, and credits should be managed to maintain adequate effective rates
• Cost of low taxation: Achieving Cyprus rates below 15% (e.g., through generous deductions) may trigger non-creditable top-up taxes elsewhere

Who Is Affected

• Cyprus entities that are part of multinational groups with consolidated revenue exceeding €750 million
• Particularly groups with significant deductions (R&D, COLA, IP Box) that reduce effective rates below 15%

Changed Collective Investment Schemes – Redemption Treatment (From 2031)

What This Means

• CIS in corporate form: Funds structured as companies (as opposed to trusts or partnerships)
• Redemption: When investor sells units back to the fund
• Current: Treated as sale of securities (typically no CGT if not Cyprus immovable property)
• From 2031: Treated as dividend receipt (subject to SDC rules for individuals or exemption rules for companies)

Impact on Investors

For individual investors:

• Redemptions will be subject to SDC at 5% (or exempt if non-dom)
• Changes investment economics and after-tax returns

For corporate investors:

• Redemptions will be treated as dividends (typically exempt for Cyprus companies)
• May actually improve tax position if currently subject to taxation

Planning Window

The 2031 effective date provides investors with approximately 5 years to:

• Review CIS holdings and structures
• Consider pre-2031 exits if beneficial
• Restructure holdings to optimize tax treatment under new rules
• Work with fund managers to understand structure (corporate vs. non-corporate)

New Dividend Certificates – Mandatory Issuance

Certificate Must Specify

1. Dividend amount paid: Actual cash or property distributed
2. Disguised dividend distribution: Any amounts treated as disguised dividends (see Business Owners page for details on disguised dividends)
3. SDC withheld by company: Amount of Special Defence Contribution withheld at source
4. Fiscal year of underlying profits: The tax year in which the profits being distributed were earned

Why Fiscal Year Matters

The fiscal year specification is critical because:

• Dividends from pre-2026 profits may be subject to transitional SDC rates (17%)
• Dividends from 2026+ profits subject to new rates (5% or exempt)
• Shareholders need this information for accurate tax return preparation

Compliance Requirements

• Timing: Certificates should be issued at time of dividend payment
• Record-keeping: Companies must maintain copies of all certificates issued
• Accuracy: Information must be accurate as it forms basis for shareholder’s tax obligations
• Format: While specific format not prescribed, certificates should be clear and comprehensive

Implementation Steps

1. Develop standard certificate template
2. Track profit years (which year’s profits are being distributed)
3. Calculate SDC withholding obligations
4. Issue certificates to all shareholders contemporaneously with payment
5. Maintain certificate copies in company records

New Electronic Rent Payment Requirement

What This Means

• All rent payments: For business premises must be made electronically
• No deduction for cash: Cash rent payments will not be tax deductible even if otherwise legitimate business expenses
• Grace period: January-June 2026 continues under old rules; electronic requirement from July 2026

Qualifying Electronic Payments

Acceptable methods typically include:

• Bank transfers
• Electronic payment systems
• Credit/debit card payments
• Any method creating verifiable electronic trail

Documentation Requirements

Companies should maintain:

• Electronic payment confirmation/receipts
• Rental agreements
• Landlord payment details
• Proof that payments match rental obligations

Action Required

By July 2026, companies must:

1. Review all rental payments currently made
2. Establish electronic payment arrangements with landlords
3. Update accounting procedures to track electronic payment requirements
4. Train staff on compliance requirements
5. Implement controls to prevent non-compliant payments

New Section 33 – Director Related Party Clarification

The law now provides clarification on the conditions under which a director of a company is considered a related party to the company for purposes of Section 33 of the Income Tax Law.

Why Section 33 Matters

Section 33 contains anti-avoidance provisions that apply to transactions between related parties, including:

• Transfer pricing requirements
• Deemed benefit on shareholder/director receivables (9% deemed interest)
• Restrictions on certain deductions

Impact of Clarification

The clarification provides certainty on when directors trigger related-party rules, affecting:

• Director loan arrangements
• Transactions between company and director
• Use of company assets by directors
• Service arrangements with directors

Companies should review their director relationships and transactions to ensure compliance with Section 33 requirements.

Changed Provident Fund & Insurance Contributions – Exempt Income

Income derived by companies in respect of certain retirement provisions is now explicitly treated as exempt income for CIT purposes.

Qualifying Income

• Approved provident funds: Contributions made to approved provident funds established in Cyprus or the European Union
• Approved insurance contracts: Income from approved insurance contracts providing bulk or periodic pension payments to beneficiaries

Impact

This exemption clarifies that companies holding pension-related assets do not pay CIT on the investment income within those assets, preserving the tax-advantaged status of retirement savings vehicles.

Extended Deemed Benefit on Receivables – Now Includes Indirect Shareholders

What is the Deemed Benefit Rule

Under Section 33, when a company has receivables from (or loans to) shareholders that are interest-free or below-market-rate, the company is deemed to have received a benefit equal to 9% per annum of the receivable amount.

This deemed benefit is:

• Taxable income to the company (at 15% CIT)
• Not deductible by the shareholder
• Automatic (applies regardless of actual interest charged)

The Extension to Indirect Shareholders

Previous scope: Applied only to direct shareholders of the company

New scope: Now applies to both direct AND indirect shareholders

What This Means

Who is Affected

• Multi-tier corporate structures with holding companies
• Companies providing financing to ultimate beneficial owners
• Family business structures with indirect ownership
• Any company with receivables from/loans to parties in ownership chain

Action Required

Companies must:

1. Map ownership structures: Identify all direct and indirect shareholders
2. Review receivables/loans: Identify all amounts owed by shareholders (direct or indirect)
3. Calculate exposure: Quantify potential deemed benefit (9% of outstanding amounts)
4. Restructure or charge interest: Either eliminate receivables or charge market-rate interest
5. Update financing arrangements: Ensure all shareholder financing properly documented and priced

Abolished Insurance Premium Tax for Life Insurance Companies

Impact

• Cost reduction: Life insurance companies no longer pay this tax on premiums
• Competitiveness: Improves Cyprus position as life insurance domicile
• Simplified compliance: Removes administrative burden of premium tax compliance

New General Anti-Abuse Rule (GAAR) – Extended Scope

The General Anti-Abuse Rule in the Income Tax Law has been amended to significantly expand its scope.

The Change

What GAAR Does

The GAAR allows the Tax Department to disregard or recharacterize transactions or arrangements that:

• Lack genuine commercial or economic purpose
• Are entered into primarily to obtain a tax advantage
• Are artificial or contrived
• Defeat the object and purpose of the tax law

Practical Impact

The extended GAAR means:

• Broader application: Can now apply to individual tax planning, not just corporate structures
• Heightened scrutiny: Artificial arrangements likely to face greater challenge
• Substance over form: Transactions must have genuine business purpose beyond tax savings
• Documentation critical: Companies must document commercial rationale for structures

Best Practices

• Ensure all transactions have demonstrable commercial purpose
• Document business rationale contemporaneously
• Avoid purely tax-motivated structures
• Maintain substance in all entities and arrangements
• Seek professional advice on complex structures

New SDCL General Anti-Abuse Rule

A General Anti-Abuse Rule has been introduced to the Special Defence Contribution Law (SDCL), similar in nature to the ITL GAAR.

Purpose

The SDCL GAAR allows the Tax Department to combat artificial arrangements designed to avoid or reduce SDC on passive income (dividends, interest, rental income).

Application

The SDCL GAAR can apply to arrangements designed to:

• Convert dividend income to non-taxable receipts
• Disguise passive income as exempt income
• Utilize intermediary structures solely to avoid SDC
• Exploit exemptions or reduced rates artificially

Combined Effect with ITL GAAR

Companies now face dual GAAR provisions:

• ITL GAAR: Applies to CIT avoidance
• SDCL GAAR: Applies to SDC avoidance

This comprehensive approach significantly strengthens the Tax Department’s anti-avoidance toolkit.

New Deemed Dividend Distribution (DDD) Payment Mechanism

For deemed dividend distributions (relevant to transitional 2024/2025 profits – see Business Owners page for DDD details), the law establishes clear payment and recovery procedures.

Payment Process

1. Company pays initially: The company is responsible for paying the SDC on deemed distributions
2. Company may recover: The company may subsequently recover the amount paid by charging it to the respective shareholders
3. Purpose: Ensures timely payment to the Tax Department while maintaining clear accountability between company and shareholders

Practical Implications

• Cash flow: Company must fund the SDC payment upfront
• Recovery process: Company should establish clear procedures for recovering amounts from shareholders
• Documentation: Maintain records of payments made and recoveries from shareholders
• Shareholder agreements: Consider addressing DDD payment/recovery in shareholder agreements

New Non-Monetary Asset Transfer Responsibilities

When a company transfers or distributes non-monetary assets (e.g., property, shares, equipment) to shareholders or beneficiaries:

• Company pays SDC: The company is responsible for payment of any SDC due on the transfer/distribution
• Company may recover: The company may then recover this amount by charging it to the respective beneficiaries
• Valuation critical: Accurate valuation of non-monetary assets essential to determine correct SDC

Examples of Non-Monetary Distributions

• Distribution of real property to shareholders
• Transfer of shares in subsidiaries
• Distribution of inventory or equipment
• In-kind dividend payments

Compliance Requirements

• Obtain independent valuations for significant non-monetary distributions
• Calculate SDC based on market value of assets distributed
• Make timely payment to Tax Department
• Document recovery arrangements with beneficiaries

New Payment Deadlines Clarified

SDC on dividends or interest income from sources outside the Republic of Cyprus is payable by the deadline for submitting the tax return for the relevant year, as stipulated in the Assessment and Collection of Taxes Law (ACTL).

What This Means

• Foreign dividends: SDC due by tax return filing deadline
• Foreign interest: SDC due by tax return filing deadline
• No advance payments: Unlike some other SDC, foreign-source passive income SDC not due on receipt
• Planning window: Provides time to plan payment before deadline

Standard Filing Deadlines

For companies, the tax return filing deadline is typically:

• 31 January: Of the second year following the tax year (13 months after year-end). Example: For 2026 tax year, the deadline is 31 January 2028.
• Extended deadlines: May apply for complex groups or with Tax Department approval

New Criminal Offenses for SDC Non-Compliance

Criminal Penalties

Additional Consequences

Beyond the criminal fines, convicted persons must:

• Pay the unpaid SDC amount in full
• Pay additional sums as determined by the court
• Cover court costs

What Triggers Criminal Liability

• Failure to pay SDC by statutory deadline
• Knowingly underpaying SDC
• Fraudulent attempts to avoid SDC
• Material non-compliance with SDC obligations

Impact on Directors and Officers

Corporate officers may face personal criminal liability for company’s SDC failures. This significantly raises personal stakes for ensuring tax compliance.

8. What Should Companies Do Now?

This guide provides general information about the Cyprus Tax Reform 2026 for companies. Tax outcomes depend on specific facts and circumstances.

This is not a substitute for professional tax advice.