Navigating Cyprus's Tax Reform: Lessons from the Past and Future Directions

On Friday, 18 July, the Cyprus Ministry of Finance published six draft tax bills in relation to the so called “tax reform” for public consultation. Without commenting on the draft bills, this article reflects on the past successes and failures to shape a robust and forward-looking tax framework.

Reflections from the 2002 Tax Reform

The 2002 tax reform in Cyprus was a landmark event, driven by the necessity to harmonise with European Law and regulations which was a prerequisite for Cyprus's accession to the EU. The reform was comprehensive, effectively dismantling the existing tax system and replacing it with an entirely new one. The architect of this reform was a foreign expert with deep expertise in international tax law and a proven track record in tax reforms, whose forward-looking approach ensured that the new tax system was aligned with anticipated changes at both European and international levels. This foresight was validated by the fact that the framework served Cyprus well for two decades without significant challenges, or reactions, from the EU or other international bodies.

The Current Tax Reform: A Comparative Analysis

In contrast, the current tax reform was prepared by a local team. It is not holistic. It consists of a series of measures that modify the existing system, however, fail to fully address certain dysfunctions within the tax framework. The limited involvement of foreign experts, a crucial addition given our limited expertise in such a process as a country, has deprived the reform team of valuable experience and knowledge, especially regarding future developments.

The presentation of the reform by the Economic Research Centre of the University of Cyprus (CypERC) and the working group in February 2025, included numerous proposals in the right direction such as the ending of the distribution of dividends, the limits on the application of the Stamp Duty on banking, insurance, and real estate transactions, and the maintenance of the main tax incentives.

However, there are also proposed changes that raise concerns. One such concern is from the proposed increase in the corporate tax rate from 12,5% to 15%, an increase that was not even amongst the EU requirements on the matter. This increase will deprive the country from one of the main advantages it offers vs the competition, which could have been the only differentiating factor in the future as we see all other similar incentives are being diminished. While there is an understanding of the need to secure revenue to finance the announced concessions, these could, and should, come from other sources.

Simplification or Complication

So, is this tax reform providing simplifications over the existing system or more complications? Providing deductions for children, for home ownership interest payments, and green taxation, although not negative in principle the was they are proposed, complicate rather than simplify the system. Household support should have been provided in the form of grants and allowances and not through the tax legislation. The purpose of the tax framework is to collect taxes and channel them into economic development and social benefits, and not to serve as a means of exercising social policy.

The increase in the tax rate and the provision of deductions, instead of allowances to individuals, are the two issues I would like to see reconsidered within the framework of the public consultation, although I am not sure whether there is much room for such changes. Addressing the pathologies of the tax system, such as the unification of fines and surcharges, the alignment of deadlines for submitting tax returns and paying taxes, the deletion and transfer of tax provisions scattered in other laws, and adoption of accounting standards as the basis for tax deduction of provisions calculated according to them, are of equal if not of higher importance.

Impact on Foreign Direct Investment

Based on the current tax reform proposal, from 2026 potential investors will face an increased corporate tax rate of 2,5%, making it more difficult for Cyprus to compete with destinations like Ireland which maintained the 12,5% rate, the UAE at 9%, and other destinations that may have higher statutory tax rates, however their effective rate is not much higher than 15%. Cyprus remains attractive for companies exploiting intangible assets and those entitled to notional interest on capital, however, to remain an attractive destination, new and innovative incentives, tax or otherwise, must be provided, and foreign experts' contribution is essential to design and achieve this balance.

Adapting to International Trends

There is a global shifting trend on taxation, with stricter standards, increased transparency, and convergence towards unified minimum tax rules. Cyprus is obliged to keep pace with developments, adopt and implement new requirements and practices introduced by the EU, OECD, and other international bodies. Implementing strict standards and increased transparency does not necessarily mean negative consequences for Cyprus as they are already applied and tested in many other countries. My concern is mostly on the implementation of minimal tax rules that may eventually lead to a unified tax base, which can effectively limit competition to the rate (hence my objection to its increase), and impact the business-friendly environment, the quality of services, and non-tax incentives.

As a country, Cyprus must improve all these areas to remain a competitive and attractive investment destination. It’s imperative to invest immediately in modern technology, to simplify procedures, to improve efficiency, and to reduce service time in government services that is currently not in line with expectations of our times.

Author: Antonis Talliotis