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Cyprus Tax Overhaul: Corporate Tax Increase And Sweeping Reforms Stir Industry Debate

Government Action Sparks Industry Alarm

While Parliament has not yet approved the hike in corporate tax from 12.5% to 15%, the decision by the government has become a red line for key professional bodies such as the Cyprus Association of Chartered Accountants (SÉLK) and the Pan-Cyprian Bar Association. These groups link the move to the abolition of the so-called dividend distribution mechanism, as well as a reduction in the emergency defense levy on dividends from 17% to 5% for earnings generated after January 1, 2026.

Revisiting Dividend And Defense Levy Adjustments

The proposed legislation, which will be thoroughly examined by the Parliamentary Committee on Financial Affairs in the coming week, has already triggered robust objections during yesterday’s debate on the emergency defense levy. Both accountants and legal professionals were clear in expressing their disagreements with the changes. The SÉLK contends that an increase in the corporate tax rate would impair Cyprus’s competitive edge and urges the government to clarify the rationale behind the proposed adjustment. The legal community, represented in part by prominent attorneys, insists that the new measures be removed from the bill, warning of significant consequences for businesses and questioning revenue projections which estimate a €240 million gain from the changes.

Complexities Of The Emergency Defense Levy Bill

The emergency defense levy bill envisages reducing the levy on income from dividends to 5%, while dividends issued until December 31, 2031, derived from earnings up to 2025, remain subject to a 17% levy. This proposal is intended to correlate past earnings—taxed at 12.5%—with current distributions. Furthermore, a diminishing rate of tax withholding for dividends issued to companies resident in low-tax jurisdictions has been announced, further complicating the policy landscape. Tax Commissioner Sotiros Markidis emphasized the necessity for anti-abuse provisions in light of the abolition of dividend taxation on certain payments.

Stamp Duty Reforms And The Call For Simplification

In parallel to the corporate and dividend tax issues, the Democratic Rally (DISY) is advocating for the abolition of the stamp duty. The proposed reform would eliminate the requirement to use stamped documents, with the exceptions of contracts related to financial services, insurance, real estate transfers, and high-value leases. Having generated €38 million in 2024, the stamp duty is anticipated to yield a revenue loss of between €8 to €10 million under the new legislation. DISY’s MP Haris Georgiadis has argued against the bureaucratic cost of maintaining outdated tax laws merely to extract marginal revenues, while Tax Commissioner Markidis noted the challenges in accurately projecting revenue from stamp duty collections in a modernized, electronic system.

Pension Fund Reforms: A Growing Concern

Significant apprehension is also being expressed by representatives of pension funds. Currently exempt from income tax to safeguard their income capacities, these funds would face a shift in tax treatment starting January 1, 2026, for revenues derived from commercial activities or property exploitation. From 2031 onwards, gains from the sale of pension fund assets such as shares or participation certificates would also be taxed. Stakeholders, including representatives from the Social Insurance Fund and various industry federations, warn that such changes could erode both net fund revenues and the resultant benefits for members, urging a withdrawal of this provision to protect long-term pension values.

Political And Economic Implications Moving Forward

Accelerated parliamentary debate on these six bills suggests a strategic effort to finalize discussions within set deadlines. The upcoming emergency session on Thursday aims to conclude debates on the remaining measures, with a further session on Monday intended to address the broader income tax reform. Finance Minister Makis Keravnos is expected to participate in the final session of the Financial Committee to provide clarity on the central issues raised across party lines.

Following the session, DISY’s MP Onoufrios Koullas remarked on the pressing need to end tax uncertainty. He stressed that the government’s broader agenda should support low-to-middle incomes, families with children and students, and small businesses, ultimately advocating for a streamlined, predictable tax system. Similarly, AKEL’s Christos Christofidis criticized the proposed increase in the tax-free allowance and decried the failure of the fiscal reform to address widening social inequalities, arguing that there remains scope for well-founded tax relief for businesses and households.

Bank of Cyprus Upgrade Signals Fresh Optimism For Greek And Cypriot Banks

Regional Banks Enter A More Favorable Cycle

Bank of Cyprus and Eurobank are well positioned to benefit from a renewed re-rating of Greek and Cypriot bank stocks, according to Cyprus-based investment firm Roemer Capital, which upgraded Bank of Cyprus to a buy rating and reaffirmed its positive view on Eurobank.

The firm cited easing geopolitical tensions, resilient economic growth in Greece and Cyprus, lower funding costs and Greece’s expected transition to developed-market status as the main factors supporting the sector.

Roemer Capital also lowered its cost of equity assumptions, updated its forecasts following first-quarter 2026 results and extended its valuation horizon to the end of 2027, raising target prices across its banking coverage.

Bank Of Cyprus Gets The Largest Upgrade

Bank of Cyprus received the biggest revision, with Roemer Capital upgrading the stock from hold to buy and setting a target price of €11.10, implying potential total upside of 27%.

The firm highlighted the bank’s strong capital generation, profitability and projected 100% dividend payout, describing it as the strongest capital-return story among the banks under coverage. Roemer Capital maintained its buy rating on Eurobank, assigning a target price of €4.90 and forecasting potential upside of 28%. The report said the bank is well placed to benefit from loan growth, improving operating performance and merger-and-acquisition synergies.

National Bank of Greece and Piraeus Bank also retained buy ratings, with expected returns ranging from 25% to 36%. Optima Bank was upgraded to buy, while Alpha Bank remained at hold on valuation grounds.

Why Growth Still Sets The Region Apart

According to Roemer Capital, Greek and Cypriot banks continue to benefit from stronger economic fundamentals than many western European peers. The report pointed to faster economic growth, healthier balance sheets, low levels of non-performing exposures, capital ratios approaching 20% and strong customer deposit bases.

Analysts expect performing loans across the sector to grow at a compound annual rate of 6% to 8% through 2028, supported by private investment, digitalisation, green manufacturing, supply-chain expansion and a gradual recovery in household lending.

The report also said the conclusion of lending under the EU Recovery and Resilience Facility is unlikely to materially affect credit growth, as banks have already shifted back towards traditional commercial lending. Roemer Capital expects Euribor to remain between 2.2% and 2.5%, a level it believes should support both lending activity and net interest margins.

Geopolitics, Valuation And Market Structure Support The Case

The report said improving geopolitical conditions have strengthened the investment outlook, noting that Brent crude prices have largely returned to pre-war levels while Greek government bond yields have stabilised at around 3.5%. Although geopolitical risks remain, Roemer Capital believes the likelihood of a major inflationary shock or significant pressure on bank profitability has eased.

Another important catalyst identified by the firm is Greece’s expected promotion to developed-market status by FTSE Russell, STOXX and MSCI over the coming months.

According to the report, the reclassification should improve liquidity and attract a broader base of international investors. Roemer Capital also said Euronext’s acquisition of the Athens Exchange is expected to strengthen market infrastructure and increase international visibility, particularly for Bank of Cyprus and Optima Bank.

The firm noted that Bank of Cyprus has already benefited from its Athens listing, with average daily trading value increasing from less than €400,000 before its September 2024 move to nearly €6 million afterwards.

Economic Momentum Remains A Core Tailwind

Roemer Capital said both Greece and Cyprus have moved beyond post-crisis recovery and are now supported by private-sector-led growth. For Cyprus, the report highlighted recent tax reform and efforts to simplify the legal and regulatory framework, while also noting that limited foreign banking competition continues to support domestic lenders.

Overall, Roemer Capital expects Greek and Cypriot banks to remain well-positioned for profitable loan growth over the coming years.

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