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Cyprus Enacts Robust Tax Reform to Boost Foreign Investment And Business Growth

Parliament Endorses Landmark Tax Reform

Cyprus’ legislature has approved a comprehensive tax reform that marks a pivotal chapter in the nation’s economic evolution. According to Invest Cyprus, this decisive action both preserves and enhances the country’s reputation as a premier destination for business and foreign capital.

Enhancing Competitiveness Through Strategic Tax Adjustments

The new framework introduces several targeted reforms for legal entities. Key measures include the elimination of the deemed distribution of dividends, along with a reduction in the withholding tax on actual dividend distributions from 17% to 5%. Additional adjustments such as the abolition of stamp duty, broadened exemptions for capital gains tax, and more favourable stock option treatments, collectively underpin a reassured investment environment. A modest corporate tax increase from 12.5% to 15% further aligns the system with evolving economic needs.

Investor Confidence And Long-Term Policy Vision

In a recent interview with InBusinessNews, Invest Cyprus chief executive Marios Tannousis emphasized that the reform fortifies the stability, predictability, and clarity indispensable to foreign investors. He noted that such a refined tax framework is foundational for Cyprus’ sustained economic appeal, extending the country’s competitive edge well into 2026 and beyond.

Collaborative Efforts Driving Economic Resurgence

Expressing appreciation for the role of both public bodies and private sector stakeholders, Tannousis commended the government, the Finance Ministry, and parliament for their collaborative efforts. This reform not only resolves a long-standing issue but also ushers in a renewed era poised to significantly bolster foreign investment and entrepreneurial growth in Cyprus.

ECB Raises Deposit Facility Rate For First Time In Nearly Two Years

Economic Shift: ECB Reverses Years Of Declining Rates

The European Central Bank (ECB) confirmed its first interest rate increase in nearly two years, raising the deposit facility rate in response to inflationary pressures and geopolitical uncertainty. Marking a shift in monetary policy, the move follows a period of rate cuts aimed at supporting economic activity and easing financing conditions.

Reevaluation Of Bank Liquidity Strategies

Although the immediate impact will be felt by only part of the borrowing market, the decision carries broader implications for banks. During the period of lower rates, banks maintained significant amounts of excess liquidity with the ECB as returns on these funds declined alongside deposit rates. With the deposit facility rate increasing by 0.25 percentage points to 2.25% from 2.00%, returns on surplus liquidity are expected to improve.

Higher interest rates, however, could also increase borrowing costs and influence lending conditions across the banking sector.

Transitioning Investment Approaches And Market Dynamics

Banks had already begun diversifying the use of excess liquidity through investments in bonds and by expanding lending activities.

Successive reductions in the deposit facility rate from 3.00% at the end of 2024 through four consecutive cuts in early 2025 reflected a more accommodative policy stance as inflation pressures moderated.

Sectoral Impact And Future Outlook

Data from the ECB’s 2025 monetary policy report show that liquidity in the Cypriot banking system declined from €19.2 billion at the end of 2024 to €18.6 billion by the close of 2025. Despite the reduction, liquidity levels remained elevated. Outstanding loans increased from €27.6 billion to €31.7 billion, while deposits recorded a slight decline. Customer deposits continued to account for the vast majority of funding. By the fourth quarter of 2025, they represented 95% of total liabilities, highlighting their importance as the banking sector’s primary source of financing.

Changes in ECB rates are expected to influence how banks manage liquidity and allocate capital as monetary conditions evolve.

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