Cyprus is under pressure to revise its legislation on the minimum tax for multinational groups after the European Commission called for changes to align the framework with Pillar 2 rules.
Policymakers face a difficult balance. Failure to comply could expose the Republic to penalties and broader regulatory consequences, while stricter rules could encourage some US-linked multinationals to relocate to jurisdictions exempt from the 15% minimum tax until 2029.
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Cyprus Adopted Its Framework In 2024
Cyprus approved its domestic top-up tax framework in December 2024, with the system scheduled to take effect in 2025. Under the law, multinational groups operating in Cyprus with an effective tax rate below 15% would pay the difference through a supplementary levy.
The framework was intended to give affected companies time to adapt while reducing incentives to relocate to more tax-favorable jurisdictions.
Brussels Calls For A QDMTT
The European Commission challenged the original framework, arguing that it disproportionately benefited parent companies of multinational groups with US interests. Brussels has called for a Qualified Domestic Minimum Top-up Tax (QDMTT) to ensure that minimum tax is collected domestically under the Pillar 2 framework.
A revised bill has been under public consultation since late July. It proposes introducing the QDMTT from Jan. 1, 2026, alongside amendments reflecting OECD guidance and recommendations.
Cyprus is scheduled for an assessment in autumn 2026, when its legal framework will be reviewed for compliance with internationally agreed Pillar 2 standards.
Businesses Warn Of Relocation Risk
The consultation deadline was extended from Sept. 5 to Sept. 7 because of the complexity of the issue. A recent meeting at the Finance Ministry brought together officials and professional bodies to discuss the proposed changes.
Some professional associations have warned that higher tax costs could prompt US multinationals to consider relocating to Malta, Estonia, Latvia or Lithuania. Those countries secured an exemption in 2023 that allows them to delay Pillar 2 implementation until 2029 because they had fewer than 12 subsidiaries of multinational groups above the €750 million threshold.
Professional groups reportedly told the ministry that US companies make a significant contribution to Cyprus’ public finances, paying about €140 million in taxes.
Ministry Sees Limited Room For Changes
Finance Ministry technocrats reportedly told stakeholders that there is little scope for further changes because of the European Commission’s firm position on the QDMTT.
Officials also warned that non-compliance could place Cyprus in a difficult position. The ministry aims to secure Cabinet approval as soon as possible and have Parliament pass the bill in October.
The issue is also being viewed against wider tensions between the US and European Union over international taxation, leaving Cyprus to balance regulatory compliance with its position as a destination for multinational groups.
Questions Remain Over The Original Rules
Private sources have raised concerns about the initial handling of the legislation, including the lack of clear data on the number of companies expected to be affected.
Parliament was initially told that 60 companies would be subject to the tax, but that figure later rose to 1,900. The ministry had estimated that the affected companies could generate between €200 million and €250 million in tax revenue for Cyprus. It is also understood that the draft legislation was amended in 2024 without notifying affected stakeholders, while EU authorities later informed Cyprus about the need for a qualified domestic tax.
Cyprus now faces a narrow path forward: comply with Brussels’ requirements while maintaining investor confidence and limiting the risk that mobile capital moves to jurisdictions offering more favorable tax treatment.
