The Cyprus Council of Ministers has approved the government’s comprehensive proposal for tax reform, a move deemed an “emblematic project” by Finance Minister Makis Keravnos. Now set for parliamentary debate and approval, this reform marks the first major overhaul in 22 years.

Enhancing Social Equity and Economic Growth

At its core, the reform is structured to redistribute the tax burden more fairly, reinforce the middle class and low-income households, and spur growth among small and medium enterprises, which constitute 98% of the national economy. The package includes six legislative amendments aimed at a broad social impact. Notably, the tax-free allowance will rise from €19,500 to €20,500, placing it among the highest in the European Union.

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Targeted Relief for Families and Key Demographics

Designed with a keen social perspective, the reform introduces significant relief measures for families, students, young citizens, and large families. For household incomes below €80,000 (extended to €100,000 for large families), the measures include:

• An entitlement of €1,000 tax reduction per child.
• A €2,000 benefit per child for single-parent households.
• A €1,000 discount for each student.
• A €1,500 reduction applicable to home loan interest or primary residence rent.
• A €1,000 credit for energy upgrades or the purchase of an electric vehicle.

According to Minister Keravnos, these adjustments are expected to result in 55% of employees being exempt from taxation, with numerous cases exceeding a tax-free threshold of €24,500.

Reforming Corporate Tax Measures

The reform introduces several pivotal changes that directly affect business operations:

• The elimination of assessed dividend distribution for profits as of January 1, 2026.
• A reduction in the extraordinary defense contribution on actual dividend distribution from 17% to 5%.
• The removal of rental income contributions.
• An increase in the corporate tax rate from 12.5% to 15%.
• The introduction of an 8% rate for gains from the disposal of crypto-assets.
• An extension of loss carryforwards from 5 to 7 years.

Minister Keravnos emphasized that the reform is fiscally neutral and is intended to promote a fair redistribution of resources among employees, businesses, and households.

Refinements Following Stakeholder Consultations

Significant enhancements emerged from discussions with social partners:

• The allowance for voluntary exemption has surged from €20,000 to €200,000.
• The proposed property and business levies have been temporarily shelved.
• For Non-Dom companies, the fee is reduced from €250,000 to €50,000 for a period of five years, maintaining incentives to attract foreign investments.

Strengthening Anti-Evasion Measures

The initiative establishes robust mechanisms to combat tax evasion. Companies identified with irregularities will receive three warnings. Should issues recur within 30 days, cases will be escalated to the judiciary, which may impose temporary closures or other sanctions.

Timeline and Legislative Endorsement

Minister Keravnos has called upon the Parliament to approve the reform before the end of 2025, ensuring implementation by January 1, 2026. “This tax reform will significantly boost the economy and provide relief to hundreds of thousands of workers and households,” he stated, expressing optimism for the package’s timely passage.