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.

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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.