Unfulfilled Potential In Economic Reform

The recent approval of the government budgets for 2026-2028 and an accompanying tax reform under President Nikos Christodoulides may have been touted as progressive steps towards modernizing Cyprus’ tax system. However, these measures fall short of catalyzing balanced and equitable economic growth. Rather than initiating substantive change, they primarily serve the interests of middle-income households and bolster the profitability of larger enterprises.

Short-Sighted Policies And Persisting Inequalities

The revisions criticized as making the tax system “fairer, more modern, and more competitive” hardly qualify as a robust reform. With soaring bank deposits and fiscal surpluses reaching €5.8 billion (as of November 2025), the government had the means to significantly reduce taxes on lower and middle-income earners and trim the VAT on essential goods and services. Instead, the tax reform maintains the status quo—perpetuating income disparity and failing to account for prolonged challenges such as inflation and demographic shifts.

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Furthermore, current measures largely favor established public companies. Even with the corporate tax rate increase from 12.5% to 15% for firms exceeding €750 million in annual revenues, the reform offers generous concessions including the abolition of the deemed dividend distribution system, a reduction in tax on actual dividend payments from 17% to 5%, and the Notional Interest Deduction scheme which can drive effective rates as low as 2.5%.

Misplaced Incentives And Underutilized Resources

The reform’s emphasis on tax incentives for green, digital, and innovative ventures is a step in the right direction. However, these incentives are undermined by a broader fiscal policy that over-prioritizes investments in property development, construction, retail, and hospitality sectors—industries that inherently rely on low-wage, low-productivity labor. This imbalance is evident when comparing Cyprus’ labor costs of €21 per hour to the EU average of €33.5 per hour in 2024. Consequently, these policies foster an environment where wage suppression and resource allocation remain skewed in favor of established, profit-centric enterprises.

Policy Recommendations For A More Equitable Future

A more impactful tax reform should address both immediate fiscal imbalances and long-term socio-economic challenges. First, a commitment to index the tax-free thresholds, higher tax rates, and tax deductions to inflation at regular intervals (akin to practices in Germany) would help preserve real disposable incomes over time.

Second, to mitigate escalating wealth inequalities—where the top 10% of income earners now command over 66% of net wealth—it is imperative to reinstate a progressive annual tax on the updated market value of immovable properties. This measure would serve to broaden the tax base and promote a fairer distribution of economic benefits.

Conclusion: A Missed Opportunity

While the tax reform introduces attractive incentives for innovation and competitiveness, its overall structure continues to support resource distribution that benefits entrenched interests. By failing to realign investments toward sectors that nurture productivity and decent job creation, Cyprus risks entrenching low-income dynamics and widening the wealth gap further. The government’s fiscal strategy must evolve to ensure a truly modern, competitive, and inclusive economy that elevates living standards for all its citizens.