Effective from 1 January 2026, Cyprus enacts its first full tax overhaul in over two decades. Below are the company-focused Cyprus Tax Reform changes that matter, what each change means, in plain-English takeaways for cross-border founders, CFOs, enterpreneurs, large-organizations and investors.
1) Corporate income tax (CIT) → 15%
The statutory CIT rate rises from 12.5% to 15%. This aligns Cyprus with the international minimum while keeping a competitive, simple base.
What this means: The move improves treaty credibility and Pillar Two optics without undermining Cyprus’ broad participation exemptions and incentives.
2) Deemed Dividend Distribution (DDD) abolished (for profits earned from 2026)
Cyprus scraps the long-criticised DDD mechanism on post-2025 profits. Transitional rules keep DDD-style 17% SDC only for dividends that relate to 2024–2025 profits (e.g., when paid or deemed in 2026–2027). Plan distributions accordingly.
What this means: Cleaner, more predictable profit repatriation from 2026 earnings.
3) Special Defence Contribution (SDC) on dividends — streamlined & lighter
- Individuals (Cyprus-resident & domiciled): SDC on actual dividends reduced to 5%. (Relevant to local owners and key talent who become resident.)
- Cyprus companies receiving foreign dividends: A targeted 5% SDC can apply only where (i) the payer’s income is >50% investment/passive, and (ii) the payer’s foreign tax burden is <50% of the Cyprus company’s tax (i.e., <7.5% given 15% CIT). This is a reduction from the old 17% defensive charge.
- Rents: SDC on rental income is abolished.
What this means: The widely used dividend participation model remains intact; the defensive rule survives but at a lighter 5%.
4) Withholding tax (WHT) on outbound dividends — defensive only
New statutory WHT on dividends paid by Cyprus companies to non-residents applies only in risk cases:
- 5% if the recipient is in a low-tax jurisdiction.
- 17% if in an EU non-cooperative (blacklisted) jurisdiction.
If both apply, the 17% rate prevails. (Interest/royalty WHT rules to non-cooperative states remain in the regime.)
What this means: For normal treaty/EU destinations there’s no dividend WHT; but structures pointing to low-tax/blacklist hubs will leak.
5) Innovation & growth incentives — extended or upgraded
- R&D “super-deduction”: 120% (expenses 2025–2030; capex included; timing clarified).
- Employee stock options: Benefit taxed at a flat 8% (up to 2× the employee’s annual salary with the issuer; minimum 3-year vesting, non-transferable before vesting, 50% min. strike vs grant value, employer plan pre-approved).
- Crypto disposals: Profits from disposal of crypto-assets taxed at 8% when they form part of taxable business profits (specific new article).
- First stock-exchange listing costs: Deduction up to €300,000, with de-minimis and carry-forward mechanics.
What this means: Headquartering, tech and scale-ups get clearer rules and better after-tax outcomes on options, R&D and capital-markets access.
6) Friction costs removed
- Stamp duty abolished in full from 1 January 2026. Contracts, share transfers and financing documents are no longer stampable in Cyprus.
What this means: Faster deals, fewer formalities, lower transaction cost for M&A, financing and intra-group documentation.
7) Administration, compliance & anti-abuse
- “Disguised distributions” can be re-characterised and taxed like dividends (with SDC/WHT as applicable). New certification mechanisms introduced.
- Stronger collection tools (incl. ability to lien/freeze shares for material tax debts).
What this means: Substance and arm’s-length standards matter even more; dividend-like value transfers will be taxed as such.
Why Cyprus remains a top place to set up
- EU, common-law, deep treaty network and professional services ecosystem.
- No dividend WHT in mainstream routes; defensive WHTs target only low-tax/blacklist leakages.
- Participation regime preserved (dividends exempt from income tax; only a narrow 5% SDC in passive/low-tax cases).
- Modern incentives (R&D 120%, 8% stock options, 8% crypto, IPO cost deduction).
- Transactional simplicity with stamp duty abolished.
What international groups should do now
- Map dividend flows: avoid low-tax/blacklist endpoints to keep 0% dividend WHT; where unavoidable, model 5%/17% leakages.
- Time distributions: profits up to 2025 can still pull 17% SDC under the transition rules; align board resolutions and reserves tracking.
- Re-check holding filters: for inbound dividends to Cyprus HoldCos, confirm the payer’s business profile (>50% investment income?) and foreign ETR (≥7.5%). If both tests fail, budget 5% SDC.
- Leverage incentives: refresh R&D pipelines, formalise option plans to meet the 8% conditions, and consider IPO readiness with the €300k deduction.
- Tighten governance: document dividends and related-party transactions; avoid disguised distributions.
How Asterisk can help
At Asterisk Corporate Services, we are a fully licensed & regulated service provider, speciaziling in Cyprus Company incorporations and ongoing maintenance (Accounting, Tax, Directorships etc). Contact us for more information and any assistance you may need on the tax reform and other matters at contact@asterisk.cy.
We have thorougly followed the Cyprus Tax Reform changes and have published also published a FAQ, focused on changes which impact businesses and our full article on key changes affecting both individuals and businesses here. You can also find the legislation as published in the Cyprus Government Gazette here.
Disclaimer
This guide is a general information summary of the Cyprus Tax Reform as enacted. It does not constitute tax, legal or accounting advice and should not be relied upon as such. Specific outcomes depend on your facts, financials and the exact legislative text and any implementing circulars. We suggest obtaining advise from a professional before acting.
