Cyprus stands at a critical crossroads. Its “brand” as a tax haven has brought growth and foreign investment, but European pressure and global changes signal that this model is nearing its end. The European Commission presents Cyprus with a stark reality: reliance on corporate tax is dangerous, and the model has no future.

As Brief reports, according to the latest European Commission report on economic, social, structural, and fiscal policy, presented at the most recent Council of Ministers meeting, Cyprus relies disproportionately on corporate taxation to sustain its public finances.

The report highlights that “in 2023, revenues from corporate tax amounted to 6.6% of GDP—the highest rate in the entire European Union. In absolute terms, almost 18% of the country’s total tax revenue came from corporations, compared with the EU average of just 8%.”

The report notes: “Corporate taxation plays a significant role in promoting competitiveness in Cyprus. The country is among the EU’s leaders in corporate tax revenue as a percentage of GDP (6.6%), largely due to the strong presence of foreign companies. At the same time, its corporate tax rate is one of the lowest in the EU.”

Beyond the low tax rate, Cyprus has introduced various incentives, including for R&D, green transition, equity capital deduction (to reduce notional interest expenses on equity from taxable profits), and favorable regimes for film production, shipping activities, and intellectual property.

However, Cyprus has often been criticized for “aggressive tax planning”, enabling multinational companies to reduce tax obligations in other jurisdictions. The Commission makes it clear that this model cannot continue without risks.

Already, a proposal is under consultation to increase the corporate tax rate to 15%, aligning with the OECD’s global minimum taxation framework for multinationals.

Moreover, under the Recovery and Resilience Plan, Cyprus expanded its special tax incentive for venture capital to include not only individuals but also legal entities, with the goal of supporting innovative SMEs.

Aside from corporate taxation, Cyprus exhibits notable features in other areas of taxation:

1. Low labor taxation, which makes employment attractive but limits social progressivity.

2. Higher consumption taxes compared to the EU average.

3. Virtually no property taxation, following the abolition of the periodic property tax in 2017.

Regarding labor taxation, the Commission notes: “The tax burden on labor is relatively low across different income levels. In 2024, Cyprus’s non-wage labor cost was far below the EU average for single individuals at various income levels.”

The European Commission recommends that Cyprus broaden its tax base through “less harmful” taxation, such as property and environmental taxes, instead of continuing to rely almost exclusively on corporate tax.