The latest tax reform proposals, presented by academics and experts from the University of Cyprus’s Center for Economic Research, introduce a mix of incentives for businesses, adjustments to dividend taxation, and an increase in the corporate tax rate from 15% to 17%. These recommendations, unveiled at the Presidential Palace, are part of a broader tax overhaul aimed at strengthening Cypriot enterprises, attracting foreign investors, and encouraging companies to relocate and retain profits in Cyprus.

Despite Cyprus already being considered a favorable jurisdiction for dividends, the proposed tax reform includes two major adjustments to further benefit shareholders:

• Reduced Dividend Tax for Cypriot Investors: The special defense contribution on dividends for Cypriot investors will decrease from 17% to 5%.

• No Dividend Tax for Non-Cypriot Investors: The existing exemption for non-Cypriot investors will remain, but an annual flat fee will be introduced.

Additionally, as required by the EU, the corporate tax rate will rise from 12.5% to 15%.

To prevent tax evasion and ensure fair taxation, the proposals introduce anti-abuse measures, particularly for close-structured companies:

• Lifting the corporate veil, allowing shareholders to be taxed as individuals conducting business.

• Adjusting salaries to market rates to prevent artificial underpayment of wages.

The reform also suggests adjusting depreciation periods for assets to support green and digital transformation, such as reducing the depreciation period for machinery to five years.

To promote Cyprus’s transition to a green and digital economy, businesses can benefit from:

• Super deductions for expenses and depreciation.

• Accelerated depreciation for qualifying assets.

• Tax deductions for employee training and upskilling.

• Unlimited loss carry-forward for losses incurred from these measures.

Certain existing provisions will remain but with some refinements:

• Tax residency rules will continue to tax global income with some exemptions.

• Clearer expense deductions for taxable income production.

• Enhanced tax residency criteria for companies, focusing on management and control.

• Maintaining the notional interest deduction (NID) for businesses.

• Preserving Cyprus’s shipping tax regime.

• Retaining the 50% tax exemption for first-time employment in Cyprus.

For individuals, key proposals include:

• Keeping the 183-day tax residency rule while strengthening the 60-day rule.

• Expanding the definition of tax residency to include individuals with their center of business interests in Cyprus, regardless of physical presence (following the French model).

• Resolving dual tax residency conflicts based on Double Tax Treaties.

• Maintaining the Non-Dom regime but introducing an annual flat fee.

Other notable proposals, many suggested by the Institute of Certified Public Accountants of Cyprus, include:

• Stamp Duty Reform: Eliminating blanket application and restricting it to real estate, finance, and insurance sectors.

• Capital Gains Tax: Retaining its application only on immovable property in Cyprus while modernizing the legislation.

• Loss Carry-Forward Extension: Extending the period from five to ten years, with limitations after the fifth year.

• Group Tax Relief Retention instead of shifting to fiscal unity.

• Depreciation of Used Buildings: Allowing depreciation based on purchase cost and resetting the depreciation period for energy-efficient upgrades.

• Abolition of Special Defense Tax on Rental Income and elimination of the 1.5% premium for insurance companies.

• Cryptocurrency Taxation: Subjecting crypto assets to taxation unless classified as capital gains, with further review by tax experts.

• Stock Option Taxation: Introducing a lower tax rate when stock options become exercisable, with anti-abuse provisions.

• Golden Hellos and Handshakes: Taxing employee severance pay in full while allowing full employer deductions.

• Cultural Donations and Contributions: Allowing tax deductions for cultural sponsorships, based on recommendations from the Deputy Ministry of Culture.

Certain tax policy areas require additional evaluation, including:

• Investment Funds: Seeking legal opinions on whether their taxation model should be adjusted.

• Trusts: Reviewing proposals from the Society of Trust and Estate Practitioners (STEP).

• Startups and Innovation: Incorporating suggestions from the Chief Scientist and the Deputy Ministry of Innovation.

• Cyprus Stock Exchange: Reviewing potential state aid measures and enhancing regulatory frameworks.

All proposed tax changes will undergo public consultation, allowing businesses, professional associations, and stakeholders to provide feedback before implementation.