The Cyprus tax reform introduces Article 20D of the Income Tax Law, establishing a preferential tax regime for share-based incentive schemes granted to employees and directors.

Under the new rules, benefits derived from share options or rights to acquire shares granted by an employer may be taxed at a flat rate of 8%, provided certain conditions are satisfied.

The benefit is treated as employment income, but the portion qualifying for the preferential regime:

• is taxed separately at 8%, and

• is not added to the individual’s other income for purposes of applying the normal progressive income tax rates.

This measure aims to support start-ups, technology companies and innovative enterprises, allowing them to attract and retain skilled employees through equity-based remuneration.

Technical conditions for the 8% regime

The preferential tax treatment applies only if the rights are granted under an incentive scheme approved by the Cyprus Tax Commissioner.

The scheme must satisfy the following conditions:

Minimum vesting period

The share rights must have a minimum vesting period of three years.

The vesting period cannot begin before the date on which the incentive scheme is approved by the Commissioner of Taxation.

Non-transferability

The rights granted to the employee or director must be non-transferable during the vesting period.

Eligible shares

The rights must relate to:

• shares of the employer company, or

• shares of a company that directly or indirectly holds shares in the employer.

The shares must carry the same rights and obligations as ordinary shares, except that voting rights may be excluded.

Minimum exercise price

The exercise price (strike price) of the shares must not be lower than 50% of the share value at the time the scheme is approved by the Commissioner of Taxation.

Limitations of the preferential regime

The 8% tax regime applies only within specific limits.

Employment income limitation

The portion of the benefit eligible for the 8% tax rate cannot exceed an amount equal to twice the employment remuneration earned by the employee or director in the year in which the rights vest.

Any benefit exceeding this threshold is taxed under the normal personal income tax rates.

Ten-year cumulative limit

The total benefit that may be taxed at the 8% rate cannot exceed €1,000,000 within any ten-year period of employment.

Related party restriction

The preferential tax regime does not apply if the rights are granted to a person considered a related party under Article 33 of the Income Tax Law.

Example – Benefit fully within the 8% regime

Assume the following scenario.

On 1 February 2026, Company X Ltd grants 10,000 share options to its director A under an approved incentive scheme.

Key information:

Benefit from exercising the options:

$$(€13-€5)\times 10,000=€80,000$$

Maximum amount eligible for the 8% regime:

$$€60,000\times 2=€120,000$$

Since the benefit €80,000 is below the threshold, the entire amount qualifies for the preferential tax rate.

Tax payable:

$$€80,000\times 8\%=€6,400$$

Example – Benefit exceeding the preferential threshold

Assume a second scenario.

On 1 June 2026, Company Z Ltd grants 20,000 share options to its director B.

Key information:

Benefit from exercising the options:

$$(€20-€6)\times 20,000=€280,000$$

Maximum amount eligible for the 8% regime:

$$€100,000\times 2=€200,000$$

Therefore:

• €200,000 qualifies for the 8% tax rate

• €80,000 is taxed at the normal personal income tax rates

Tax calculation:

The ten-year cap of €1,000,000 is not exceeded in this example.

Transitional rule

Employers may submit an existing incentive scheme to the Commissioner of Taxation within six months from 1 January 2026, even if the vesting period started before that date, provided the minimum three-year vesting period has not yet expired.

This allows existing share-based incentive plans to potentially benefit from the new regime.

Commentary – Policy objective

The introduction of the 8% tax regime for share-based payments represents a significant development for the Cyprus tax system.

Equity-based remuneration is commonly used by start-ups and high-growth companies, particularly in the technology sector, where companies may prefer to offer share participation rather than high cash salaries.

By introducing a predictable and relatively low tax rate, Cyprus aims to strengthen its position as a jurisdiction for innovative businesses and entrepreneurial ventures, while maintaining safeguards against abuse through the eligibility conditions and limits.