Overview

In addition to the main reforms introduced in the Cyprus tax system, the tax reform package also includes a series of technical amendments to the Income Tax Law affecting the taxation of companies.

These amendments address several aspects of the corporate tax framework, including deductible expenses, capital allowances, research and development incentives, related party rules and the treatment of certain types of income.

Although many of these changes are technical in nature, they improve the clarity, consistency and functionality of the Cyprus corporate tax system.

Deductible expenses and new tax incentives

Stock exchange listing expenses

Companies are now allowed to claim a tax deduction of up to €300,000 for expenses incurred in connection with the first listing of their shares on a recognised stock exchange.

The deduction is granted in accordance with the EU de minimis Regulation (EU) 2023/2831 and may be carried forward for up to two subsequent years, provided the conditions continue to be satisfied and the deduction does not create a tax loss.

Cultural donations

A tax deduction of up to €50,000 is available for donations or contributions to cultural institutions approved by the Deputy Ministry of Culture.

The deduction is granted only to the extent that it does not create a tax loss.

Entertainment expenses

The ceiling for allowable business entertainment expenses has increased from €17,086 to €30,000, while the existing restriction that such expenses may not exceed 1% of the gross income of the business remains in place.

Salary expenses and social contributions

Salary or wage expenses will not be deductible where the related contributions to the General Healthcare System (GESY) have not been paid.

However, an exception applies where such contributions are subject to a court-approved settlement arrangement.

Rental payments

Rental payments will not be considered tax deductible where they are made in breach of Article 48A of the Assessment and Collection of Taxes Law, which requires rental payments to be made exclusively through electronic means.

Interest expense restrictions

Interest expenses incurred for the acquisition of shares in a wholly owned subsidiary will not be deductible where that subsidiary is:

• resident in a non-cooperative jurisdiction, or

• incorporated in such jurisdiction and not tax resident in another cooperative jurisdiction.

Ex gratia payments to employees

Expenses relating to ex gratia payments to employees or officers, falling within the provisions of Article 5 of the Income Tax Law, are not deductible for tax purposes.

Capital allowances and investment incentives

Intangible assets with indefinite life

For tax amortisation purposes, the useful economic life of intangible assets with indefinite life is now deemed to be 20 years.

Contribution of assets in exchange for shares

Where assets are transferred to a company in exchange for the issuance of new shares, the tax value of those assets for capital allowance purposes is determined based on their fair market value at the time they enter the business.

No deduction will be allowed if the value is not adequately substantiated to the satisfaction of the Tax Commissioner.

Entry of assets into the Cyprus tax system

The law now clarifies how the initial tax value of assets entering the Cyprus tax system is determined in situations such as:

• the transfer of assets to Cyprus

• the transfer of the tax residence of a company to Cyprus

• the creation of a permanent establishment in Cyprus.

Where the assets are transferred from another jurisdiction, the tax value generally corresponds to the value recognised in the transferring jurisdiction, unless that value does not reflect fair market value.

Energy efficiency and green investments

The provisions granting capital allowances for investments improving the energy efficiency of buildings and for electric vehicles have been extended until the 2030 tax year.

Agricultural investments

Accelerated depreciation is introduced for machinery and installations used in agricultural and livestock production, excluding machinery relating to irrigation.

The deduction is granted in accordance with EU State Aid Regulation (EU) 2022/2472.

Research and development incentives

The additional 20% super deduction for research and development expenses has been extended until 2030.

Where the relevant R&D expenditure is capital in nature, the deduction is granted through the capital allowance provisions.

However, the additional deduction cannot be claimed for the same intangible asset where the IP Box regime (nexus approach) has been applied.

Pension and provident fund income

Income derived from:

• contributions made to an approved provident fund established in Cyprus or another EU Member State, or
• payments received under an approved insurance contract providing lump-sum or periodic pension benefits

is considered exempt income for the purposes of the Income Tax Law.

Notional deduction for additional COLA (Cost of Living Allowance)

A new notional tax deduction is introduced equal to twice the additional Cost of Living Allowance (COLA) granted compared with the immediately preceding year, in accordance with the Permanent COLA Agreement.

Group relief clarification

The legislation clarifies that before claiming group relief, a company must first offset any taxable income against its own brought-forward losses.

Only after this step may group losses be utilised.

Related party clarification

The law further clarifies the conditions under which a director may be considered a related party of a company for the purposes of Article 33 of the Income Tax Law (arm’s-length principle).

Insurance companies

The insurance premium tax previously applicable to life insurance companies has been abolished.

Consequently, the former mechanism requiring a minimum tax based on gross premiums no longer applies.

Foreign permanent establishments

The exemption from tax in Cyprus for profits of a foreign permanent establishment does not apply where the permanent establishment is located in a jurisdiction included on the EU list of non-cooperative jurisdictions for tax purposes.

Tax credits and global minimum tax

The Income Tax Law clarifies that double taxation relief cannot be granted in respect of the top-up tax imposed outside Cyprus under the Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR) within the framework of the EU Global Minimum Tax Directive (Pillar Two).

Accordingly, any such top-up tax cannot be credited against Cyprus corporate income tax under the normal foreign tax credit rules of the Income Tax Law. Instead, the relevant legislation provides a separate mechanism for the elimination of double taxation within the global minimum tax framework.

This provision primarily affects large multinational groups with consolidated annual revenues exceeding €750 million, which fall within the scope of the global minimum tax rules.

Example

Assume a multinational group with a parent company in another EU Member State has a subsidiary in Cyprus.

The Cyprus company generates profits of €1,000,000. Due to available deductions and incentives, the effective tax rate in Cyprus is 12%, resulting in tax paid of €120,000.

Under the global minimum tax rules, the minimum effective tax rate must be 15%, corresponding to €150,000.

The parent jurisdiction may therefore impose a top-up tax of €30,000 under the Income Inclusion Rule (IIR).

Under the amendment to the Cyprus Income Tax Law, this €30,000 top-up tax cannot be claimed as a foreign tax credit against Cyprus corporate income tax, as the Pillar Two legislation provides its own mechanism for addressing double taxation.

Collective investment schemes

Profits arising from the redemption of units or shares in a collective investment scheme established as a company are treated as dividend income, after deducting any capital gains tax already paid.

Such redemption does not constitute a disposal of securities, meaning that the securities disposal exemption does not apply in these cases.

These provisions apply from 1 January 2026. Accordingly, where the investor is a Cyprus tax resident and domiciled individual, the profit element arising from the redemption is subject to Special Defence Contribution on dividends at the rate of 5%. However, based on the transitional framework accompanying the reform, the practical application of this rule is expected to affect redemptions taking place from 1 January 2031 onwards, allowing a transition period for existing investment structures.

For Cyprus tax resident individuals who are non-domiciled, as well as non-resident investors, dividend income continues to be exempt from Special Defence Contribution.

General rule on tax deductions

A new provision clarifies that tax exemptions and deductions used to determine taxable income must generally be granted under the provisions of the Income Tax Law. However, exemptions or deductions already provided under other legislation in force on 1 January 2026 will continue to apply until such legislation is amended or repealed.

Commentary

While many of these amendments are technical, collectively they contribute to improving the clarity, consistency and practical operation of the Cyprus corporate tax framework.

Several provisions also introduce additional tax incentives or extended reliefs, particularly in areas such as innovation, capital investment, sustainability and capital market development.

These changes further support Cyprus’ objective of maintaining a competitive and transparent corporate tax environment.