Cyprus enacted the most significant reform of its tax system in more than two decades, effective 1 January 2026. The headline is the corporate income tax rate, which rose from 12.5 to 15 per cent in line with the OECD global minimum.
That figure is being reported as though it settles the question. It does not. The 15 per cent rate is a starting point, and the two regimes that reduce it for holding, financing and IP-owning companies survived the reform intact.
The notional interest deduction
A Cyprus company funded with new equity rather than debt can claim a notional interest deduction against its taxable profit, without any interest actually being paid. The deduction is capped at 80 per cent of the taxable profit generated by that equity, which brings the effective rate on qualifying profit down to 3 per cent.
The reference rate is based on the ten-year government bond yield of the country where the capital is employed, plus a fixed premium, and the Tax Department publishes the applicable rates each year. The deduction is claimed annually for as long as the capital remains productively deployed. It cannot create or increase a tax loss, and anything unused in a year is lost rather than carried forward.
For an international group capitalising a Cyprus financing or holding vehicle with fresh equity, this is the single most valuable feature of the system, and the reform did not touch it.
the IP box
Qualifying profit from qualifying intellectual property, including patented inventions and copyrighted software, benefits from an 80 per cent exemption. Only the remaining 20 per cent is taxed, which produces an effective rate of 3 per cent on income within the regime.
The regime is nexus-based and follows the OECD modified nexus approach, so the benefit is proportionate to the qualifying development expenditure actually incurred by the Cyprus company. It rewards genuine development activity rather than the acquisition of an intangible. Alongside it, Cyprus continues to offer a 120 per cent deduction for qualifying research and development expenditure, extended to 2030.
the holding structure
The features that make Cyprus work as a holding jurisdiction are unchanged and, taken together, are more important than the headline rate.
Dividends received from subsidiaries are exempt from corporate income tax, subject to anti-avoidance conditions. Gains on the disposal of securities are exempt, with the position on property-rich companies tightened by the reform and worth checking where real estate sits in the structure. Cyprus imposes no withholding tax on dividends or interest paid to non-residents, and none on royalties where the right is used outside Cyprus. Royalties for rights used in Cyprus bear 10%, and payments to companies in EU blacklisted jurisdictions have carried withholding tax since 2022. From 1 January 2026 the defensive measures extend to low-tax jurisdictions, where interest and royalties paid to associated companies are no longer deductible. The destination of every payment therefore needs checking rather than assuming.
Furthermore, stamp duty has been abolished entirely from 1 January 2026. That removes a cost and an administrative step from share transfers, loan agreements and intra-group documentation. The treaty network remains extensive and includes all three Baltic states.
the compliance timetable tightened
For tax years from 2026 onwards, the corporate income tax return and the final tax payment both fall due by 31 January of the second year following the tax year, rather than 31 March with payment later. The first return under the new date is the 2026 return, due 31 January 2028. Supporting records must be kept for six years.
The reform also extended the carry-forward period for trading losses from five years to seven, applying to set-off from tax year 2026. For groups with loss-making years behind them, that is worth modelling before the next return.
The return depends on audited financial statements, so the audit is the binding constraint rather than the tax deadline. A group that appoints its auditor late in the cycle compresses everything downstream, and Cyprus has a finite number of licensed audit firms with capacity concentrated around filing season.
the practical position
Cyprus is no longer competing on headline rate. It competes on what sits underneath it, and for equity-funded holding and financing structures, or companies owning genuine intellectual property, the effective outcome is materially lower than 15 per cent.
Structures set up before this year should still be reviewed. The corporate residency test was widened, the property-rich threshold for securities disposals was revised, and the filing calendar moved. None of those are difficult to address, but they are easier to address now than at the next deadline.
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Sebastian Nikita FCCA is a director and audit signing partner at Nikita & Partners Limited, an ICPAC-licensed audit, tax and advisory firm in Limassol, Cyprus.
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