Cyprus Tax Reform: ICPAC’s 14 Proposals and What They Could Mean for Strategic Planning

Cyprus is once again at the forefront of tax innovation, as the country’s leading accounting body has submitted a comprehensive set of proposals aimed at modernizing the nation’s tax system. The Institute of Certified Public Accountants of Cyprus (ICPAC) has recently proposed 14 targeted measures aimed at refining the nation’s tax system. These suggestions are designed to modernize Cyprus’ fiscal framework, enhance its international competitiveness, and address specific areas requiring improvement.

1. Intellectual Property (IP) Nexus Regime: Increase the notional deduction from 80% to 90% for qualifying IP assets introduced from 1 January 2026. This move aims to bolster Cyprus’ appeal as a hub for IP development and management.
2. Notional Interest Deduction (NID): Enhance the deemed deduction rate from 80% to 90% for new equity introduced from 1 January 2026. Additionally, allow any unused deduction to be carried forward indefinitely, promoting equity financing over debt and strengthening corporate balance sheets.
3. Tax Treatment of Imported Assets: Extend the tax step-up provisions to assets imported into Cyprus following a tax exit from non-EU countries, ensuring equitable treatment and encouraging business relocations to Cyprus.
4. Tax Loss Carryforward: Allow businesses to carry forward tax losses for up to 10 years, an increase from the current five-year limit. This would provide companies with greater flexibility in offsetting future profits against past losses.
5. Qualifying Refundable Tax Credits: Introduce mechanisms for refundable tax credits in specific sectors or activities, incentivizing targeted investments and fostering economic growth.
6. Incentives for Foreign Investment Funds: Develop tax incentives tailored for foreign investment funds to attract international capital and position Cyprus as a preferred jurisdiction for fund domiciliation.
7. Simplification of Tax System: Streamline tax procedures and reduce bureaucracy to enhance efficiency and reduce compliance costs, particularly benefiting small and medium-sized enterprises (SMEs).
8. Digitization of Tax Services: Accelerate the digitization of the Tax Department’s operations to improve service delivery, reduce errors, and facilitate easier compliance for taxpayers.
9. Regulation of Tax Advisors: Implement a regulatory framework for tax advisors to ensure high professional standards and protect taxpayers from erroneous or unethical advice.
10. Establishment of a Tax Council: Create an independent body to oversee tax policy, ensuring transparency, consistency, and adaptability in the tax system.
11. Tax Justice: Enhance mechanisms for resolving tax disputes efficiently and fairly, ensuring taxpayer rights are upheld.
12. Green Tax Incentives: Introduce tax benefits for investments in environmentally friendly technologies and practices, supporting Cyprus’ green transition and sustainability goals.
13. Support for Digital Transformation: Provide tax deductions or credits for businesses investing in digital technologies, encouraging innovation and competitiveness in the digital economy.
14. Review of Personal Income Tax Bands: Adjust personal income tax brackets to ensure a fairer distribution of the tax burden and enhance disposable income for middle-income earners.

Planning Considerations:

• For Businesses: Companies, especially those in the IP sector or considering equity financing, should assess how these proposed changes could impact their tax planning strategies. The potential for increased deductions and extended loss carryforward periods may offer significant benefits.
• For Investors: The introduction of incentives for foreign investment funds and refundable tax credits could make Cyprus a more attractive destination for investment. Evaluating these opportunities in the context of the broader tax landscape is advisable.
• For SMEs: The emphasis on simplifying the tax system and reducing compliance costs could alleviate administrative burdens. SMEs should stay informed about these developments to leverage potential efficiencies.
• For All Taxpayers: The proposed digitization of tax services and regulation of tax advisors aim to enhance the overall taxpayer experience. Engaging with qualified professionals and utilizing digital platforms can facilitate compliance and optimize tax positions.

These proposals reflect ICPAC’s commitment to fostering a tax environment that is competitive, fair, and conducive to economic growth. Stakeholders are encouraged to engage with the consultation process and consider how these potential changes may influence their financial and operational strategies.

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