Cyprus tax reform aims to boost take-home pay from January

Three weeks into the rollout of the new tax system, the tax department has already identified a series of targeted adjustments aimed largely at easing the burden on natural persons, with the House of Representatives signalling it is ready to adopt the proposed changes.

Tax Commissioner Sotiris Markidis presented the suggested additions and clarifications to the Parliamentary Finance Committee, which approached them positively.

The additional fiscal cost resulting from the proposed adjustments is not considered prohibitive.

At the same time, officials stress that the reform already adopted by parliament has strengthened the tax department’s enforcement tools, reinforcing tax collection while supporting efforts to curb tax evasion and safeguard state revenues.

Addressing the committee, he said the department’s first priority had been to inform individuals, noting that January marks the first month in which employees are paid under the new tax regime.

“All taxpayers who paid tax will see a reduction in the income tax they will pay,” he said.

Markidis continued saying that “It is clear that they will see a higher salary, whether they manage to submit the relevant declaration form or not, since the tax-free amount has increased and more favourable scales are provided.”

He clarified that there is no immediate need for taxpayers to submit the relevant tax declaration form in January in order to benefit from deductions, as any amounts declared later will be adjusted accordingly.

One of the first practical issues identified during implementation, he said, concerned the structure of the declaration form itself.

In order to avoid the inclusion of sensitive personal data, such as the number of children or overall family income, taxpayers are required to understand which deductions they are entitled to and calculate them independently.

He added that the form was reviewed by the Commissioner for Personal Data Protection.

To support this process, the tax department published a detailed explanatory guide, frequently asked questions and practical examples on its website.

In parallel, since mid-January, the department has organised extensive information seminars for Oev, Keve, Selk, employers and the two major trade unions.

Around 10,000 people are expected to attend within a month, Markidis said.

One of the key clarifications concerns how dependent children are counted for income-related tax deductions.

Markidis told MPs that families should not lose deductions simply because some children have married or become financially independent, provided the family still includes at least one minor or dependent child.

Under the proposal, all children will continue to be counted for deductions linked to loans, rent and green energy, as long as the family has at least one dependent child and remains within the €200,000 income threshold.

The emphasising philosophy, he explained, “is to offer families with more than one child a form of recognition and support”.

The finance committee endorsed the approach, viewing it as both fair and socially beneficial.

Another adjustment gaining support concerns tax relief for loans taken out to renovate a primary residence.

Interest paid on such loans would now be eligible for tax deductions.

Markidis noted that while this was not explicitly provided for in the legislation, the department had treated it as applicable, with committee chair Christiana Erotokritou confirming that this reflected parliament’s intention.

Further clarification is also proposed for households where adult, unmarried children are employed but continue to live with their parents.

In such cases, the income of those children would no longer be counted toward the household’s overall income ceiling, but only for child benefit purposes.

A broader discussion was held on the calculation of family income, reflecting the growing complexity of family structures.

Tax officials explained that income criteria are aligned with the child allowance framework and that, under the law, the income of all individuals living under the same roof is currently counted, not only that of the parents.

Markidis proposed that, where at least one dependent child exists, all children should continue to count for deductions on loans, rent and green purchases, while their income should be excluded from the family income calculation.

Clarifications were also given on income that is not taxable but is still included for eligibility purposes, such as maintenance payments, public grants and green subsidies.

On maintenance, the tax department explained that while the payer receives no tax exemption and the recipient is not taxed, the amount received is included when calculating the recipient’s family income.

In single-parent families, the parent with custody receives a double deduction, while the other parent may benefit from a single deduction per child, provided income does not exceed €40,000.

Where custody is shared equally, the household is not treated as a single-parent family and incomes are assessed jointly.

In cases where a divorced parent does not have custody or overnight stays but later forms a new family, the income threshold rises to €100,000, while the parent remains entitled to a dependent deduction for children from a previous marriage, even if they live under a different roof.

Attention was also drawn to share option schemes, following feedback from the TechIsland Association.

Companies are seeking flexibility during the six-month transitional period so that existing employee share purchase plans that do not fully align with the new law can still be approved, with the intention of bringing them into full compliance once the transition ends.

On home insurance, Markidis noted that the legislation currently covers both primary and secondary residences, including rented homes.

Under the new system, individuals are entitled to a €500 tax exemption for insuring their home.

He suggested the benefit should apply to both spouses, regardless of whose name appears on the insurance policy.

Turning to green investments, the Tax Commissioner acknowledged that unnecessary bureaucracy is slowing the granting of tax exemptions.

He proposed that eligible expenditure should be recognised on the date the invoice is issued, rather than after lengthy procedural checks, with effect from January 1, 2026.

As for electric vehicles, the department is examining whether tax deductions should be granted in full at the time of purchase or spread over time when the vehicle is financed.

Markidis said he favours granting the deduction upfront, based on the purchase value.

He also referred to further issues that may require attention, including the requirement that from July 1 all rents be paid via electronic transfer, noting that the legislation does not currently provide for an administrative fine in cases of non-compliance.

Disy MP Onoufrios Koulas observed that while the family income threshold was raised to €100,000, the limit for single individuals remained at €40,000, proposing that it be increased to €50,000 on a proportional basis.

Responding to comments by Akel MP Andreas Kafkalias, Markidis clarified that the tax department is presenting issues identified during implementation and has not received instructions from the Ministry of Finance.

Officials also clarified that students under the age of 24 are considered dependents regardless of marital status or whether they have children of their own.

Child-related deductions apply for the full year, even if a child is born on December 31 or dies during the year.

Closing the discussion, Markidis said it would be unfair to portray the reform as overly complex, stressing that clarifications during the first year are both expected and necessary.

Following the meeting, committee chair Erotokritou said that just five weeks after its adoption, the reform is already having a tangible effect.

“What matters in politics is that what we vote on in the Plenary has a direct effect on people’s pockets,” she said.

Elam MP Sotiris Ioannou, meanwhile, pointed to the position of divorced parents, arguing that the €40,000 income threshold remains too low given child support obligations, adding that there is a commitment to revisit the issue in the coming weeks.