1. Taxation of Provident and Pension Funds

Why introduce such a measure?

Provident and pension funds have been tax‑exempted for more than twenty years, reflecting a socially balanced approach to retirement savings for employees and pensioners alike. Importantly, there is no pressure from the European Union to introduce taxation on these funds. On the contrary, the Commissioner for Pension Funds has publicly noted that 29 out of 36 OECD countries do not tax fund returns and has recommended the continuation of the existing regime.

Furthermore, in response to a parliamentary question, the Minister of Finance confirmed that there is no recommendation or request from the EU to alter the tax treatment of provident and pension funds.

The proposed taxation also creates unequal treatment when compared to other insurance‑based investment products of a similar nature. It is particularly difficult to justify this measure given that no such taxation was introduced in 2013, during the Cyprus financial crisis, when the state was in urgent need of funds. Today, with reported fiscal surpluses, appr Euro 800MLN the rationale for such a change is even less clear.

 

Impact on fund structures (UCITS, property funds, etc.)

The proposal extends taxation to other fund structures, including property and other investment funds. This development risks making Cyprus‑based funds significantly less attractive to overseas investors, family offices, and international structures. Tax neutrality has been a key selling point for Cyprus’ fund industry and a major competitive advantage for fund managers and introducers. Removing this benefit undermines the country’s position as a regional fund centre, without delivering any obvious strategic gain. 

 

Our position

Taxing provident and pension funds is inherently unfair and disproportionately affects public servants, employees, and lower‑income earners. The measure risks discouraging long‑term savings and further demotivating civil servants and employees who rely on these schemes for retirement security.

 

 

2. Changes to the Corporation Tax Rate

The 2026 Tax Reform proposes an increase in the Corporation Tax (CT) rate from 12.5% to 15%, largely to offset the reduction of the Special Defence Contribution (SDC) on dividends from 17% to 5%.

Our objection is not focused solely on the numerical increase of the corporation tax rate by 2.5%, but on the underlying principle. As an international financial centre, Cyprus must prioritise tax stability. Frequent changes to headline tax rates create uncertainty and undermine investor confidence, particularly for international businesses seeking a predictable long‑term operating environment. Prior to 2013, the Corporation Tax Rate in Cyprus was 10%. During the  2013 crisis it has increased to 12.5% and 13 years later we are proposing to increase it to 15% without any pressure from the European Union as explained below. 

Being an international financial centre Cyprus should keep its tax rates stable if not reducing them and strive to find attractive tax measures for international clients to keep the Republic competitive.

 

The OECD Pillar Two Global Minimum Tax – A Misapplied Argument

It is often argued that the increase in Corporation Tax is necessary due to the OECD Pillar Two Global Minimum Tax and its EU implementation. This argument is misleading. Pillar II regime is designed to prevent profit shifting by large multinational corporations, not to justify a blanket increase in Corporation Tax for the entire business community.

Pillar Two applies only to large multinational enterprise (MNE) groups and, under EU law, to large‑scale domestic groups that meet strict revenue thresholds. It does not apply to the vast majority of companies operating in Cyprus (>98%) which are small sized according to the EU size requirements.

 

Pillar Two actually applies to:

1. Large multinational groups only
   Pillar Two targets MNE groups with consolidated annual revenues exceeding €750 million, measured over at least two of the previous four financial years.
2. Large domestic groups (under EU law)
   The EU directive extends the regime to large domestic groups that meet the same revenue threshold.
3. Exclusion of SMEs
   Small and medium‑sized enterprises that are not part of qualifying multinational or large domestic groups fall outside the scope of the GloBE (Global Anti‑Base Erosion) rules.

         

Conclusion

A small or medium‑sized local Cyprus companies with revenues far below €750 million will not be subject to the OECD Pillar Two minimum tax, therefore even if these tax, measures are imposed to Cyprus by the EU they will have little applicability to local businesses. 

In practice, Pillar Two is expected to affect no more than <100 companies maximum in Cyprus — representing less than 2% of all registered companies. While the reduction in dividend taxation is welcome, there is no compelling reason why the loss of SDC revenue must be recouped through an increase in Corporation Tax. If Cyprus were managed as a competitive business hub, it would seek to enhance its attractiveness through targeted incentives—similar to the non‑dom regime and the IP box—rather than offsetting one tax reduction by increasing another.

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3. Excessive Powers Granted to the Tax Commissioner

We also express our concerns and reservations regarding the proposed expansion of powers granted to the Tax Commissioner. Measures such as the suspension of business operations, interference with rent payments, corporate deregistration, share seizure, and cancellation of property transfers—without recourse to court proceedings—pose significant risks, despite their well‑intentioned objectives.

By bypassing judicial oversight, these measures concentrate excessive authority within the Commissioner’s office, enabling direct intervention in commercial activity. Such powers are not suitable for a “one‑size‑fits‑all” application and are likely to generate procedural complexity, legal uncertainty, and operational disruption.

Cyprus has a diverse business landscape, ranging from small local enterprises to large international complex multijurisdictional groups. Administrative delays, outstanding filings, or minor tax arrears should not justify the freezing or closure of otherwise viable businesses. In many cases, such issues arise from internal processes or external factors rather than deliberate non‑compliance. Also, what happens in situations when such filings or penalties are oversights of the actual income tax office. Such measures are simply not practical.

We are concerned that these measures could undermine the credibility and prestige of Cyprus’ financial model, drawing comparisons with administrative practices seen in other weaker jurisdictions (such as Greece) that Cyprus has historically sought to differentiate itself from. In a small country, where commercial relationships are closely interconnected, concentrating such extensive powers within a limited administrative framework creates unnecessary risks of disputes, misuse, or perceived misconduct.

Conclusion: We partially agree with many of the collectability procedures of the Tax Commissioner but bypassing the court for freezing of the assets and business operations closures is not something that would work well in Cyprus. Rather than trying to find quick fix solutions, the Republic should aim to make its court system more efficient and faster something that would benefit not only the image and prestige of Cyprus but also the tax collectability effectiveness.

 

 

Conclusion

The proposed tax reform represents a genuine and respectable hard effort to address a number of long‑standing structural weaknesses, inefficiencies, and perceived inequities within the Cypriot tax system. Given the breadth and complexity of the reform, it is both reasonable and necessary to highlight areas that, in our view, require reconsideration. Notably, the issues raised in this article are limited in number and focused in scope. There are numerous changes in the reform which we are in total agreement with but the purpose of this article is to stress out some areas of our concern over this large detailed tax reform (6 tax bills in total).

 

It is essential to emphasise that Cyprus operates as an international financial centre. To maintain this position, a stable and competitive tax framework must continue to offer legitimate tax planning opportunities for international clients and investors. Any reform should therefore strike a careful balance between commercial competitiveness and fair taxation, ensuring that the Republic remains attractive while safeguarding fiscal integrity.

 

In our opinion, if these three areas outlined above are appropriately revisited, and if certain existing tax planning mechanisms (not analysed in this article) are preserved, the 2026 Tax Reform has the potential to become a highly valuable and significant step forward for the Cypriot tax system attractiveness as an International Financial Centre.

 

CYAUSE Audit Services is an Audit & Assurance firm with offices in Cyprus and the UAE regulated by the UK ICAEW, International ACCA and the Cyprus ICPAC. 

 

Our firm has extensive knowledge and experience in local tax legislations, relocation consultation, international tax planning solutions and licensing of investment firms, funds and insurance agents / brokers. Our routine day to day services include accounting, audit, tax and advisory services to international businesses interested in relocating or establishing presence to Cyprus.

 

Our Partnership with  BKR International  (a USA association ranked number 10 in the world), ACCACE Circle (European Network) and 3E Accounting International, a Hong Kong Network, ensures that we are wired and closely connected in all jurisdictions, getting the latest corporate and tax news ensuring our tax planning is accurate and validated before finalisation. Being part of international networks ensures seamless collaboration with overseas experts and access to fast and accurate information on overseas tax and corporate legislations.

 

Feel free to contact us at enquiries@cyprusaccountants.com.cy or call us at +357 99 428 543.

 

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