Cyprus Corporate Tax Increases to 15%: Winners, Losers, and What You Should Do

The headline landed on December 22, 2025: Cyprus corporate tax would increase from 12.5% to 15%, effective January 1, 2026.

For the first time in over two decades, Cyprus's corporate tax rate—one of the pillars of its appeal to international business—had changed.

The reaction was predictable. Some saw it as the end of Cyprus's tax competitiveness. Others recognized it as inevitable alignment with global minimum tax standards. Most just wanted to know: what does this actually mean for my business?

Here's the honest assessment: yes, the rate increased. But the impact depends entirely on what your company does, how it's structured, and whether you're using Cyprus's tax framework properly.

This isn't a death knell for Cyprus. It's a recalibration. And for some businesses, the overall package is now even more attractive than before.

Why the Rate Changed: OECD Pillar Two Alignment

Cyprus didn't raise its corporate tax rate on a whim. The increase directly aligns with the OECD's Pillar Two global minimum tax framework.

The context: In 2021, 138 countries agreed to implement a 15% global minimum tax on multinational enterprises with consolidated revenues above €750 million. The goal: end the "race to the bottom" on corporate tax rates and ensure large multinationals pay at least 15% tax wherever they operate.

What this means for Cyprus:

• Groups above the €750M threshold would pay top-up tax anyway under Pillar Two

• By raising the rate to 15%, Cyprus captures that revenue domestically rather than losing it to other jurisdictions

• For groups below the threshold (the vast majority), Pillar Two doesn't apply

• Cyprus maintains competitiveness whilst complying with international standards

The practical reality: If you're running a mid-sized Cyprus company earning €5 million annually, Pillar Two was never going to affect you. But the 15% rate does.

The question is: does 2.5 percentage points materially change Cyprus's value proposition?

What Actually Stayed the Same (And Why It Matters)

Before analyzing winners and losers, it's critical to understand what didn't change. Because this is where Cyprus's real advantages still lie.

1. The IP Box Regime (3% Effective Rate)

Still available: 80% deduction on qualifying intellectual property income.

If your business generates revenue from software, patents, or other qualifying IP developed in Cyprus, you can still achieve a 3% effective tax rate through the IP Box regime.

The math:

• Standard rate: 15%

• Less: 80% IP Box deduction

• Effective rate: 3% of taxable income 

What this means: The IP Box benefit actually increased. Previously, it saved you 10 percentage points (12.5% → 2.5%). Now it saves 12.5 percentage points (15% → 3%).

For SaaS companies, software developers, and IP-driven businesses, Cyprus became more attractive, not less.

(For detailed IP Box guidance, see our complete Cyprus IP Box guide)

2. Notional Interest Deduction (3% Effective Rate)

Still available: Up to 80% deduction on notional interest for equity financing.

Companies can deduct notional interest on new equity introduced into the business, reducing taxable income by up to 80%.

The math:

• Standard rate: 15%

• Less: 80% NID deduction

• Effective rate: 3%

What this means: For well-capitalized businesses or those raising equity, the effective rate remains exceptionally low.

3. Participation Exemption (0% on Dividends)

Unchanged: Dividends received from qualifying subsidiaries remain tax-exempt.

There are no minimum holding requirements or holding period requirements.

The exemption applies to dividends from:

• Cyprus tax-resident companies

• Non-resident companies subject to tax similar to Cyprus's corporate tax

What this means: Cyprus holding companies continue to receive dividends tax-free, maintaining Cyprus's role as a premier EU holding jurisdiction.

4. Capital Gains Exemption (0% on Share Disposals)

Unchanged: Gains from disposal of shares and other securities remain tax-exempt.

This applies to:

• Shares in Cyprus and foreign companies

• Bonds, debentures, and other securities

• Options on titles

What this means: Cyprus remains ideal for investment holdings, private equity structures, and venture capital funds.

5. No Withholding Taxes

Unchanged: Cyprus maintains zero withholding tax on:

• Dividends paid to non-residents

• Interest paid abroad

• Most royalties paid abroad

Exception: 5% withholding tax on dividends paid to companies in low-tax jurisdictions (part of anti-avoidance measures).

What this means: Cross-border profit extraction remains efficient and cost-effective.

6. Extensive Tax Treaty Network

Unchanged: Cyprus maintains over 65 double tax treaties.

Coverage includes:

• All major EU countries

• UK, USA, China, India, Russia

• GCC countries

• Most significant business jurisdictions globally

What this means: Treaty benefits—reduced withholding taxes, relief from double taxation—remain fully available.

The Winners: Who Benefits Under the New Rules

Not all businesses are affected equally. Some structures become relatively more attractive.

Winner 1: How Cyprus Corporate Tax 15% Affects IP-Driven Businesses

Effective rate: 3%

If your business model centres on intellectual property—software, SaaS, patents, proprietary technology—the IP Box regime delivers a 3% effective rate whether the base rate is 12.5% or 15%.

Why they win:

• Absolute effective rate unchanged (still 3%)

• Relative advantage increased (saving 12.5 percentage points vs 10 previously)

• Differentiation from standard businesses widened

Example: A SaaS company earning €2M from proprietary software:

• Old system: 12.5% base rate → 2.5% via IP Box 

• New system: 15% base rate → 3% via IP Box 

• Net impact: Zero

Meanwhile, a consulting company with the same profit pays €300K (15%) vs €250K previously (12.5%).

The IP Box company just became 5× more tax-efficient relative to the consulting firm.

Winner 2: Holding Companies

Effective rate: 0% on investment income

Cyprus holding companies receiving dividends from subsidiaries pay zero tax on that income under the participation exemption.

Why they win:

• Core function (dividend receipt) unaffected by rate change

• Still zero tax on qualifying dividends

• Capital gains on share disposals still exempt

• No withholding tax on dividend distributions

Example: A holding company owning subsidiaries across Europe receives €5M in annual dividends:

• Old system: €0 tax (participation exemption)

• New system: €0 tax (participation exemption)

• Net impact: Zero

Winner 3: Well-Capitalized Companies Using NID

Effective rate: 3%

Companies that can utilize the Notional Interest Deduction achieve a 3% effective rate regardless of the base rate increase.

Why they win:

• NID regime unchanged

• Can still deduct up to 80% of taxable income

• Effective rate remains 3%

Who this suits:

• Companies raising significant equity capital

• Businesses with strong balance sheets

• Groups capitalizing Cyprus entities properly

Winner 4: Groups Below €750M Revenue

No Pillar Two exposure

The OECD's 15% global minimum tax only applies to groups with consolidated revenues exceeding €750 million.

Why they win (relatively):

• Not subject to Pillar Two top-up tax

• Cyprus captures the 15% rate domestically

• No risk of tax being clawed back by other jurisdictions

• Maintain planning flexibility without Pillar Two complexity

Reality check: This is 99%+ of companies. Pillar Two affects large multinationals. If you're reading this article for your SME or mid-market business, Pillar Two doesn't apply to you.

The Losers: Who Pays More

For some business models, the 2.5 percentage point increase creates a genuine additional burden.

Loser 1: Standard Trading and Services Companies

Effective rate increase: 12.5% → 15%

If your Cyprus company operates a straightforward trading or services business without qualifying IP or significant equity financing, you pay the full 15% rate.

Impact:

• 20% increase in tax liability

• Direct hit to cash flow and profitability

• No offsetting benefits

Example: A consulting firm earning €1M profit:

• Old tax: €125K (12.5%)

• New tax: €150K (15%)

• Additional cost: €25K annually

Who this affects:

• Professional services (consulting, legal, accounting)

• Trading companies without IP

• Service businesses

• Standard operational companies

Mitigation options:

• Explore whether any IP can be identified and separated (branding, methodology, proprietary systems)

• Optimize capital structure to access NID benefits

• Review whether substance costs still justify Cyprus vs alternative jurisdictions

Loser 2: Companies With Thin Margins

Disproportionate impact

If your business operates on thin profit margins, a 2.5 percentage point tax increase can materially affect net returns.

Example: An e-commerce company with €10M revenue and 5% net margin (€500K profit):

• Old tax: €62,500 (12.5%)

• New tax: €75,000 (15%)

• Additional cost: €12,500

• Impact on margin: 5% → 4.875%

For margin-sensitive businesses, even small percentage increases matter.

Loser 3: Companies That Chose Cyprus Purely on Rate

Competitive position weakened

If the only reason you chose Cyprus was the 12.5% rate—ignoring IP Box, NID, participation exemption, and treaty benefits—you may now find alternative jurisdictions more attractive.

Why:

• 15% is no longer the EU's lowest rate (Hungary: 9%, Bulgaria: 10%, Ireland: 12.5%)

• Without using Cyprus's special regimes, the rate advantage narrowed

• Substance costs remain the same whilst tax savings decreased

What to do: Reassess whether Cyprus still offers the best total package for your specific business model, or whether restructuring makes sense.

What You Should Do: Action Plan by Business Type

The impact of the 15% rate depends entirely on your business model. Here's what to do based on your situation.

If You Run an IP-Driven Business (SaaS, Software, Tech)

Your situation: Minimal impact

✅ Immediate actions:

1. Confirm your IP income qualifies for the IP Box regime

2. Ensure R&D expenditure is properly documented and occurs in Cyprus

3. Review nexus ratio calculations (development location determines benefit)

4. Maintain proper substance (employees, operations, board meetings in Cyprus)

✅ Strategic opportunities:

• Cyprus's relative advantage vs standard businesses increased

• IP Box now saves 12.5 percentage points (vs 10 previously)

• Consider whether additional IP development can be moved to Cyprus

• Link to our Cyprus IP Box guide for detailed planning

Key message: You're still getting a 2.5% effective rate. The change barely affects you.

If You Run a Holding Company

Your situation: No impact

✅ Immediate actions:

1. Confirm subsidiary dividends qualify for participation exemption

2. Ensure adequate substance in Cyprus (board meetings, decision-making)

3. Review treaty benefits remain optimal under new rate environment

✅ Strategic opportunities:

• Cyprus holding structures remain zero-tax on investment income

• No withholding taxes on dividend distributions

• Consider whether additional subsidiaries should feed through Cyprus holding

Key message: Your effective rate on dividends is still 0%. Nothing changed for you.

If You Run a Standard Trading/Services Company

Your situation: Tax increased 20%

✅ Immediate actions:

1. Update cash flow forecasts to reflect 15% tax rate

2. Review pricing strategy—can increased costs be passed to customers?

3. Adjust dividend distribution plans for higher corporate tax

4. Model net impact: additional €25K tax per €1M profit

✅ Strategic questions to ask:

• Can any IP be identified in your business? (Methodologies, systems, branding?)

• Is there scope to capitalize the company and access NID benefits?

• Does Cyprus still make sense vs alternatives given substance costs?

• Would restructuring (separating IP, optimizing capital) offset the rate increase?

Honest assessment: The 15% rate is still competitive within the EU. But the value proposition narrowed if you're not using Cyprus's special regimes. Consider whether operational benefits (EU access, treaty network, banking) justify the cost.

If You're Considering Setting Up in Cyprus

Your situation: Evaluate holistically

✅ Key questions:

1. What's your business model? (IP-driven vs trading/services)

2. Will you qualify for IP Box or NID benefits?

3. Are you below €750M revenue? (Pillar Two doesn't apply)

4. Do you need EU market access and treaty benefits?

5. Can you establish genuine substance in Cyprus?

✅ When Cyprus still makes sense:

• IP-driven business (2.5% effective rate)

• Holding company structure (0% on dividends)

• Well-capitalized entity (3% with NID)

• Need EU presence and extensive treaty network

• Benefit from participation exemption or capital gains exemption

✅ When to reconsider:

• Standard trading/services with no IP

• Can't establish genuine substance

• Purely tax-driven with no operational rationale

• Substance costs exceed tax savings under 15% rate

Cyprus Corporate Tax at 15%: Is Cyprus Still Competitive?

Let's be direct: at 15%, Cyprus is no longer the EU's lowest corporate tax rate.

EU corporate tax rates (2026):

• Hungary: 9%

• Bulgaria: 10%

• Ireland: 12.5%

• Cyprus: 15%

• Poland: 19%

• Czech Republic: 21%

• Netherlands: 25.8%

• Germany: 30%+

• France: 25%

But headline rates don't tell the full story.

Cyprus's competitiveness was never just about the 12.5% rate. It was the entire package:

What Cyprus still offers:

• EU membership (Single Market access, freedom of establishment, regulatory familiarity)

• IP Box regime (3% on qualifying IP income)

• Notional Interest Deduction (3% effective rate with proper capitalization)

• Participation exemption (0% on dividends, no holding requirements)

• Capital gains exemption (0% on share disposals)

• No withholding taxes (dividends, interest, most royalties)

• 65+ tax treaties (including UK, USA, China, India, major markets)

• English common law influences (familiar legal framework)

• Sophisticated professional services ecosystem

• Genuine substance infrastructure (offices, workforce, banking)

What Hungary or Bulgaria at lower rates don't offer:

• Cyprus's treaty network

• The same regulatory sophistication

• English-language business environment

• Western European professional standards

• Same level of political and economic stability

The honest comparison: If you're choosing purely on headline rate, Hungary (9%) or Bulgaria (10%) look more attractive.

But if you need:

• EU credibility with clients

• Access to specific treaty benefits

• IP tax optimization

• Holding company structure

• Professional services ecosystem

• Regulatory stability

Cyprus remains compelling at 15%.

What Didn't Change: The Tax Reform Context

The 15% corporate tax rate is one element of Cyprus's comprehensive 2026 tax reform. Other major changes work in your favour:

1. Deemed Dividend Distribution Abolished

The complex and administratively burdensome deemed dividend distribution rule was eliminated for profits from 2026 onward.

Why this matters:

• Previously, Cyprus companies had to calculate and report deemed distributions annually

• Created compliance complexity

• Generated tax on undistributed profits in certain cases

• Now: distribute when you choose, no forced deemed distributions

Net effect: Simplification and cash flow flexibility.

2. Special Defence Contribution on Dividends: 17% → 5%

For Cyprus tax residents receiving dividends, the SDC rate dropped from 17% to 5%.

Why this matters:

• If you're a Cyprus tax resident shareholder, actual dividend distributions are now taxed at 5% (vs 17%)

• Combined with corporate tax: 15% + 5% = 20% total vs 12.5% + 17% = 29.5% previously

• Net effect: Lower total tax burden on profit extraction for resident shareholders

3. Loss Carry-Forward Extended: 5 → 7 Years

Tax losses can now be carried forward for seven years instead of five.

Why this matters:

• Startups and growth companies with accumulated losses get more time to utilize them

• Greater tax planning flexibility

• Particularly valuable in cyclical businesses

4. R&D Super-Deduction Extended Through 2030

120% deduction on qualifying R&D expenditure continues through 2030.

Why this matters:

• Incentivizes innovation and development activity

• Reduces taxable income for R&D-intensive businesses

• Compounds with IP Box benefits (develop IP with 120% deduction, exploit at 3% rate)

The point: Yes, the rate increased. But the overall tax framework became more favorable in other ways.

Common Mistakes to Avoid

As you adjust to the 15% rate, don't make these errors:

Mistake 1: Assuming All Cyprus Advantages Disappeared

The rate change is real. But it's one variable in a multifaceted framework. IP Box, NID, participation exemption, and treaty benefits remain intact.

Don't abandon a well-structured Cyprus setup because of a 2.5 percentage point increase if you're still achieving sub-5% effective rates.

Mistake 2: Ignoring Transitional Planning Opportunities

The tax reform includes transitional rules, particularly around deemed dividend distribution for pre-2026 profits.

Proper planning requires segregating pre-2026 and post-2026 profit reserves and understanding how each is taxed.

Consult with advisors before distributing profits accumulated before 2026.

Mistake 3: Chasing Lower Rates Without Substance Analysis

Hungary's 9% rate looks attractive. But can you:

• Establish genuine operations there?

• Access the same treaty benefits?

• Operate in English with Western European professional standards?

• Maintain EU client credibility?

Don't restructure based purely on headline rates. Substance costs, operational reality, and client perception matter.

Mistake 4: Not Optimizing Structure Under New Rules

If you're paying 15% on all profits, ask whether you should be.

Could you:

• Separate IP into a structure qualifying for IP Box?

• Capitalize the company properly to access NID benefits?

• Restructure profit flows to maximize exemptions?

The 15% rate is the default. Strategic structures achieve much lower effective rates.

Mistake 5: Failing to Reassess Dividend Policy

With deemed dividend distribution abolished and SDC reduced to 5%, the optimal dividend policy changed.

Previously: Pressure to retain profits to avoid deemed distributions and 17% SDC.

Now: Flexibility to distribute or retain based on business needs, with only 5% SDC on actual distributions.

Reassess your profit extraction strategy under the new rules.

What to Do Next

If you operate a Cyprus company or are considering Cyprus for business operations:

1. Assess Your Effective Tax Rate (Not Just the Headline)

Calculate what you actually pay:

• Standard operations: 15%

• With IP Box: 3%–15% (depending on nexus ratio)

• With NID: 3%–15% (depending on capitalization)

• Holding company receiving dividends: 0%

Your effective rate determines impact. If it's below 5%, the rate increase barely affects you.

2. Review Your Structure's Optimization

Ask:

• Are we using IP Box if we qualify?

• Is our capital structure optimized for NID?

• Are we separating IP income where possible?

• Do holding structures maximize participation exemption?

Many companies pay 15% when they could pay 3%–5%. The difference is structure, not luck.

3. Model the Financial Impact

Calculate the exact cost:

• Annual profit × 2.5% = additional tax liability

• €1M profit = €30K additional tax

• €5M profit = €125K additional tax

Then ask: do operational benefits (EU access, treaty network, professional ecosystem) justify the cost?

4. Consider Transitional Planning Opportunities

The 2026 tax reform includes transitional rules. Proper planning around:

• Pre-2026 vs post-2026 profit reserves

• Timing of dividend distributions

• Loss utilization strategies

• Restructuring opportunities

Can reduce tax liability significantly.

5. Get Professional Advice

The 15% rate is one variable in a complex system. Optimal structures require:

• Understanding of IP Box nexus calculations

• Capital structure planning for NID

• Substance requirement compliance

• Treaty benefit optimization

• Transitional rule navigation

DIY tax planning under the new framework risks missing significant opportunities or creating compliance problems.

Final Thought

Yes, Cyprus's corporate tax rate increased from 12.5% to 15%.

For standard trading and services companies, this is a genuine cost increase—an additional 20% in tax liability that affects cash flow and profitability.

But for IP-driven businesses, holding companies, and well-structured entities using Cyprus's special regimes, the impact ranges from minimal to zero.

The 3% effective rate via IP Box didn't change. The 0% rate on qualifying dividends didn't change. The extensive treaty network didn't change. EU membership didn't change.

What changed is that Cyprus became less attractive for businesses using it purely for a low headline rate without leveraging the specialized regimes that make Cyprus genuinely competitive.

If your business model fits Cyprus's strengths—intellectual property, investment holdings, EU market access, treaty benefits—the jurisdiction remains compelling at 15%.

If you chose Cyprus only for the 12.5% rate on standard trading income, it's worth reassessing whether the total package still justifies the substance costs.

The headline rate increased. But whether Cyprus still makes sense depends entirely on how you use it.

LCK Financial Services Ltd advises businesses on Cyprus tax optimization, corporate structuring, and compliance under the new 2026 tax framework. If you're evaluating the impact of the 15% rate on your specific business or considering restructuring to minimize effective tax rates, get in touch for a practical assessment of your situation.