A final report by the University of Cyprus Economics Research Centre (ΚΟΕ) shows that the government’s initial tax reform proposal is not fiscally neutral, despite earlier claims. Instead, it generates a surplus estimated at 112 million euro, which is fully absorbed once the revised measures agreed with parliamentary parties are added.
The study, which examined a comprehensive redesign of the tax system, concludes that raising the tax-free threshold to 22,000 euro and expanding eligibility for deductions exhaust the available fiscal space created by the original reform package.
According to the ΚΟΕ, the adjustments negotiated between the Ministry of Finance and DISY, DIKO, EDEK and DIPA, intended to enhance the social dimension of the reform, do not increase the fiscal burden. This calculation, the Centre notes, assumes strict implementation, particularly in revenue collection and enforcement against tax evasion. Without disciplined execution, the numbers will not hold.
The report states that the reform is fiscally neutral to slightly positive, generating a net surplus of around 112 million euro while supporting growth, transparency and long-term fiscal sustainability.
Revenue and expenditure impacts
The modelling by the ΚΟΕ is based on a tax-free threshold of 20,500 euro, revised income tax brackets, a top marginal rate of 35 percent and deductions for children, housing and green investment. The total fiscal cost of these measures is estimated at 432 million euro, while expected revenue reaches 544 million euro.
The largest expenditure losses arise from changes to personal income tax and a reduction in the defence contribution rate to 5 percent, costing 151 million and 217 million euro respectively. Additional reductions are linked to digital and green corporate tax credits, the abolition of the defence contribution on rents and limits on stamp duty, which collectively reduce revenue by a further 54 million euro.
On the revenue side, increasing the corporate income tax rate from 12.5 percent to 15 percent is expected to generate about 240 million euro. The Centre used a dynamic revenue-maximisation model to estimate the real economic impact of the higher rate, concluding that annual revenue could increase by roughly 200 million euro. A complementary calculation based on average corporate tax receipts between 2019 and 2024 suggests that, assuming no behavioural changes, total revenue could reach 1.62 billion euro, an increase of about 270 million euro. The projected figure of 240 million euro reflects the midpoint of the two methodologies.
Other key revenue sources include deemed dividend distributions, estimated at 130 million euro, and secondary economic effects worth approximately 60 million euro.
The ΚΟΕ notes that, even under conservative assumptions, the fiscal balance returns to baseline levels within a few years, supported by increased consumption, investment and employment.
Implementation risks and the need for discipline
Despite the positive fiscal outlook, the study warns that successful implementation is essential to avoid undermining the reform. Effective administration and strong political coordination will be required to ensure that expected revenues materialise.
The report stresses that although the estimated fiscal cost of personal income tax changes is significant, the long-term benefits for living standards and public confidence justify the reform. It argues that Cyprus now has an opportunity to develop a more inclusive and future-proof tax system grounded in evidence-based policy design.
The ΚΟΕ concludes that the proposals form a solid foundation for meaningful change, on the condition that enforcement and administrative capacity are strengthened to support the new framework.