Sweeping changes to tax collection and business audits in Cyprus

A major overhaul of the Cyprus tax system is set to take effect from the 2026 tax year, fundamentally reshaping the assessment and collection procedures for citizens and businesses while mandating tax returns for almost all residents aged 25 to 71.

These new provisions will significantly expand the categories of individuals required to submit a tax declaration.

The thinking behind the legislation is that every person with a substantial economic presence (whether through salaried services, self-employment, or other sources) must be registered with the Tax Department.

This is the case regardless of whether their final tax liability is zeroed out by the tax-free threshold or other deductions.

The most substantial change for individuals involves the broadening of those required to submit a tax return, irrespective of their total income level.

From 2026 onwards, a declaration must be filed by all natural persons who are residents of the Republic and who, by December 31 of the tax year, have reached their 25th year and have not exceeded the age of 71, even if they earned no taxable income during that year.

This change applies to the 2026 tax year, meaning it will first affect the tax returns submitted in 2027.

This adjustment is expected to impact thousands of citizens who, until the 2024 tax year, benefited from an exemption if their income remained below the tax-free threshold.

This exemption will cease to apply from 2026 with the aim of creating a complete fiscal picture of the entire economically active population.

Individuals are also obliged to submit a notice for registration in the Tax Register and obtain a Tax Identification Number if they are residents of the Republic and have reached the age of 25, or if they have income falling under Article 5 of the Income Tax Law.

As a transitional provision, any person who does not have such income for the 2026 and 2027 tax years and is not already registered may submit their registration notice by December 31, 2027.

For natural persons, the final deadline for submitting a tax return remains July 31 of the year following the tax year in question.

Particular weight is being placed on a new provision regarding rent payments, which introduces mandatory traceability for all transactions involving immovable property.

From the date the provision comes into effect, every rent payment for a property within the Republic must be made exclusively through a bank transfer, a debit or credit card, or any other recognised electronic payment method.

The acceptance of rent in cash is explicitly prohibited, and non-compliance will trigger both criminal and administrative sanctions.

Specifically, any person who fails to comply with or violates the regulations issued by the Cabinet is guilty of an offence and, upon conviction, faces a fine not exceeding €5,000, imprisonment for up to three years, or both.

For companies and the self-employed who are required to prepare audited or reviewed accounts, the reform introduces a dual change to their obligations.

The deadline for submitting a tax return is being shortened to January 31, while the deadline for the payment of self-taxation is being extended to July 31.

The logic behind this move is to provide businesses with sufficient time to manage their cash flows without delaying the official assessment of the tax due.

Moreover, the Cabinet retains the power to determine a later deadline if such a move is deemed necessary.

In a move towards simplification, the article in the legislation providing for a special method of calculating provisional tax for insurance companies has been deleted.

This change means insurance firms will now be integrated into the general provisional tax system based on common criteria of income and profitability applicable to all other corporate entities.

The ability to suspend operations or seal a premises represents the most powerful administrative tool available to the Tax Commissioner for tax collection.

The law dictates that sealing a business is a measure of last resort, activated only when notices, warnings, and reasonable compliance periods have been exhausted.

The process begins when the Tax Commissioner determines that a business or self-employed person has failed to submit a tax return within the legal deadline, failed to pay assessed taxes such as VAT or withholding tax, or repeatedly ignored compliance notices.

The Tax Commissioner must send a written notice clearly defining the nature of the violation, such as the failure to submit at least two tax returns or at least 12 monthly declarations of tax withholdings and contributions.

A business also risks being sealed if it fails to submit at least three VAT returns on or after January 1, 2027, or fails to pay calculated tax exceeding €20,000, including penalties.

The duration of the suspension of operations and the sealing of premises cannot exceed 10 days.

Before an order is issued, the Tax Commissioner must send three notices via double-registered mail to the last known address or the registered office of the legal entity.

The first notice provides a period of at least 10 days for compliance, followed by a second notice with another 10-day deadline if the violation persists.

If compliance is still not achieved, a third notice is sent, and the person carrying out the business is invited to submit their views in writing within five days.

Execution of the decision includes the physical sealing of the premises and the posting of an official notice at the entrance in both Greek and English, with the latter stating “operation suspended due to tax violations”.

The decision takes effect from its publication in the Official Gazette of the Republic, and execution cannot take place until at least 10 calendar days have passed since the decision was served.

Any person who violates the suspension of operations and the sealing of the premises commits a criminal offence and faces up to two years in prison, a fine of up to €30,000, or both.

Any judicial challenge to the suspension does not relieve the person or business of their obligation to comply with their tax duties.

In terms of corporate governance, a company director continues to bear full responsibility for any acts or omissions of themselves or the company during their tenure, regardless of the Companies Law.

This liability remains even if the director has been removed from the Register of Directors and Secretaries by the time administrative or legal proceedings begin.

A positive development for the business community is the adjustment of the minimum turnover threshold above which an entity must prepare audited accounts.

This threshold is being raised to €120,000 from the current €70,000, a move affecting thousands of small and medium-sized enterprises.

Natural persons exercising a business with an annual turnover and other gross income not exceeding €120,000 are now exempt from the obligation to prepare accounts.

Furthermore, persons with a turnover between €120,000 and €200,000 may have their accounts subjected to a review rather than a full audit, provided their total assets do not exceed €500,000 for at least two consecutive years.

The reform also facilitates the Tax Department’s access to data by establishing the mass transmission of information from banks and employers.

Banks will be required to provide the names, tax residence, and Tax Identification Numbers of persons credited with interest, as well as the amount of interest and the tax withheld.

Employers must submit a statement by the end of March each year detailing their employees, including part-time staff and those on contracts.

This statement must include the employee’s name, identity number, email, residential address, and start or termination dates of employment, as well as any income or benefits provided.