A bill tabled in parliament on Thursday would fully apply a qualified domestic minimum top-up tax on large multinational groups from 2026, after the European Commission was not satisfied with the law Cyprus passed in 2024.
The bill leaves parliament facing a difficult choice. On one side is a visible risk that multinationals with US interests could leave Cyprus, although the finance ministry says there is no sign of this. On the other, the country faces a series of consequences if it does not comply with EU rules.
The legislation, known as Pillar Two, imposes a minimum effective tax rate of 15 per cent on entities belonging to multinational groups, or to large domestic groups, with annual revenue of more than 750 million euros.
Risks of non-compliance
If Cyprus fails to comply with the EU directive, there is a risk of financial penalties, because Brussels would take legal action against the country, according to the impact assessment accompanying the bill.
The assessment also warns that the OECD and other jurisdictions might not recognise the Cypriot regime, which could lead to double taxation of the groups affected. Companies could also relocate.
There is still no exact picture of how many entities are affected or how much revenue the tax will bring in, the assessment says, because affected entities were still submitting their Pillar Two returns when the bill was prepared.
The 2024 law
The amendment follows the Commission’s dissatisfaction with legislation passed in December 2024. That law allowed Cyprus to impose a domestic top-up tax as a standalone corporate tax. Under it, groups operating in Cyprus that pay an effective tax rate below the 15 per cent minimum must pay the difference as a top-up tax.
According to the explanatory report on the new bill, Cyprus chose that model because of the particular features of its tax system and of the business activities and structures that have developed on the island. The finance ministry says the formula was a deliberate policy choice. It aimed to ensure a smooth transition to the new international tax environment while protecting Cyprus’s competitiveness as a reliable investment and business centre.
The EU had argued that the 2024 law favoured multinationals with US interests based in Cyprus. The OECD had also made recommendations.
Transition plan
After consultations with the EU, the Cypriot authorities decided on what the finance ministry calls a balanced and workable transitional approach. Cyprus will keep its domestic top-up tax for 2025, and apply the fully harmonised qualified tax from 2026. According to the ministry, this allows a smooth transition to the fully harmonised regime without retroactive tax burdens.
From the 2026 tax year, the bill provides for the qualified domestic minimum top-up tax (QDMTT) to apply in full. The finance ministry says this will secure recognition of the Cypriot tax regime and effectively protect the Republic’s tax revenue.
