Households are set to receive tax deductions amounting to €151 million per year with the tax reform, the discussion of which began last Friday in Parliament. This is, of course, provided it is approved as is, without changes to the specific provisions by the parties.
According to a study by the Economics Research Centre (ERC) of the University of Cyprus—which was submitted to Parliament—the reform reduces the tax burden for middle-class households and families and promotes fairness. Specifically, the ERC states that the new tax breaks for children, housing, and green investments enhance social justice, primarily offering relief to middle-income households.
As the ERC notes in its study, which the Ministry of Finance relied upon to prepare the relevant bills, the proposed reform of personal income tax constitutes a decisive step towards modernising Cyprus’s fiscal framework.
By readjusting the tax brackets, providing targeted deductions, and offering incentives such as home ownership and green investments, the reform aims to enhance fairness, efficiency, and economic resilience. The measures address socio-economic challenges such as housing, the demographic problem, environmental sustainability, and participation in the labour market—especially for women.
Proposed Measures
Based on the bills before Parliament, the tax-free threshold is set to increase to €20,500, and tax brackets will be expanded. Income from €20,501 up to €30,000 will be taxed at 20%.
Income from €30,001 to €40,000 will be taxed at 25%. Income from €40,001 up to €80,000 will be taxed at 30%, and income over €80,000 will be taxed at 35%. Additional tax relief is also provided based on the family composition. Households with an annual gross income of up to €80,000 are covered, while for families with many children, the income limit will be up to €100,000.
In detail, the tax deductions to be granted are as follows:
€1,000 annual deduction for each spouse/partner/single person for every dependent child and student. Single-parent families will receive a €2,000 annual deduction.
€1,500 annual deduction for each spouse/partner/single person for interest on a performing loan for the purchase of a principal residence or for rent expenses for a principal residence in the Republic.
€1,000 annual deduction for each spouse/partner/single person for capital expenditures for the energy upgrade of the principal residence and for electric vehicles. The relief will also be carried forward over the next four years.
Utilised Data
In preparing its study, the ERC considered the European statistics on income and living conditions, which provide harmonised data on income, poverty, and living conditions across all EU member states. It also used other econometric models.
The four changes that will occur in the taxation of household incomes will result in a fiscal impact (revenue loss) for the state of €151 million.
In detail, the financial impact on the state will be as follows:
The readjustment of tax brackets and rates, including the increase of the tax-free threshold to €20,500 and the shift of the top 35% rate to incomes above €80,000, leads to a revenue loss of €66 million.
Granting additional tax deductions of €1,000 per child or student for households with income up to €80,000 leads to a reduction of €26 million.
Based on the University of Cyprus scenarios, the largest loss of state revenue comes from families with many children.
Specifically, with maximum family income limits of €100,000 for families with four or more dependent children/students, while maintaining the €80,000 limit for the rest, the cost increases to €28 million.
Furthermore, with maximum income limits of €100,000 for families with three or four children/students and €160,000 for families with five or more, the cost rises to €29 million. In the case where the deduction for every child/student is increased to €2,000, the cost for the state rises to €44 million.
In parallel, granting a deduction of up to €1,500 per spouse for housing loan payments or rent for a first home leads to a loss of €30 million. Meanwhile, granting deductions to households of up to €1,000 for residential green upgrades (e.g., photovoltaics, electric vehicles) leads to a reduction of €29 million.
At the same time, single-parent households are treated most favourably, meaning they are treated as two-parent households, receiving double the deduction amount (€2,000 per child/student), while the income limit is set at €40,000.
The Results
The ERC study also examined specific scenarios by varying the amount of total income taken into account and the tax-free threshold.
As the University of Cyprus study showed, if the maximum tax bracket limit in the tax reform remains at €60,000 instead of the proposed €80,000, the fiscal cost is reduced to €56 million.
In parallel, if the tax-free threshold is increased by €5,000 to €24,500 (from the current €19,500) but the tax brackets are structured as proposed in the bills, the fiscal cost for the state would be €187 million.
Significant Tax Reduction
From the analysis of the various scenarios conducted by the ERC, it concluded that the proposed tax reform significantly reduces the tax liabilities of almost all families.
It points out that the greatest benefits accrue to families with children, which will reflect a more family-friendly tax system. It also suggests that for families with two working adults and two children, the reduction is particularly large, almost eliminating the income tax liability.
Specifically, a comparison was made between the existing tax system and the proposed one for families with two working adults and a total gross annual income of €56,184, and for families with one working adult and a gross annual income of €28,356. With the proposed tax reform, the burden on two-earner families with the proposed deductions is reduced as follows:
In a family where both work but have no children, the tax liability will be €422.
If the household has one dependent, the tax liability is reduced to €222.
For households with two dependent children, the liability is reduced to €22.
Furthermore, for single-earner households, the corresponding tax liabilities are reduced to €796, €596, and €396, respectively.
