Filenews 11 January 2026 - by Eleftheria Paizanou
On the one hand, the tax reform may mainly benefit the middle class due to the increase of the tax-free allowance to €22 thousand. and the granting of tax deductions, however, on the other hand, the calculation of exemptions on the basis of the composition and income of the family causes serious complications.
The new tax system, especially for income taxation, is in some cases a difficult equation. As the data show, the tax reform is generous, but it is also complex and difficult to implement. What is even taken for granted is that when we submit the income returns for the tax year 2026 in 2027, we should have... the explanatory guide of the Tax Department, as it will be an extremely difficult case.
The definition of family for the purposes of calculating the gross family income, which will be taken into account for the personal deductions that will be given to natural persons who are tax residents of Cyprus based on their marital status and income criteria, particularly troubled the technocrats of the Tax Department, who through various scenarios reflected the changes brought about in the new legal framework.
The problems are found in the peculiarities of the composition of each family, the existence in many cases of cohabitants instead of spouses, the increase in the number of single-parent families and consequently divorced couples, the existence or not of joint parental responsibility and other factors. The composition of the family - inside or outside of marriage - as well as the income of its members will determine the new personal deductions that families will benefit from from the tax year 2026 onwards.
The basic conditions for granting the deductions include the condition: spouses or cohabitants under civil cohabitation or even cohabitants other than the civil cohabitation model who have common children must consent to the disclosure of their tax information to each other, in order to be confirmed by the Tax Department that the total family income does not exceed the income criteria set by the tax reform.
Also, the tax returns of spouses or cohabitants with civil cohabitation or of cohabitants without civil cohabitation and with common children or of the single parent must be submitted within the prescribed deadlines
What is family
According to the explanatory guide of the Tax Department, the following cases are considered (for the purposes of calculating the gross income of the family):
– Parents who live together and their common children as well as the children of one or the other, provided that these children live with these parents under the same roof.
– Father unmarried, widowed, divorced and his children living with him under the same roof.
– A mother who is not married, or is widowed or divorced and her children who live with her under the same roof.
– The children of the family when both of their parents are dead or missing or the children of the family when their father or mother, as the case may be, are dead or missing, who live under the same roof together and have custody of them, his/her spouse if any, and their children if any, as long as they live with him under the same roof.
– A married father and his children living with him under the same roof, provided that his wife is serving a prison sentence of six months or more.
– A married mother and her children living with her under the same roof, if her husband is serving a prison sentence of six months or more.
– Spouses or cohabitants with civil partnerships, who do not have common children or whose children of one or the other do not live under the same roof.
Children and additional discounts
With the additional discounts for children, students, mortgage interest for permanent residence, rent for owner-occupancy and green investments in homes, families with incomes up to €100,000 benefit (without children or with 1 to 2 children), or incomes up to €150,000 (3-4 children) and incomes up to €200,000 for families with five or more children.
For single persons (single parents), it is provided that their income must not exceed €40,000 to be entitled to the discounts.
For the first dependent child and student, the discount will be €1000, for the second dependent child €1250 and for the third and each additional dependent child €1500. A dependent child for whom the discount is granted is a biological or adopted child, who is under 18 years old, a secondary school student under 20 years old, a soldier in the National Guard under 21 years old, a student under 24 years old and a child of any age who permanently lacks the ability to support himself.
According to the explanatory note of the Tax Department, for the purposes of income criteria, children, ancestors (i.e. children of a spouse or cohabitant with a civil partnership who are not biological children of the spouse/cohabitant), out of wedlock and legally adopted children will be considered children. It is worth noting that the discount for each child will be given only to the biological or adoptive parent of the child.
That is, a dependent child is considered to be the biological or legal adopted child.
The deductions for each spouse or cohabitant for interest on performing mortgages and for rent will be €2,000 and €1000 for improving the energy efficiency of the main residence, RES systems and electricity storage batteries for electric vehicles as well.
Seminars and an electronic tool for calculating the tax
The Commissioner of Taxation, Sotiris Markides, speaking to "F", stated that from the first moment the Department began to work intensively for the smooth transition to the new regime.
"What was important and urgent was to inform employees, employers and professionals about the changes concerning natural persons, employees/employees.
"Employees are the ones who are directly affected by the implementation of the new provisions, as January 2026 will be the first month in which the Income Tax will be withheld from their salaries under the new tax regime.
"In order for the Income Tax to be properly withheld, employers must be informed by their employees (through the T.F.59 form) about their income and any deductions and deductions they are entitled to," he added.
He also said that on the website of the Tax Department IAW A special section has been created concerning the 2026 tax reform. According to the Registrar, in the coming days, the electronic income tax calculation tool is expected to be posted, with which by filling it one will calculate the amount of income tax before and after the reform, as well as the net benefit from the reform. https://www.mof.gov.cy/mof/TAX/taxdep.nsf/index_en/index_en
We remind you that all taxpayers who have been paying income tax until now will have a benefit, i.e. a reduction in the income tax they will have to pay.
"All employees, especially those who are entitled to benefit from the newly introduced discounts, are urged to fill it in and hand it over to their employers, so that their details are updated in the employers' records so that the correct withholding of the Income Tax corresponding to them each month (PAYE) can be made," he added.
He said at another point that online seminars with OEB and CCCI are scheduled within the month, while all-day live information days will be held with ICPAC (Institute of Certified Public Accountants of Cyprus), as well as other seminars/information days in collaboration with other private sector bodies.
"The interest is very high and we estimate that 3-4,000 people will attend them. All seminars/information days will be presented by officials of the Tax Department and really here I would like to thank our officials who, with the great effort they have made in recent months, are able to implement this great reform," he concluded.
Examples for a better understanding of the new tax system
In order to make the new system and the way tax deductions will be granted more understandable, the Tax Department gives specific examples:
– A family with two children and interest on the main residence that is within the income criterion.
Spouses or civil partners who have two common dependent minor children. They have spent within the tax year €5,000 in interest on a mortgage performing loan of the main residence. The father has a gross income of €60,000 and the mother €35,000. At that time, the spouses/cohabitants together with the two children form a family, with a total gross family income of €95,000. Therefore, they fall within the limit of €100,000. That is, each parent will receive a discount of €2250 (€1,000 for the first child and €1,250 for the second). In addition, each spouse or cohabitant is entitled to a discount of up to €2,000 on the mortgage interest.
– A family with two children and interest on the main residence that is within the income criterion
Partners without civil cohabitation, who have two common minor dependent children. They have spent within the tax year €3,000 in interest on a mortgage performing loan of the main residence. The father has a gross income of €60,000 and the mother €35,000. Although they are cohabitants without political cohabitation, however, because they have common children, the two cohabitants/parents together with the two dependent children form a family.
Their total gross family income is €95,000. Each parent is entitled to a dependent child discount of €2,250 (€1,000 for the first child and €1,250 for the second). In addition, both cohabitants/parents are entitled to a total deduction for interest up to €3,000, which is the actual interest expense of the mortgage. The amount of the total discount of €3,000 can be divided between the two partners, as they jointly choose, without exceeding the amount of €2,000 for each.
– A family with three children and with the purchase of an electric vehicle that is outside the income criterion.
Spouses with three common dependent children. Within the tax year, they have spent €50,000 on the purchase of an electric vehicle. One spouse has a gross income of €90,000 and the other €65,000, so the total gross income is €155,000. That is, it is outside the income criterion of €150,000. In this case, the parents are not entitled to the dependent child discount and the purchase of a vehicle, because they exceed the income criterion of €150,000.
– Single person with two dependent children who pays rent within the income criterion.
A divorced father who lives alone (single person), has two dependent children who have the habitual residence with their mother. He pays rent for the use of a main residence of €4,800 per year. His gross income is €38,000. Because they are a single person with an income below the income criterion of €40,000, they are entitled to a child deduction of €2,250 (€1,000 for the first child and €1,250 for the second). €38,000, as well as a main residence rent discount of €2,000.
– Single-parent family within the income criterion.
A single mother living with a minor child, paid within the tax year €5,000 for interest on a mortgage performing loan of the main residence and has a gross income of €80,000. Therefore, it is a single-parent family with a gross income of €80,000. The income criterion for single-parent families with one child, the limit of €100,000 applies. This mother is entitled to the dependent child discount, which is doubled due to the fact that she is a single parent, of €2,000 for one dependent child. In addition, he is entitled to an interest deduction for a main residence loan of €2,000.
– A family with a student who works and with interest on a mortgage loan with a subsidy, within the income criterion.
Spouses or cohabitants with a cohabitation agreement, with a child who is a 22-year-old student. Within the tax year, they have spent €3,500 on interest on a performing loan for a main residence and the subsidy is €1,000.
So, the actual expense corresponds to €2,500. One parent has a gross annual income of €60,000 and the other €38,000. The student works part-time with an annual gross income of €5,000. The spouses/cohabitants together with their child who is a student, form a family. Parents have a total income of €98,000. The income of the child-student is excluded from the calculation of family income, because this income is from employment. Thus, the gross family income remains €98,000. Each parent is entitled to the €1,000 child deduction, as the gross family income is €98,000, i.e. below the income criterion.
In addition, spouses/cohabitants with a civil partnership are entitled to a discount of up to €2,000 each on interest on a performing mortgage loan of the main residence and the total discount granted to both spouses/cohabitants cannot exceed €2,500 (actual interest expense). They can divide the total amount of €2,500 as an interest deduction on each's return.
– Cohabitants with civil cohabitation with common and non-joint dependent children, who pay rent, within the income criterion
A parent with two dependent children from a previous marriage enters into civil cohabitation with a cohabitant and they have a joint dependent child. They all live together under the same roof (a total of 3 children). The cohabitants pay an annual rent for the use of a main residence in Cyprus amounting to €9,000. The sum of their gross incomes is €140,000. For a family with three children (two ancestors for one Symbious and one common child), the limit is €150,000. As the total gross family income is below the threshold of €150,000, one parent is entitled to a dependent child discount of €3,750 (€1,000 for the first, €1,250 for the second and €1,500 for the third dependent child) and his/her partner is entitled to a dependent child discount of €1,000 for the one joint dependent child, i.e. he is not entitled to a dependent child discount for the ancestors. Also, each partner is entitled to a €2,000 discount on rent paid for the use of a primary residence in Cyprus.
