Taxation of Share-Based Payment Plans – 8% Regime (Cyprus Tax Reform 2026)

As part of the 2026 Cyprus tax reform, a special mode of taxation was introduced for approved share-based remuneration schemes. The purpose of this regime is to strengthen Cyprus’ attractiveness as a jurisdiction for startups, scale-ups and established groups that use equity incentives as part of executive and employee compensation.

Under this regime, benefits derived from approved share option rights and other qualifying share-based schemes are subject to a flat income tax rate of 8%, instead of being taxed at the ordinary progressive personal income tax rates, which may reach up to 35%.

The regime applies to benefits derived by employees and directors in the form of share option rights or rights to acquire shares. The taxable benefit generally arises at the time of exercise or acquisition of the shares, depending on the structure of the specific plan. The 8% flat rate applies only to the portion of the benefit that does not exceed an amount equal to two times the annual employment remuneration earned by the individual in the year of vesting, excluding the share-based benefit itself. Any excess over this threshold is subject to taxation at the ordinary progressive personal income tax rates.

In addition, the total benefit that can benefit from the 8% rate is capped at one million euro per individual over a rolling ten-year period. Any amount exceeding this cumulative threshold is taxed under the normal income tax scale.

In order for a scheme to qualify for the 8% regime, specific conditions must be satisfied. The plan must provide for a minimum vesting period of three years, and this vesting period must commence from the date the scheme is approved by the Commissioner of Taxation. The rights granted under the scheme must be non-transferable. The shares to which the rights relate must be shares of the employer company or of a company that directly or indirectly holds shares in the employer. These shares must carry the same rights as ordinary shares of the issuer, with the exception that voting rights may differ. Furthermore, the exercise or acquisition price must not be lower than 50% of the market value of the shares at the time the scheme is approved by the Commissioner. Formal approval of the scheme by the Commissioner of Taxation is required for the regime to apply.

The special 8% taxation does not apply where the rights are granted to an individual who is considered a related party to the employer within the meaning of Article 33 of the Income Tax Law. Schemes that fail to meet the vesting, structural or approval requirements also fall outside the scope of the regime and are taxed under the ordinary personal income tax rules.

Transitional provisions are available for incentive plans whose vesting period started before 1 January 2026 and where the minimum three-year vesting period does not lapse by 30 June 2026. In such cases, employers may apply to the Commissioner of Taxation for approval by 30 June 2026 in order to secure access to the 8% regime.

In practical terms, the introduction of the 8% flat tax significantly reduces the tax burden on equity-based compensation when compared to the progressive rates applicable to employment income. The regime provides a predictable and competitive framework for structuring long-term incentive arrangements, particularly in growth-oriented and technology-driven sectors where share-based remuneration is a key component of compensation strategy.