The construction sector in Cyprus is navigating a rapidly evolving tax and VAT landscape in 2026. The Cyprus tax reform introduced certain key legislative changes that came into effect on 1 January 2026. Furthermore, even though VAT was not part of the tax reform, significant VAT changes are also being implemented. As a result, property developers, contractors, and investors must adapt their financial and compliance strategies to optimise their financial position.
Corporate Income Tax
As part of Cyprus’ alignment with the OECD’s global minimum tax initiative (Pillar Two), the standard corporate income tax rate for companies increased from 12,5% to 15%, as of 1 January 2026. Even though this change affects all sectors, the rising construction costs and the volatility in the prices of raw materials driven by the intense geopolitical and economic uncertainty are factors that may create cash flow and profitability issues for construction companies, especially in the cases where the costs cannot be passed on to the clients or where a project is lost/cancelled.
Value-Added Tax (VAT)
VAT remains the most dynamic tax area for the sector, as it is a factor that drives growth in the property market. Even though the standard VAT rate is 19%, a reduced VAT rate of 5% applies to the below transactions:
- Purchase or construction of new primary residences for individuals who occupy the property as their main residence in Cyprus for at least 10 years. The reduced VAT rate of 5% applies to the first 130 sqm (up to a value of €350.000), provided that the total area does not exceed 190 sqm and the total cost does not exceed €475.000. Any area exceeding 130 sqm or any value exceeding €350.000 is taxed at the standard 19% rate.
- Construction or renovation of qualifying educational buildings (used for VAT exempt educational services). The reduced VAT rate of 5% covers both labour and materials.
Despite the fact that VAT was not part of the tax reform, the VAT legislation was recently changed, amending the definition of a “new” building for VAT purposes. Based on the changes, from 1 September 2026 onwards, a building is considered “new” if there is no systematic use/occupation of at least 18 months. This change to the definition is important, as used buildings are exempt from VAT. It is noted that until 1 September 2026, a building will be considered “new” if it is sold within 5 years of completion and it has not been used by a non-related person for a continuous period of at least 24 months. It is
Last but not least, for VAT purposes, the construction industry is subject to the domestic reverse charge mechanism. This applies to services related to the construction, renovation, demolition, repair, or maintenance of buildings. Under this mechanism, the recipient of the services, rather than the supplier, must account for the VAT due, reducing the risk of tax fraud and simplifying cash flow for compliant contractors.
Capital Gains Tax (CGT)
The Cyprus tax reform also introduced notable changes to CGT, which is generally imposed at the rate of 20% on profits derived from the sale of real estate in Cyprus. Some of these are the following:
- Rollover relief for land swaps: Land-for-property exchange arrangements between landowners and developers are now fully exempt from CGT, provided construction is completed within five years (subject to conditions).
- Increased Lifetime Allowances: The lifetime CGT exemption for a primary residence has increased significantly to €150,000 (from €85,430), subject to conditions.
- Expanded Scope: CGT now applies to the disposal of shares in companies where 20% or more of their value derives from Cyprus immovable property, lowered from the previous 50% threshold.
Other notable changes of the tax reform that indirectly affect the construction sector
- Special Defence Contribution (SDC) on dividends received by Cypriot tax resident individuals distributed out of profits generated from 2026 onwards is reduced to 5% (previously 17%).
- Stamp duty on contracts and most instruments was fully abolished from 1st of January 2026, reducing transaction costs.
Given the rapid pace of legislative change and the technical tax and VAT legislative provisions applicable to the construction sector, construction professionals and investors in Cyprus are strongly advised to seek specialist tax advice to ensure full compliance and optimise their fiscal position.
