Cyprus is expected to increase state revenue by requiring company owners, directors and shareholders who draw dividends alongside low declared salaries to pay social insurance contributions on part of those dividend earnings, under a proposed pension reform.
The changes, first reported by local news outlet Philenews, aim to address a practice under which business owners and shareholders declare low monthly salaries while receiving additional income through dividends, potentially qualifying for tax exemptions and future social benefits.
According to Labour Ministry data cited in the report, 2,990 company owners, directors and shareholders working in businesses with up to three people declare monthly salaries below €500, despite also receiving dividend income.
Overall, 11,500 owners, directors and shareholders declare monthly earnings of up to €2,000, with 26 per cent reporting salaries below €500.
Contributions to be calculated on dividends
Under the draft pension reform legislation, employees who also hold shares in the companies where they work would have dividends from those businesses included in the calculation of their earnings for social insurance purposes.
The proposed system would require contributions on dividends until the individual reaches a ceiling equivalent to two insurance units, or €22,960 a year.
The threshold is based on annual basic insurable earnings of €11,480, the level set for both 2025 and 2026.
Under the formula, the authorities would first calculate contributions on the salary declared by the individual, then apply contributions to dividend income until the annual ceiling is reached.
For example, a company owner declaring a salary of €500 a month, or €6,000 a year, would pay contributions on that salary, with additional contributions calculated on dividends until the relevant ceiling was reached.
Labour Ministerial figures cited in the report indicate that someone earning an annual salary of €15,000 and receiving €30,000 in dividends would pay contributions on their salary and a further €8,000 in dividends, bringing the total earnings subject to contributions to approximately €23,000.
The reform is intended to increase the number of people contributing to the social insurance fund and, consequently, boost state revenue.
Changes address low salaries and dividend income
For years, the report mentioned, some company owners, directors and shareholders have declared monthly salaries of around €500 while receiving much of their income through dividends, on which they did not pay social insurance contributions.
Before the 2026 tax reform, dividend income was subject to a 17 per cent tax rate, which was reduced to 5 per cent from January 1, 2026.
Because some individuals declared low salaries, they could also fall below the income tax threshold and pay no income tax on their salaries, while potentially qualifying for social pension payments and benefits for low-income pensioners in the future. The practice was permitted under the existing legal framework.
The Labour Ministry’s proposed changes seek to ensure that social insurance contributions more closely reflect the income received by individuals who are both employees and shareholders.
The labour minister has said that some people declare low salaries while simultaneously receiving dividend income, and that the aim is for pensions to reflect the contributions made by each insured person, reducing reliance on welfare benefits.
New category for people receiving income from assets
The pension reform bill also proposes creating a new category of contributors to the social insurance fund covering people whose income comes from sources other than conventional employment.
This category, described as income earners, would include income from positions held, dividends, interest, rents, copyright and patent royalties, fees and other profits derived from property.
The proposed framework would broaden the contribution base beyond salaries and seek to bring a wider range of income into the social insurance system.