How Tax Payments and Tax Refunds Are Now Set Off in Cyprus: Priority Rules Introduced on 31.12.2025

On 31 December 2025, Cyprus published Law No. 243(I)/2025, titled The Assessment and Collection of Taxes (Amendment) (No. 2) Law of 2025, which amends the Assessment and Collection of Taxes Law of 1978. The law was published in the Official Gazette of the Republic of Cyprus on 31 December 2025.
One of the practical amendments is the new section 39A of the Assessment and Collection of Taxes Law, inserted by section 23 of Law Ν. 243(Ι)/2025. This provision regulates the order in which tax payments are applied and the Commissioner’s ability to set off tax refunds against outstanding tax liabilities.
1. Partial payments are applied first to interest and penalties, not to principal tax
New section 39A(1) provides that monetary payments made against a specific tax discharge the outstanding amount in a statutory order of priority.
The order is as follows:

1. interest for late payment of tax;
2. additional charge and monetary charge for late payment of tax;
3. monetary charge and administrative fine;
4. monetary charge for late submission of a tax return;
5. the original amount of tax and any additional tax imposed.

In practice, this means that if a taxpayer makes only a partial payment, the payment will not necessarily reduce the principal tax first. Interest, penalties and charges are discharged before the principal tax amount.
2. Tax refunds may be set off against older outstanding liabilities
New section 39A(2) provides that where a person is entitled to a tax refund under the Assessment and Collection of Taxes Law and the relevant taxing law, the Tax Commissioner may, at his discretion, deduct outstanding amounts of tax and contributions from any payment due to that person.
The set-off is made:

• starting from the oldest overdue liabilities;
• following the same order of priority set out in section 39A(1).

As a result, a tax refund may not necessarily be paid out to the taxpayer. If the taxpayer has existing overdue tax liabilities or contributions, the Commissioner may apply the refund against those liabilities.
3. Why this matters for companies and individuals
The new rule is relevant to all taxpayers, but it is particularly important for companies that may have multiple tax-related balances at the same time, such as:

• principal tax;
• late-payment interest;
• administrative fines;
• penalties for late filing of tax returns;
• older tax or contribution liabilities;
• an expected tax refund.

After the introduction of section 39A, a partial payment may not reduce the principal tax as quickly as the taxpayer expects. If interest and penalties have accrued, the payment is applied to those amounts first.
4. Practical example
A company has the following outstanding amounts:

• €1,000 — principal tax;
• €100 — late-payment interest;
• €150 — penalties and charges.

If the company pays €1,000, this does not necessarily mean that the principal tax has been fully settled. Under the new statutory order, the interest and penalties are settled first, and only the remaining balance is applied to the principal tax.
Therefore, after a partial payment, the company may still have an outstanding principal tax balance.
Conclusion
Taxpayers in Cyprus should be aware that a partial payment of tax arrears is now allocated according to a statutory order of priority, not necessarily according to the taxpayer’s expectation. Interest, penalties and charges are settled first, and only then is the principal tax reduced.
In addition, an expected tax refund may be set off by the Tax Commissioner against existing liabilities, beginning with the oldest overdue debts.