Cyprus: Cyprus: Changes in the Tax System

Last Updated: 4 January 2002

Article by Andreas Neocleous and Maria Kitromilidou

On the 9th of January 2001, the Minister of Finance of the Republic of Cyprus introduced to House of Representatives the proposed changes to the existing tax system. The proposals took the form of a preliminary document titled ‘Tax Reform 2001’. The final draft will be presented and for discussion in Parliament after the Parliamentary elections due in May 2001.

Nine years after the last tax reform, (see Tax Planning International Review, June 1991) the Government justifies the proposed changes as being necessary (a) to fulfill Cyprus’ European Union (EU) commitments especially in the context of custom duties and harmonization of Cyprus tax practices with the EU, (b) to satisfy the OECD requirements for the elimination of harmful tax practices, while at the same time maintaining its antagonistic position as an international business center, (c) to promote social justice, (d) to create a simpler and more efficient taxation system especially as regards the imposition and collection of taxes and (e) to provide tax incentives for the achievement of economic priorities.

A. EU Commitments

  1. The current VAT rate in Cyprus is 10% substantially lower than the 15% minimum according to the 6th EU Directive. The proposed change will have the effect of initially increasing VAT to 13% bringing it to a level of 15% at a second stage by January 1st, 2003.
  2. To offset the increase in VAT rates the government proposes to abolish or partly- abolish the emergency defense levy.
  3. Currently Cyprus has much lower excise taxes on products such as petrol, alcohol and tobacco than European Union guidelines commands. This will change with a steep increase in excise taxes on all such products for example tobacco’s 40% tax rate will increase to 57% and alcohol’s excise tax of £1.19 per litre will rise to £3.20.
  4. The drawback system which provides for the return of money paid in duties or excise taxes on raw materials will be abolished for goods exported with EUR 1 certificates.
  5. Along the lines of (4) above, duty exemptions will also be abolished.
  6. Refugee tax now levied on agricultural products and some manufacturing products will be abolished.
  7. Consolidation of losses for different companies in the same group relief. This is expected to help improve the groups organization, operations and future growth.
  8. Current legislation provides very limited tax breaks for companies that go through reconstruction, mergers or acquisitions in order to modernize or enhance the efficiency of their operations. New measures are proposed, which together with (7) above are aimed at preparing Cypriot companies or groups of companies against the increased competition that will flow from accession to the EU. It should be noted that legislation allowing group relief was introduced in 1989 but regulations required by the law to operate such relief were never introduced. The Government with these proposed changes is now rectifying this anomaly.
  9. Currently there are tax incentives for the import of foreign capital to Cyprus. The imminent liberalization of exchange controls necessitates the abolition of such tax breaks.

B. OECD commitments:

  1. Currently the tax regime as regards corporation tax is 20% for profits of up to CYP 40,000 and 25% on profits over CYP 40,000. The proposals provide for the decrease of corporation tax on profits over 40,000 from 25% to 23%. This is seen as a step towards leveling corporation tax in relation to local and international business companies. Currently the later are treated much more favorably, in that they are taxed at only 4.25%, amidst OECD’s calls for reforming Cyprus favorable tax regime.
  2. Under present legislation dividends received from "local" companies are subject to a 20% withholding tax, which no tax is withheld from dividends paid by international business companies. It is now proposed that all companies will be obliged to withhold 20% income tax from dividends paid to shareholders irrespective of the identity of the shareholders or the source of income from which the dividend was paid. Where double taxation agreements are in force the lowest rate will be enforced. This tax will be withheld at the source and it will be final.
  3. Current practice provides for a tax break for dividends that are paid from profits that are brought from abroad. The proposal is that dividends should be taxed at source whatever the origin of the profits from which they are distributed.

C. Promotion of Social Justice:

  1. Increase in the threshold of taxable income from £6,000 to £8,000.
  2. Tax credits will be abolished and these will be incorporated in the tax-free income.

D. Simplification of the taxation system

  1. Gradual abolition of employees tax files and their transfer to the pay as you earn method (PAYE) used by employers. The new system will be introduced first for civil servants, moving-on later to semi-government and other big organizations such as banks and listed companies. This change will save the Inland Revenue a substantial number of staff.
  2. End to the current system of expenses or costs for the use of private cars for business purposes and entertaining expenses.
  3. Payment of tax after the due date is subject to 5% interest if paid within six months of the due date and 9% interest if paid after six months. The proposals call for the abolition of the 5% rate.
  4. All revenue from interest will be taxed at the source, i.e. at the banks, co-ops, saving societies and bonds traded on the CSE. This will reverse the current practice where the onus was on the tax payers to declare the interest earned in their forms and be taxed accordingly. Individuals who are under the tax threshold will be able to apply for a certificate from the tax office which they will present to the banks so that the tax will not be withheld.
  5. There will be a new tougher method of valuing property prior to a sale. Under this proposal, transfer duties will be paid on the Land Registry’s valuation, not that declared by the parties to the agreement.
  6. Immovable property tax will be raised to 0.5‰ with a parallel abolition of other taxes levied on property.
  7. A consumer tax on luxury goods such as smoked salmon and yachts will also be abolished.

E. Tax Incentives

  1. Provision of professional services abroad. Currently 60% of profits that are brought into the country are not taxed. This percentage will be reduced to 40% but at the same time the same exemption will apply to several services provided from Cyprus abroad.

Other proposed changes include the change of the governments’ contribution to the Social Security Fund, increase in the car license of diesel cars and further introduction of social benefits.

Effects of Proposals:

It is generally felt that tax reform is both necessary and essential both in order to streamline the tax system of Cyprus with European and OECD standards and also because as a general principle as society evolves the financial and other circumstances of a country and its citizens also change and so the tax system must react proactively to meet these changes.

This should be reflected in a comprehensive tax reform package that balances the government’s objective of raising revenue to fund its expenditure and the need for any such measure not to be overly burdensome on a particular group. At the same time the taxation system should enable and not curtail business activities, as these are the cornerstones of all healthy economies. As such the only criticism we make of the proposed measure is that a more comprehensive package as far as corporation tax is concerned and perhaps a greater reduction in the percentage payable on the profits of companies. Currently, profits over £40,000 are taxed at a 25% rate be reduced to 23% if the proposals are implemented. Even with this change there is a large discrepancy between the taxation of international business companies that are currently taxed at a rate of 4.25% and local companies. A further reduction of tax paid by local companies and an increase to the tax paid by international business companies for example at a compromising 10% level would do much to please local businessmen, the EU and OECD in particular and any negative impact on the position of Cyprus as an international business center would be minimal.

Furthermore, it is asserted in the Minister of Finance’s statement that ‘if implemented the government-proposed tax package will benefit the average citizen who at the end of the day will have more money in his pocket’ has yet to be achieved. The statement is mainly based on benefits that may occur for lower and medium income tax groups that are currently subject to a tax exemption threshold of £6,000 about to increase to possibly £8,000. Yet, whether this will have any real effect in the light of the fact that at the same time tax credits are abolished and VAT increases to 13% and eventually 15% as such making life for consumers, especially ones with big families, more expensive is not hard to predict. Furthermore, the proposed abolition of consumer tax on luxury goods such as smoked salmon and yachts is unlikely to have much effect on the tax group said to benefit more from the changes. Perhaps if the increase in social benefits that the report proposes, albeit rather vaguely in its last page, is substantial so as to make a difference in the quality of life of such groups (i.e. supplementary benefits if a taxpayers income is less than a minimum amount) then there may be some benefit for lower and medium income earners. For the time being it seems that there might even be a negative impact of these changes to lower income families or taxpayers, especially the ones that are already under the £6,000 per year threshold as these will see no benefit from the changes while at the same time their life will become more expensive. Perhaps an increase in the minimum salary to reflect the rising prices would be a compromising solution.

Having made the above comments, overall it should be noted that the main objectives of the Ministers proposals i.e. the simplification of the tax system, harmonisation with EU and compliance with certain OECD requirements have been achieved.

 

Main changes

  1. VAT rise from 10 to 15% (with an intermediary stage of 13%)
  2. Defence levy to be scrapped
  3. Income tax to be withheld from interest payments
  4. Steep rise in excise taxes
  5. Tax free threshold to rise to £6,000 to £8,000

 

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.