Cyprus Tax Reform: Balancing Act or Missed Opportunity?

Tax Reform - Wins and Losses

The long-awaited tax reform has finally been approved by the Parliament and the new tax regime has come into force at the beginning of the year. A reform that has been achieved after a long process of public debate and tough negotiations, culminating in a compromise reached between the various stakeholders.

The outcome of the reform elicits mixed reactions, largely dependent on one's perspective.

Benefits for individuals and local companies

For individuals, the increase of the tax-free amount from €19,500 to €22,000, the widening of the tax bands, and the increase in the income threshold for the highest personal tax rate of 35%, were all welcomed. So was the decrease of the special defense contribution on dividends from 17% to 5%. Additionally, newly introduced deductions for dependent children and university students, interest on loans used for acquisition of main residence or rent for main residence, insurance payment against natural disasters on residence, interest on loans used for acquisition of main residence or rent for main residence, expenses for energy efficiency and acquisition of electric car are expected to benefit many.

‘Local’ companies cannot complain either. The abolition of deemed dividends distribution and of the stamp duties was a demand for many years and a very positive development. The extension of tax losses carry forward period from seven to five years,, the certainty has been introduced with regards to taxation of interest which from now on will always be taxed under corporation tax and the change in the tax return submission and payment by self-assessment deadlines which now coincide is definitely also steps in the right direction.

Challenges for entities with foreign interests

Conversely, entities with ‘foreign interest’ have every reason to feel as the ones “paying the bill”, as the increase in the corporate tax rate from 12.5% to 15% has not been accompanied by any new incentives for them. As a result, they will see their tax burden unavoidably increasing. The extent of the increase will depend on whether such an entity benefits from the notional interest deduction or the intellectual property (IP) regime.

Professional perspectives and systemic concerns

For a professional though it is not all rosy. The introduction of personal deductions does surely benefit the individuals, however it also makes our system unnecessarily complicated. If the government’s intention was to help individual taxpayers, something widely agreed as important, it would have been better for the increase in their disposable income to be achieved through subsidies instead of tax deductions. In doing so, individuals whose earnings fall below the tax-free band, who are often most in need, would benefit as well, while now they do not.

The increase in the corporate tax rate is also a cause for concern, that hopefully we will not regret in the future. The 12.5% rate was undeniably one of Cyprus’ competitive advantages. Given that the tax base been determined under similar rules over the recent years, and with the indications that applying a common base, at least within EU, may not be far away, one wonders why a foreign investor will choose Cyprus over, say Ireland, Luxembourg, Malta, or the UAE. Especially taking into consideration the absence of other incentives that will differentiate us from the competition, while at the same time we have, justifiably or unjustifiably, some reputational issues.

And, not only we did not offer new incentives, but certain provisions we had in our laws have been amended beyond what is generally applied globally reducing even further Cyprus’ attractiveness as a jurisdiction. For example, the amendment to the definition of shares that directly or indirectly own immovable property to include shares which derive 20% (from 50% previously) of their value from immovable property situated in Cyprus in the Capital Gains Tax Law raises questions. Similarly questionable is the reduction of the ability of a taxpayer to utilise group losses by introducing a provision which requires firstly the use of own losses from previous years (which can be carried forward for seven years) and then those of a group company from which you can only benefit in the year these loses have been suffered. Such changes seem counterproductive to enhancing our jurisdictional appeal and create concerns if this is the right approach to effectively enhance our position.

Besides the areas of simplification and the country’s attractiveness, the recent changes have also left a taste of unfairness. Is it fair for the Tax Authorities to have six years from the tax return submission date, which in practice means seven years, to examine a return, while a taxpayer only has three to revise their own return? Moreover, why should interest on tax overpaid be calculated four months after the tax return giving rise to the refund has been submitted or four months after an assessment for a refund has been issued, while the interest on any due taxes is calculated from the due day?

It remains to be seen if the many positives of this reform will outweigh the negatives. In the meantime, one might be left with a feeling that we lost out on the opportunity to do much more and achieve a better outcome. But, as they say, “the best is the enemy of the good”. 

Published in Gold Magazine's special feature: ''Tax Advisory Firms''