Cyprus's Corporate tax rate increase to 15%: A new chapter in tax law

The Cyprus' House of Representatives recent decision to increase the corporate tax rate from 12,5% to 15% for large multinational companies or large domestic groups with annual consolidated revenues exceeding €750 million, marks a significant development in the Republic's tax and economic landscape.

As with every new development in a jurisdiction's tax and economic scene, the introduction of the Global Minimum Tax rules involves challenges and opportunities.

This decision, in alignment with international trends towards determining a global minimum tax rate, as part of a series of broader tax reforms, sets Cyprus in a position to be considered as a progressive member in the international financial system, while at the same time addressing domestic economic considerations.

Having its roots in the OECD BEPS Project, the Pillar Two framework is a set of rules that introduces a minimum tax rate of 15% for large multinational companies or large domestic groups. The purpose is to minimize tax base erosion and profit shifting by multinationals, ensuring a fairer distribution of tax profits among jurisdictions where these companies operate. Cyprus, as a member of the European Union, committed itself to transposing the EU Directive 2022/2523 into law. Following the official announcement of the transposition into law of the EU Directive, Cyprus is taking significant steps towards evolving and embracing a new approach to combat tax avoidance, base erosion, and profit shifting.

Cyprus, a traditional competitive tax jurisdiction that attracts foreign investment and multinational corporations, is prepared to demonstrate that a jurisdiction can responsibly engage in the global initiatives promoted by the OECD BEPS Project while still maintaining a full range of competitive tax laws and incentives.

Following the announcement of the introduction of the new rules, there are a number of concerns to be addressed, but also it would be fair to recognize the positive implications this will bring to the Cyprus economy.

The change in the policy will probably find some investors, accustomed to the lower tax rate of 12,5%, be worried, however Cyprus still retains a suite of other competitive advantages that continue to make it a compelling destination for businesses. Its geographic location, skilled workforce, advanced professional services sector, and extensive network of double tax treaties continue to provide unparalleled advantages.

Cyprus' reputation is not expected to be tarnished, but it will likely be reinforced and continue to attract quality investments.

Furthermore, despite the increase only affecting a fraction of the businesses operating in Cyprus, the Government acknowledges the possibility that some of these multinational companies may strategically decide to redomicile their Cyprus-based operations to other jurisdictions with more favourable tax regimes. It is comforting, though, that the Government is positive to take decisive steps towards providing incentives to those businesses impacted by this law. It is indeed a necessity for Cyprus to start considering countermeasures in a competitive global environment.

Not last but also, a significant positive implication would be that the additional public revenue streams will bolster the government's tax capacity that will enable it to invest in sectors with continuous growth or promising prospects.

Despite the real challenges and promising opportunities, Cyprus will continue to be at the forefront of combatting tax avoidance and following global initiatives that promote fairness among tax jurisdictions. That being said, it would be interesting to see more G20 countries adopt the rules, considering that BEPS Pillar Two Model Rules is indeed an OECD/G20 joint Inclusive Framework.

To maintain its status as a competitive and compliant jurisdiction globally, Cyprus has strategically aligned its corporate tax rate with global tax standards. This development is not expected to significantly undermine Cyprus's appeal, even though it presents additional concerns for businesses. The Cypriot government must commit to taking parallel actions to improve the business environment.

As we move forward, the effectiveness of these reforms in balancing economic growth with compliance will be pivotal in shaping Cyprus's future as a business destination.

*Iacovos Themistocleous, Senior Tax Manager & Board Member, RSM Cyprus