What the proposed Tax Reform entails for businesses and households

Increasing the tax-free income threshold for individuals by €1,000 to €20,500, opening up tax brackets and transferring the top tax rate of 35% to taxable income greater than €80,000, are among the proposals proposed by the experts who presented their recommendations for a comprehensive tax reform.

The presentation was given at a special event at the Presidential Palace on 26 February, in the presence of the President of the Republic, Nikos Christodoulides, who also delivered a speech.

In relation to corporate tax, the proposals suggest it is increased to 15%, while a company that records profits will be taxed only 5%, from 17% which is currently the case, in the event that it distributes dividends from its profits. In the event that the company does not distribute dividends and keeps the profits to make an investment, it will not be taxed.

Corporate taxation

The experts, Costas Markides and Marios Andreou, who assisted the University of Cyprus’ Economics Research Centre (CypERC) on corporate taxation issues, gave their own presentation.

Markides said that the last time a holistic tax reform took place in Cyprus was in 2004 due to EU accession and added that the aim was to modernise and simplify the tax system.

He also stated that it is an urgent need to proceed with a reform in order to be able to practically and effectively support the middle class, to further shield the Cypriot economy and to make Cypriot businesses more resilient and competitive, taking into account that the international economic environment in which they have been called upon to operate in recent years is unpredictable.

Markides said that certain provisions of the existing model "we considered particularly beneficial and should be kept”

As he said in line with the recommendations, tax residency for companies would continue to be determined based on control and management, and once it is determined that a company is a tax resident, we proceed to taxation of global income with exemptions and deductions where and when they arise.

Markides stated, among other things, that an expense deduction would only be given when taxable income is generated.

Andreou said that a proposal was being made to abolish the defence contribution on rents, that is, to tax it with income tax.

He stated that "there is an anachronistic way of taxing insurance companies that paid 1.5% on premiums" and a suggestion is made that it be abolished and "that they be taxed like all other companies in Cyprus."

He mentioned that there is a proposal to tax cryptocurrencies unless they are of a capital nature, adding that this will require further elaboration.

Andreou referred to a study of tax systems in other countries and the examination of specific sectors of the economy, while taking into account, among other things, EU observations on the Cypriot economy.

He also mentioned that they had worked to identify problematic provisions and these were linked to all the recommendations.

The changes for households and individuals

Presenting the proposals at the event, the Director CypERC, Elena Andreou, stated that the reform presents a significant reduction in the tax burden of households from 63% to 82% for a typical middle-class household.

At the same time, she stated that CypERC proposes the following tax deductions for households that are applied with an income criterion of total gross income of the household with two working spouses/partners up to €80,000 as follows:

Based on family composition, €1,000 to each spouse plus two children, for each child under 19 and 21 years old, €1,000 to each spouse plus two children for each student up to 23 and 24 years old, for installments of a serviced loan for the purchase of a first home or rental up to €1,500 to each spouse, for green household upgrades up to €1,500 to each spouse in the year the upgrade is made, such as for example up to five years, for energy upgrades to the home, installation of photovoltaic panels, installation of a heat pump and electric car.

She stated that single-parent families are classified in the most favorable scenario, that is, as families with two children, and gave as an example, a single-parent family with one child, which will benefit from a €2,000 tax deduction.

Among other things, she cited as an example the average salary of a worker, which is €28,356, as published by CySTAT, stating that this household with one worker without children will pay €422 in tax, if it has two children it will only pay €22 in tax, while if this worker is not part of a couple and is a single parent, they will not pay tax.

According to Andreou, the fiscal cost of the tax changes amounts to €150-€170 million from individuals and €230-300 million from a reduction in defence contributions. The impact on state revenues is €220-270 million from the increase in corporate tax, €80-130 million from other potential taxes and €50-70 million from VAT/Income Tax refunds.

According to the Director of CypERC, the tax reforms for individuals have been carried out after an analysis of the existing tax system, the study of good practices in other countries, as well as the costing of the suggestions from the 50 bilateral meetings that have been held with organisations and stakeholders.

Elena Andreou stated that the main objectives of the tax reform for individuals are to reduce the tax burden for all taxpayers, to support the middle class by providing tax breaks based on family composition for children and students, for the cost of acquiring a first home, for the green upgrade and transition of households, to alleviate the housing problem and support household homeownership, to encourage serviced loans for housing and the declaration of rents - therefore reducing tax evasion - to increase employment and encourage female participation in the workforce, to alleviate the problem of low birthrates and to promote the green transition of households.

She added that another, final goal is still under consideration, which has to do with the flight of human capital, in which the stakeholders are studying the improvement of the existing system.

Referring to the fiscal impact of the four reforms advocated by CypERC,. Andreou said that increasing the tax-free amount by €1,000 and changing the scales and transferring 35% to €80,000 would cost the state €65 million.

She stated that tax deductions for children and students amount to €27 million, for first-time homeowners to €30 million, and for green households to €29 million, with the total fiscal cost amounting to €151 million, if all households decide to go green.

"If not, this scenario could be even less," she added.

Andreou also said that for a typical household with two employees and two children, tax deductions will amount to up to €5,500 and in most cases this leads to a tax reduction that will be more than €5,000 tax-free.

Referring to examples of how the middle-class household tax is applied and reduced, Elena Andreou said that let's say three different middle-class households with two employees, where the gross annual household income is €56,184, which is based on published data from CySTAT in relation to the average salary of men and the average salary of women for 2023.

She stated that under the current tax system, this household pays €2,150, regardless of the composition of the family, with or without children.

Andreou also said that when the tax deductions proposed are implemented, the most significant reduction in the income tax paid by the household is presented as follows: In the first case, a household without children will pay €796 in tax after the reform, while a household with one or two children will pay €596 and €396 in tax respectively.

"The reform presents a significant reduction in the tax burden on households from 63% to 82% for a typical middle-class household," she noted.

At the same time, Elena Andreou mentioned that many households in Cyprus have one employee (one working parent) and "if we apply the same tax deductions that apply to one employee, today this household pays €1,122 and if the average salary of the employee is €28,356, as published by CySTAT, this household with one employee, without children, will pay €422 in tax, if it has two children it will only pay €22 in tax.

"This worker, if he is not part of a couple and is a single parent, will not pay tax. Also, if the last-mentioned worker received €5,000 tax-free, instead of these deductions, he would pay €122 in tax," Andreou explained.

"We believe that the tax increases we are proposing are aimed at helping the middle class and have specific pillars and goals," she added.

More specifically, Andreou said that if someone is interested in seeing how this typical household with two workers and two children is affected by all the tax deductions, they could look at the fact that the reduction in household taxation, which is €2,150 today, will be €396 after the reform.

She stated that from the increase in the tax-free allowance, the household would gain €400, from the 2 children it would gain €800, from the first home loan €354, and from the green transition €200.

In relation to how household taxation is reduced by the tax-free and different number of children, Andreou said that in this case the household decides that it does not want to benefit from either the tax deduction for the first home or from the greens.

"In this case, we have the same household we saw until now with the €56,000 income, the €2,150 tax it pays today, if it has two children it will pay €950 tax under the new tax, if it has three children €696 tax and if it has four children €496 tax.

In public consultation for another three weeks

Speaking during the presentation, Finance Minister Makis Keravnos said that the event was the third in a series of presentations regarding the upcoming tax reform, which is "an emblematic reform of our Government."

"It is one of the announcements of President Christodoulides' governance agenda, which began to be implemented as planned, with steady steps and consistency," he added.

Keravnos reported that within the framework of social dialogue and exchange of views, more than 40 bilateral meetings have been held with private sector bodies, associations, federations, employer organisations, trade unions, organisations, professional bodies and political parties.

He also said that written positions and opinions have been requested, which have been recorded and duly evaluated, so that the issues of concern to the bodies are weighed in the planning of the holistic tax reform.

"Written suggestions and positions have also been received from ordinary citizens," he added.

Keravnos stated that following the presentation of the tax reform framework, it will be put up for public consultation for another three weeks, while the proposal will be discussed and studied at the Government level and, with the preparation of the relevant bills, be put before Parliament for a vote.

Stating that the tax system decisively affects a country's economy, Keravnos said that the objective goal of a tax system in a modern economy is to finance public spending, strengthen and continue economic growth and redistribute the wealth produced in order to ensure social cohesion and improve the average level of prosperity, as well as encourage entrepreneurship and integration into the labor market.

The Minister of Finance thanked the CypERC experts for completing this project within the framework of "a high-level scientific approach with objectivity and reliability" and those who contributed with opinions, suggestions and proposals, as well as the Ministry executives who were responsible for monitoring the progress of the project.

(Source: InBusinessNews)