Why the Tax Reform is a positive equation for the business environment of Cyprus

The tax reform being promoted for implementation, the content of which was revealed during the presentation at the Presidential Palace by the experts of the University of Cyprus’ Economics Research Centre (CypERC) and the members of the advisory committee under whose supervision the entire project is developing, has been welcomed as being positive for businesses.

The recommendations made by CypERC and concerning the country's business environment are very close to the positions expressed by the business world during the previous consultation, thus satisfying its key proposals and largely allaying any concerns that may have existed about a possible setback in the development course of business activity on the island.

The upcoming tax reform, as it took shape during the 26 February presentation, is moving in a direction that can only leave the domestic and foreign business community in Cyprus satisfied, since what it includes, and in particular the incentives provided, maintain the attractiveness and competitiveness of our island as an investment destination, despite the increase in corporate tax from 12.5% ​​to 15%.

The increase in corporate tax was, moreover, largely expected and inevitable, as it is something that, among other things, arises as Cyprus’ obligation to comply with the European Union and specifically the directive for a uniform tax rate throughout its territory.

The complete abolition of deemed dividend distribution and the reduction of withholding tax on actual dividend distribution from 17% to 5% are considered of paramount importance for business , while the preservation of the framework for intangible assets (IP Box) is also considered of particular value.

And this - on the latter -, is since this is a tax regime that concerns profits from innovation and investments in intellectual property (IP), which is considered extremely important for companies, local and foreign, that operate in the rapidly growing and enormously contributing technology sector to the economy.

Additionally, the maintenance of the Notional Interest Deduction (NID), as well as the maintenance and extension (with the imposition of an annual fee) of the non-domicile status of Cyprus, as well as the maintenance of the 50% deduction for first employment in the Republic, are elements that add to the overall positive tax reform.

Indicative of the positive reading by the business world were the first statements made by CCCI and OEB, as well as by TechIsland, with the three associations expressing their readiness to submit further suggestions during the three-week public consultation that will follow.

With the government's goal of having the tax reform come into effect by 2026, what certainly emerges as a vital issue the day after its presentation is that the timelines set for the next steps be adhered to and the reform move forward, without becoming a victim of endless discussions and a victim of missteps to serve petty political or other expediencies.

The roadmap for the implementation of the tax reform provides, as mentioned above, for a three-week public consultation, during which all interested parties will be able to submit their opinions and suggestions, in order for the preliminary framework presented yesterday by the Tax Reform Commission to be perfected and submitted to the government.

Subsequently, the comprehensive proposal will be studied and discussed at the government level, the relevant bills will be prepared, which, after undergoing the necessary legal review and being approved by the Council of Ministers, will be submitted to Parliament for voting.

The government's goal, as emphasised by both the President of the Republic Nikos Christodoulides and the Minister of Finance Makis Keravnos, is for the bills to be approved by Parliament by the end of the year, so that the tax reform can come into effect from 2026.

Everything provided for businesses

In more detail, regarding businesses, according to what experts Marios Andreou and Costas Markides, announced, through the upcoming tax transformation, the following will be maintained:

• Taxation of worldwide income with exemptions/deductions where they exist for tax residents of Cyprus.
• The deduction of expenses for the production of taxable income.
• Strengthening criteria for tax residency for companies (control and management).
• The notional interest deduction (NID).
• The framework for intangible assets (IP Box).
• The shipping regime.
• The 50% discount for first employment in the Republic.

Additionally, the CypERC experts recommend the complete abolition of deemed dividend distribution, the imposition of a 5% withholding tax on actual dividend distribution for tax residents of Cyprus who are also domiciled in Cyprus, as well as an anti-abuse clause, with the imposition of a withholding tax at a higher tax rate than 5% on disguised dividend distribution based on the Estonian model.

At the same time, an increase in corporate tax from 12.5% ​​to 15% is proposed, as well as anti-abusive measures for "close-structured companies", such as the possibility of lifting the corporate veil and taxing a shareholder as a natural person carrying on a business and the possibility of adjusting salaries to free market prices.

Regarding the green transition and digital transformation, a suggestion has been made to choose a combination of super-deductions for expenses/depreciation, accelerated depreciation, discounts for upgrading skills and retraining of personnel, as well as losses created by the above measures to be transferred without restrictions.

For tax residents of Cyprus (natural persons), the provisions for 183 days remain, while the provisions for 60 days are strengthened.

The definition is also expanded to cover individuals whose centre of business interests is Cyprus, regardless of physical presence (based on the French model), while in the case of dual tax residence it will be resolved on the basis of a Double Taxation Avoidance Agreement.

Also based on the recommendations, the non-dom status is maintained and expanded with the imposition of an annual fee.

At the same time, it is proposed to abolish the horizontal imposition of stamp duty to simplify the framework and a suggestion is made to impose it only in the real estate, financial and insurance sectors, for specific amounts, however, per category.

In relation to the capital gains tax, CypERC recommends maintaining its philosophy, but proposes that it be imposed only on real estate in the Republic.

For the carryforward of losses, the Centre proposes extending the time period from five to 10 years, but with restrictions, such as allowing a deduction as a percentage of the taxable profit of the respective year after the 5th year.

In addition to the above, it is proposed to maintain Group Relief, abolish the imposition of defense levy on rents, abolish the 1.5% premium for insurance companies, while the possibility of allowing depreciation for second-hand buildings based on the buyer's cost and renewing the depreciation period is being studied.

The state's fiscal costs and revenues

It is worth noting, finally, that according to economist Dr. George Syrichas, based on the preliminary estimate, the fiscal cost of the measures-regulations proposed by the CypERC for the tax reform ranges from €380 million to €530 million, of which €150-€170 million from individuals and €230-€300 million from the reduction in the defense contribution.

At the same time, it is expected that state revenues will increase by €350 to €470 million, of which €220-€270 million euros from the increase in corporate tax, €80-€130 million from other potential taxes and €50-€70 million from VAT and income tax refunds.

(Source: InBusinessNews)