ICPAC submits its positions on the proposed tax reform, including 14 new suggestions

The Institute of Certified Public Accountants of Cyprus (ICPAC) has shared its positions and opinions regarding the upcoming tax reform in a letter and accompanying annexes sent to the Minister of Finance, Makis Keravnos.

The letter was sent within the context of the recent consultation taking place over the past few weeks on the recommendations of the University of Cyprus’ Economics Research Centre (CyERC).

ICPAC expresses overall satisfaction with the proposed tax package, recognising that the tax burden on taxpayers and businesses is limited. At the same time, as it indicates, the further consolidation of the tax base and the rules of presence and status of tax residents is a particularly legitimate development.

At the same time, however, the ICPAC notes "weaknesses", as it states in its letter to Makis Keravnos, adding that it would expect to see more simplification of the system, with the unification or abolition of taxes or specific provisions that bring complexity, as well seeing more flexibility in procedures, the reduction of bureaucracy and the consolidation of the stability and predictability of the entire tax framework.

"We also expected," ICPAC underlines, "to see proposals that will reduce the ever-increasing in recent years administrative compliance costs for small and medium-sized enterprises (SMEs), which undoubtedly constitute the backbone of the Cypriot economy." It went on to note the opinion that a comprehensive tax reform would be expected to include:

• First: The establishment of a Tax Council.
• Second: Tax Justice.
• Third: The regulation of Tax Advisors.
• Fourth: The Digitisation-Automation of the Tax Department's operations.
• Fifth: The partial transformation of tax laws.

READ THE LETTER TO MAKIS KERAVNOS (IN GREEK) HERE

Within the context of its overall position on tax reform, ICPAC presented its comments on CypERC’s proposals, providing specific explanations on proposals for which it either disagrees or has reservations.

ICPAC's positions on CypERC’s framework for businesses

• Complete abolition of deemed dividend distribution

ICPAC agrees with the complete abolition of deemed dividend distribution and the imposition of a 5% withholding tax on actual dividend distribution for tax residents of Cyprus who are also domiciled in Cyprus.

Regarding the imposition of a withholding tax at a higher tax rate than 5%, on a concealed dividend distribution (Estonian model), the ICPAC comments that more information is needed on this specific point.

"We maintain our concerns about its legal basis and the purpose of its implementation. Therefore, we cannot agree without having a full and clear picture," it adds.

• ICPAC's position on increasing corporate tax from 12.5% ​​to 15%

ICPAC, realising, as it states, that the increase in corporate tax from 12.5% ​​to 15% is a political decision aimed at strengthening the image and credibility of the country, accepts the suggestion and at the same time, cites its own reasoning:

"Our basic position is to enhance the value and credibility of Cyprus as a business destination of choice and quality, by continuously upgrading the product and services offered, as well as by simplifying, strengthening and effectively implementing the country's internal infrastructure, processes and operations (beyond taxation), thus offering value-added services at a competitive cost."

We remain concerned about whether the proposed increase in corporate tax rate may be perceived negatively by the business community (local and foreign), as an increase in the cost of doing business in Cyprus, which may affect the perception of the country's competitiveness as a centre for business and financial services.

On the other hand, this increase could be offset by limiting employment costs for the employer, by reducing either the contribution rate to the Social Cohesion Fund or/and the Redundancy Fund, thus maintaining tax advantages."

Regarding the anti-abuse measures for close-structured companies, ICPAC expresses the position that more information is needed. “We maintain our concerns about its legal basis and the purpose of its implementation. Therefore, we cannot agree without having a full and clear picture,” it explains.

At the same time, it disagrees with the possibility of lifting the corporate veil and taxing a shareholder as a natural person running a business and the possibility of adjusting salaries to market rates, commenting that the legal background, legal basis and proportionality of the measure must be examined, as it could potentially lead to an excess of powers and unequal or problematic treatment.

• Non-Dom status, green transition and digital transformation

On the Non-Dom regime, ICPAC agrees with the principle of the proposal and at the same time notes that more information needs to be provided regarding the extension (i.e. after 17 years) as well as determining the amount of the annual fee.

ICPAC agrees in principle with the recommendation regarding the green transition and digital transformation, noting that the provision of more information with more targeted measures is necessary.

READ ICPA’S COMMENTS ON ALL CYPERC’S SUGGESTIONS IN GREEK HERE

The 14 new tax measures proposed by ICPAC

Beyond its comments on the CypERC recommendations, ICPAC proposes new tax measures to maintain, as it states, Cyprus' international tax competitiveness.

The measures proposed by ICPAC are the following:

• Intellectual Property nexus regime

The notional deduction should be increased from 80% to 90% (e.g. Belgium has 85%); this increased limit should only be applied to assets that enter this regime from January 1, 2026 (i.e. assets that were already within this regime on December 31, 2025 should remain with the limit at 80%).

• Imputed Interest Discount

(a) The deemed deduction should be increased from 80% to 90% (e.g. Luxembourg has 90%); this increased limit should only be applied to share capital introduced from 1 January 2026 (i.e. capital introduced up to and including 31 December 2025 should remain with the limit at 80%).

(b) Any excess deemed deduction (i.e. deemed deduction that was not used as a deduction in Cyprus) may be carried forward to subsequent years without quantitative or temporal limitation.

• Assets (e.g. Intellectual Property) imported into Cyprus following tax exit from another country

As the law stands today, if assets (e.g. Intellectual Property) are imported into Cyprus following a tax exit from another Member State, their tax cost on import is equal to their market value on the day of import (i.e. a tax step-up is given), which also applies to future wear & tear tax deductions and to the future calculation of the profit on a future exit from Cyprus; this should also be extended to assets (e.g. Intellectual Property) imported into Cyprus following a tax exit from non-Member States.

• Secondary adjustments

An explicit provision should be introduced that Cyprus does not apply them (i.e. the tax practice in Cyprus today, which is non-application, should be strengthened legally).

• Qualifying Refundable Tax Credits ("QRTCs")/Government grants

In view of the introduction of the European Pillar 2 Directive (minimum tax rate of 15%) into Cypriot tax legislation from 1 January 2024, the measures that the Ministry of Finance is considering regarding QRTCs/Government grants should be included within the framework of tax transformation so that they apply from 1 January 2026.

• Foreign tax deduction

(a) All foreign taxes of the taxpayer to be grouped (pooling of tax credits) for deduction purposes (as is the case, for example, in the Netherlands)

(b) The foreign tax deduction shall precede the deduction of tax losses of previous years and the deduction of group tax losses (group relief)

(c) Any excess foreign tax (i.e. foreign tax not used as a deduction in Cyprus) should be carried forward to future years without quantitative or temporal limitation

(d) Notional foreign tax credits should be granted (as is the case, for example, in Malta).

• Active/passive interest income

For simplification purposes and for the purposes of supporting the status of non-domiciled individuals, interest income should always be considered an asset for companies and always a liability for individuals.

• Research & Development (R&D) Expenses

To extend the super discount that was valid for the years 2022-2024 to further years.

• Foreign investment funds in the form of cooperatives

To introduce the provision of Taxation Regime Choice (check-the-box) regarding their handling for purposes of Cypriot tax treatment (as is the case, for example, in Malta).

• Tax loss carryforward

(a) Deduction of tax losses from previous years: Tax losses from previous years may be carried forward to future years without quantitative or temporal limitations.

(b) Group relief discount: Tax losses from previous years should also be available for group relief discount in subsequent years.

(c) Group relief discount: In cases where a Cypriot company is transferred from one group to another, group relief discounts should be available to both groups of companies on a time-sharing basis.

• Interest expenses

(a) There should be no restriction on the deduction of interest beyond the restriction imposed by the European ATAD Directive.

(b) If (a) is not applied, then a discount should also be given for equity less than 100% (e.g. for equity not less than 75%).

• Capital gains tax on real estate within Cyprus

Capital gains tax should only apply to disposals to unrelated persons.

• Trading goodwill

Not to be considered as arising in Cyprus, and therefore not subject to Cyprus income tax, any commercial benefit that may arise when a Cypriot company sells an exempt foreign permanent establishment, or when an exempt foreign permanent establishment sells its assets.

• Legal status of tax opinions

The institution of tax opinions should be included within the tax legal framework.

READ THE DOCUMENT WITH THE MEASURES PROPOSED ICPAC IN GREEK HERE

The ICPAC also submits proposals for individual, easy and quick, as it points out, adjustments to the existing tax legal framework, which will bring, according to the Association, additional simplifications and the clearing up of uncertainty.

READ ICPAC’S SUGGESTIONS IN GREEK HERE

It is noted that today, Friday, 21 March within the framework of the consultation for the promotion of tax reform, Finance Minister Makis Keravnos will chair the Advisory Economic Committee for a discussion of the preliminary framework, as announced on 26 February.

During the meeting, a presentation of the framework will be made by CypERC, as the project contractor.

(Source: InBusinessNews)