The proposed tax reform and the core that must not be changed

The countdown for Cyprus’ tax reform began at the end of February, when the relevant framework was presented by experts from the University of Cyprus’ Economics Research Centre (CyERC) and the members of the advisory committee.

This necessary reform, coming more than 20 years after the last one, constitutes a vital undertaking for strengthening the competitiveness of the Cypriot economy and of course for further strengthening and highlighting Cyprus' position as an attractive international business centre.

The formation of a tax model that will, on the one hand, support the development of domestic business activity and, on the other hand, provide the necessary incentives to attract quality foreign direct investment, constitutes an essential strategic direction that must be followed, without, of course, under any circumstances disrupting or putting fiscal stability and soundness at any risk.

It must be carried out in a way that will balance, on the one hand, the need for a business-friendly tax framework and, on the other, the need to ensure the required flows of tax revenue to state coffers.

The tax transformation proposed by the experts of the University of Cyprus's Tax Reform Committee and by the members of the advisory committee, as presented in February, is generally based on this philosophy and serves precisely this goal.

This is, as assessed, a well-thought-out and balanced tax approach, hence the fact that it was viewed and greeted with a positive stance by almost all of the country's economic/business stakeholders, as well as the political sector.

By maintaining significant incentives for foreign investment and, at the same time, relieving Cypriot companies of the tax burdens they currently bear, the upcoming reform introduces significant advantages for attracting and retaining foreign and existing investors in Cyprus, further improving the country's already attractive tax regime where and when needed, without unnecessary risks and without introducing "radical" incentives for the sole purpose of creating impressions.

CyERC’s recommendations

It is recalled that the CyERC’s proposals for tax reform with regard to corporate taxation, which InBusinessNews has highlighted in recent publications as extremely important for the competitiveness of the business ecosystem of Cyprus, include, among others:

Increase in corporate tax from 12.5% ​​to 15%

• Increase of corporate tax from 12.5% to 15%
  
• Anti-abuse measures for "close-structured companies"
  ➤ Possibility to lift the corporate veil and tax the shareholder as a natural person conducting business
  ➤ Possibility to adjust salaries to market rates

The increase in corporate tax from 12.5% ​​to 15% is a development that sends clear messages abroad and that, by maintaining Cyprus' competitiveness, contributes to the general effort to restore the country's reputation as a reliable business center and a reliable investment destination.

EXTRAORDINARY DEFENCE CONTRIBUTION ON DIVIDENDS

Proposal 1

• Complete abolition of deemed dividend distribution
  
• Imposition of 5% withholding tax on actual dividend distribution for tax residents of Cyprus who are also domiciled in Cyprus
  
• Anti-abuse clause
  ➤ Imposition of a higher withholding tax rate than 5% on concealed dividend distributions (Estonian model)

a) Complete abolition of deemed dividend distribution

b) Reduction of withholding tax on actual distribution of dividends for tax residents of Cyprus who are also domiciled in Cyprus from 17% to 5%

With the complete abolition of the deemed distribution of dividends in combination with the reduction of the withholding tax on actual distribution of dividends to 5%, the competitiveness of Cypriot businesses is enhanced, achieving a fairer burden and more effective tax treatment of profits.

Essentially, the above proposed arrangements correct the chronic distortion and competitive disadvantage faced by Cypriot companies with shareholders who are tax residents of Cyprus, who also have their domicile in the Republic.

And this since, with the proposed tax reform, on the one hand they are fully exempted and on the other hand they now bear a significantly reduced burden, which in both cases, based on the Extraordinary Contribution for the Defence of the Republic Law, it should be recalled that shareholders of companies who, while being tax residents of Cyprus, do not have their residence in the country (non-domiciled) do not have an obligation.

PRESERVATION OF EXISTING PRIVILEGES

Retention of Existing Provisions

• Cyprus tax resident – taxation on worldwide income with exemptions/allowances where applicable
  
• Expense deduction for the generation of taxable income (clear terminology)
  
• Corporate tax residency – control and management (strengthening of criteria)
  
• Notional Interest Deduction (NID)
  
• Framework for intangible assets (IP Box)
  
• Shipping regime
  
• 50% deduction for first employment in the Republic

Retention of Notional Interest Deduction (NID)

An incentive introduced by Cyprus in 2015 is maintained and remains important for attracting new direct investments, as well as for the inflow of new capital into existing businesses.

This is the incentive that concerns the granting of an annual tax deduction for deemed interest on new capital introduced, either in the form of cash or in the form of assets in kind, such as shares.

This tax deduction concerns both companies that are tax residents of Cyprus and companies that are not tax residents of Cyprus, but have a permanent establishment in Cyprus.

Maintenance of 50% discount for first employment in the Republic

It concerns the maintenance of an extremely important tax incentive in the effort to attract highly specialised professionals to settle and employ in Cyprus.

This specific discount is of particular value mainly for technology and IT companies operating in our country, whether foreign or local, given that one of the most important problems they face is that of finding specialised personnel to staff them.

Maintaining the framework for intangible assets (IP Box)

With the proposed tax reform, a strong IP Box regime remains in place, supporting technology and innovation.

Specifically, the preferential tax regime for profits from innovation and investments in intellectual property (IP) is maintained, a tax regime extremely beneficial for IT businesses and companies that develop technologies and spend a lot of money on research and development (R&D).

Its continuation is considered and is particularly important, given the rapid growth of the technology sector in Cyprus and the presence of a large number of foreign companies in the sector in our country.

Maintaining non-dom status and extending it by imposing an annual fee

Proposal 5

Non-Dom Regime

• To be retained
  
• Extension with the imposition of an annual fee

Featuring an attractive non-dom regime, Cyprus is an excellent choice for individuals (both from the EU and non-EU) with high incomes and significant assets, in order for them to transfer their tax residence to the country.

Given the very good ecosystem and the non-doms that already exist on the island, contributing to the maximum extent with their investments in the development of the economy, with its maintenance and expansion by imposing an annual fee, Cyprus will continue to be able to attract high-income and high-net-worth individuals to settle on the island, with multiple obvious benefits for the country's economy and its status as an investment destination.

This opportunity is growing due to the abolition of the similar regime, which was previously offered by the United Kingdom.

Lower tax rate for Stock Options

Other Proposals (3/3)

• Stock Options:
  ➤ Consideration of taxation at a lower tax rate at the point where there is a right to free exercise (anti-abuse clauses)
  
• Gratuitous Payments (based on best practices):
  ➤ For the employee – to be taxed, but with an exemption up to a specified amount
  ➤ For the employer – the entire amount to be deductible
  
• Golden Hellos / Handshakes (based on best practices):
  ➤ For the employee – the full amount to be taxed
  ➤ For the employer – the full amount to be deductible
  
• Donations and Contributions to Culture:
  ➤ To be deductible from income (based on recommendations from the Deputy Ministry of Culture)

It is proposed to tax at a lower tax rate (between 5%-10%) at the point in time when there is a right to free exercise (with anti-abuse clauses.)

This is something that, as estimated, may push an even greater number of companies to utilise Stock Options as a modern and win-win tool with their employees in shaping their contractual relationship with their senior executives, strengthening their development path and by extension creating consequential multiplier benefits for the entire economy.

It is noted that in Greece the corresponding percentage is 8%.

Extension of time period for loss carryforward

Other Proposals (1/3)

• Stamp Duty:
  ➤ Abolition of horizontal imposition to simplify the framework.
  To be imposed only in the real estate, financial, and insurance sectors, for specific amounts by category.
  
• Capital Gains Tax:
  ➤ Retain the current philosophy and apply only to immovable property within the Republic – modernisation
  
• Loss Carryforward:
  ➤ Consideration of extending the carryforward period from 5 to 10 years (with restrictions, e.g., after the 5th year, deduction allowed as a percentage of the taxable profit of each year) – No recommendation for loss carryback to previous years
  
• Retention of Group Relief (Vs Fiscal Unity)

Since 2012, and due to the Memorandum under which the Republic of Cyprus was placed, a limitation on the carryforward of losses to five years has been imposed and is in force, greatly hindering the mobility of businesses.

Through the relevant proposal submitted in the context of the tax reform, the extension of the time period from five to ten tax years is being considered (with restrictions - e.g. after the 5th year, a deduction of a percentage of the taxable profit of each year would be allowed). At the same time, no loss carryover to previous years is proposed.

The proposed extension from five to ten years largely constitutes a balanced formula for the partial lifting of the restriction that was imposed during the economic crisis for fiscal restraint purposes and for which, it is worth noting, the business world favors its complete abolition, as is the case in other countries competing with Cyprus, where there is no restriction.

It is worth noting in this regard that in Malta and Ireland there is no restriction, while in Luxembourg the loss carryforward period is 17 years.

Abolition of the imposition of defence levy on rents

Other Proposals (2/3)

• Used Buildings:
  ➤ Examination of the possibility for depreciation to be allowed based on the buyer’s cost, and for the depreciation period to be renewed (in the case of energy/green upgrades to the building)
  
• Abolition of imposition of defence contribution on rental income
  
• Abolition of the 1.5% premium for insurance companies
  
• Cryptocurrencies:
  ➤ To be taxed unless they are capital in nature – further clarification to be developed with specialised experts
  
• Improvement of the restructuring framework to facilitate the separation of family businesses, aiming to ensure continuity of operations

The suggestion made within the framework of the tax reform proposal is to abolish the obligation of companies that rent assets from tax residents of Cyprus (natural persons) to withhold and pay an extraordinary defence contribution on rents.

The withholding rate is 3% on 75% of the rent, i.e. 2.25% on the gross rent, while it is worth noting that the extraordinary defence contribution on rents is not withheld when rents are paid to non-tax residents of the Republic.

In other words, an unfavorable discrimination suffered by tax residents of Cyprus against non-tax residents of Cyprus is removed here as well, and by extension the tax framework is greatly simplified.

Moving ahead without unnecessary delays and backtracking

In view of the above, and with the public consultation that took place recently having been completed and the stakeholders involved having submitted their own opinions, positions and suggestions on the proposals of the Tax Reform Commission, the next step in the tax reform project is the immediate preparation of the relevant bills and their submission for voting in Parliament.

This is a process that must run without unnecessary delays and backtracking, given the government's goal of implementing the tax reform from 1 January, 2026.

It is logical that during the process of preparing and discussing bills, the suggestions and positions submitted during the public consultation should be taken into account in shaping their final form, since this was the reason for which it was held.

The aim, however, given the positive assessment of CypERC’s proposals by the entire business world, is not to alter the philosophy and the basic core of the reform, and not to attempt or implement changes and variations that would essentially nullify the "work" that preceded it and the result that emerged, which is generally acknowledged to be sufficiently compatible with the goals set in relation to the tax transformation.

Besides, there are many examples of reforms, - the most recent and striking being that of local government - which, while they were designed and presented in one way, ended up and were implemented in another as a result of misguided party and other interventions in their core and philosophy.

Interventions that "flooded" the reforms, altered their character and ultimately made them problematic in their practical implementation.

Both at a technocratic and political level, it is essential to understand that any attempt to alter the content of the tax reform will not only call into question its implementation within the set timelines, but will also become extremely detrimental to the service of what the government aspires to achieve with the tax transformation.

This is further development of the local economy, the strengthening of business activity and the strengthening of Cyprus' position on the global investment map.

(Source: InBusinessNews)