The government is defending its tax reform legislation amid continuing opposition from organised bodies over anti-tax evasion measures, which critics argue could harm Cyprus’s competitiveness as an investment destination.
Government sources told Phileleftheros that additional tools given to the Tax Department are needed to cover the fiscal cost arising from the reform.
The economic team faced a dilemma between imposing additional taxes and reinstating corporate fees or taking additional anti-tax evasion measures to cover a €200 million gap created by reform provisions.
University study reveals €200m shortfall
A University of Cyprus study showed that abolishing deemed dividend distribution, reducing special defence contribution from 17% to 5%, and granting tax deductions to individuals would create a fiscal cost of around €200 million. The study was presented to relevant bodies last February.
Currently, corporate tax stands at 12.5%, with dividend distribution through defence contribution taxed at 17%. For Cypriot companies, dividend distribution reaches 27.4%, meaning every €100 incurs €27.4 tax. Companies not distributing profits currently pay 23% taxation through deemed dividend distribution.
Maximum and minimum tax changes
Under the reform bills, corporate tax increases to 15% for all companies, whilst Cypriot companies distributing dividends face 19.25% taxation. Effectively, Cypriot companies would pay a maximum tax of 19.25% instead of 27.4% and a minimum tax of 15% instead of 23% – an 8% reduction.
For example, a company earning €1 million would pay €192,500 instead of €274,000. According to the university study, this creates the €200 million deficit.
The University of Cyprus calculates €70 million would be covered through increased consumption.
For the remaining €130 million, the Centre for Economic Studies had proposed covering this through property tax and an annual corporate fee of €800, which the government rejected in favour of anti-tax evasion measures.
Property tax was abolished in 2017, whilst corporate fees ended last year. Another scenario examined involved replacing anti-evasion measures with increasing defence contribution to 10% and other taxes. Technocrats chose anti-evasion measures to avoid additional taxation on individuals and legal entities.
Parliament concerns
Government sources worry that if Parliament removes specific provisions when bills are tabled, public finances could derail, forcing tax increases or new tax impositions.
Extended consultation period
The Finance Ministry yesterday granted a 15-day extension to public consultation following requests from numerous associations. Interested parties can submit positions on the six bills until 10 September.
High-level meetings scheduled
Today the Tax Commissioner meets with KEVE, tomorrow with Techisland, and on 1 September with OEB. OEB awaits recommendations from 110 organised member associations. Previous meetings included SELK, with additional meetings possible.
Some affected parties believe the bills should be withdrawn and redrafted following proper consultation. They argue texts should be simplified, as current bills are complex, claiming many businesses would be harmed and forced into self-employment.
Several bodies have contacted political parties seeking intervention, with some pressuring parties to demand removal of anti-evasion provisions whilst retaining only changes to tax scales and tax-free allowances presented last February.
The government intends to include additional safeguards in legislation, particularly regarding anti-evasion provisions.
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