A majority is forming in Parliament to block the taxation of provident funds’ investment activities, despite the provision being included in the government bill. Some parties are already preparing an amendment to prevent the 15% taxation of these activities.
Most parties oppose taxing provident funds’ investment activities, even though the government—through both Finance Minister Makis Keravnos and Tax Commissioner Sotiris Markides—believes continuing the current practice of non-taxation may put the Republic at risk, as the Commission views this as state aid to provident funds.
The two officials referred to an opinion from the State Aid Control Office. The Commissioner, Stella Michaelides, told Phileleftheros the Office cannot take a position on whether the state will tax these activities, but can state whether the measure falls under state aid rules.
In a recent letter to Finance Committee members, she notes that the classification of an entity as a business is always linked to a specific activity.
She cites an EU announcement on state aid rules, according to which, in compensation for providing services of general economic interest, a pension system or fund does not constitute a business when membership is mandatory, the system fulfils a purely social mission, is non-profit in nature, and benefits are independent of contributions.
“It is understood that, in the opposite case and taking into account the aforementioned principles of the Court, it is presumed to be a business for the purposes of the state aid framework,” she adds.
She indicates that in relation to the concept of a business and the exercise of economic activity, the proposed amendment is deemed appropriate and reasonable, since any exemption of the funds’ income, in cases where the funds constitute a business regarding their activities, may constitute state aid.
“In the event that this amendment is not introduced into the Income Tax Law, as the Republic of Cyprus, we will be accountable to the European Commission for granting incompatible state aid through the acceptance of favourable tax treatment of the funds, at least regarding cases where they exercise economic activities, according to state aid rules,” she concludes.