Cyprus tax reform

In an interview in early March 2024 marking one year in the office, Cyprus President Nikos Christodoulides outlined plans for a comprehensive tax reform, with a focus on encouraging entrepreneurship, providing relief to households and ensuring fiscal neutrality. Noting that the last tax reform was implemented in 2002, President Christodoulides emphasized the importance of collaboration between the government and the private sector.

During the interview, President Christodoulides has also highlighted the government’s proactive stance in establishing the Single Supervisory Authority for the fiduciary services sector, mandated by the Council of Ministers of the Republic of Cyprus, to operate under the Cyprus Securities and Exchange Commission (CySEC) in liaison with the Cyprus Bar Association and the Institute of Certified Public Accountants of Cyprus (ICPAC), as a part of the government efforts to set up a more robust supervisory framework to regulate companies providing administrative services.

Following the tax reform status update meeting held on 28^th March 2024 at the Presidential Palace, Minister of Finance Makis Keravnos stated: “the aim of this tax reform is to encourage entrepreneurship, to provide relief to households, to have a strong social element and to contribute to the equal distribution of income”, adding that the tax reform aims to address any tax evasion and tax avoidance, and will be fiscally neutral. Additionally, proposed reforms align with the objectives of the European Green Deal, with 2 new bills proposed by the Ministry of Finance on 26^th March 2024 to promote environmental sustainability, introducing carbon tax on energy products and accommodation taxes.

Tax reform project: Integrated Tax Reform

Economist George Syrichas, on behalf of the Economics Research Centre (CypERC) of the University of Cyprus (undertaking the tax reform project), stated that the first 6 phases (out of 15) of the tax reform are close to completion, adding that “the President shared with us how he sees the tax reform and said that he expects it to contribute to the competitiveness of the Cypriot economy, to be an investment-friendly system. The President said that he expects the tax reform to maintain social cohesion and if possible, to reduce inequalities as well”.

Tax reform will focus on the following:

• Promotion of investment; tax policies that reduce business risk and encourage the financing or undertaking of investments in research, development and innovation. Simplification of the tax system and the reduction of tax costs (e.g. compliance costs) are included, which in turn encourages innovation, investment and competitiveness.
• Shifting part of the tax burden from labor to other forms of taxation, e.g. consumption, green taxation, real estate, with the aim of encouraging employment. The tax burden of labor in the EU is moderately higher, compared to other developed countries.
• Green taxation can play a crucial role in advancing environmental objectives and milestones by imposing levies on polluters while incentivizing environmentally friendly practices and behaviors. It is noted that green taxation might have regressive effects, disproportionately impacting lower-income groups. Consequently, many countries implement compensatory measures to address this issue.
• Addressing the shadow economy and curbing tax evasion. In Cyprus, the shadow economy represents a significant percentage of GDP, underscoring the importance of tax reform initiatives aimed at its reduction.
• A key element of tax reform involves ensuring the medium- and long-term sustainability of public finances. In addition to the general principle of containing expenditure and augmenting revenue, due consideration must be given to demographic shifts. Population aging and changes in the labor market will have significant impact on public finances.
• To establish a fair and efficient tax regime aligned with the priorities outlined by the European Commission, strategic planning should target a tax policy blend that takes into account efficiency, redistributive impacts, as well as tax compliance and administrative cost concerns. A comprehensive examination of taxation and benefits is imperative, necessitating a holistic approach rather than piecemeal analysis. While evaluating tax adjustments in isolation holds significance, a thorough assessment of their efficiency and implications for social justice and equality—factors influenced by broader economic dynamics beyond the tax regime—is achievable through a holistic perspective.

15 phases of the tax reform:

1. Macroeconomic Analysis in Cyprus and other countries:

• • Tax revenue trends, income inequalities, tax burdens, tax reliefs, etc; the above analysis will help to understand the tax reforms adopted by various countries, mainly in the EU.

2. Green Taxation and compensatory measures:

• • Early next year green taxes are expected to be imposed, among others, on fuel, water. A study will be conducted on the economic effects and econometric estimates of this taxation on the various income classes and population groups with different characteristics and the corresponding compensatory measures will be proposed to mitigate the effects.

3. Global benchmarks:

• • Experiences of other countries, mainly EU and literature review (emphasis on international organizations – EU, OECD, World Bank, ECB).

4. Existing tax regime:

• • In collaboration with the Tax Department, formulation of an in-depth analysis of the existing tax framework; recording any weaknesses/ shortcomings/ administrative burden of each framework (Laws/CDP/circulars) to simplify the tax system.

5. Identification of all tax-related legislations and their registration:

• • Recording of the upcoming European Directives, international requirements as well as the changes in the tax framework that may occur, in relation to the Economic Recovery and Resilience Plan and the class of taxpayers that may be affected.

6. Quantitative research based on EU practices:

• • Econometric methods and tax models of other European states, estimation of elasticities and tax multipliers for the Cypriot economy and comparison of findings with some EU countries.

7. Status report to professional associations/ bodies/ councils.
8. Evaluation of the findings and preliminary formulation of proposals for tax changes.

• • A first formulation of proposals based on the findings of the analysis that preceded phases 1-7.

9. Assessment of economic impacts of tax reform in Cyprus:

• • Quantifying economic impact using econometric tools & models (Euromod, DSGE, Input-Output, Demand System Equations etc).

10. Defining a preliminary framework based on the above assessments, taking into account the recommendations and positions of professional associations/ bodies/ councils.
11. Status report to professional associations/ bodies/ councils, with a first update of the proposed tax framework.
12. Drafting of relevant legislation based on the analysis and assessments stated in the above phases.
13. Finalization of a framework taking into account the suggestions of the private sector, professional associations/ bodies/ councils.

• • Ministry of Finance finalizing decisions on tax reform matters, e.g. tax rates and related parameters; joint implementation team (JIT) to conduct a summary quantitative and qualitative assessment.

14. Final report.
15. Finalization of relevant legislation based on the Final Report.

As Cyprus moves forward, the government remains dedicated to addressing pressing issues, implementing reforms, and fostering innovation and sustainability for the benefit of its citizens and the environment.

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