Filenews 26 February 2022 - by Adamos Adamou
The decision to increase the corporate tax from 12.5% to 15% should be considered to have been taken, horizontally and without exceptions, despite the requests of Cypriot business in this direction.
This emerges from a letter sent by the Director-General of the Ministry of Finance a few days ago to affected groups, such as professional service associations, employers' organisations and other stakeholders, in the context of the tax reform that is being promoted.
As stated in the relevant letter, "the main axis of the proposed tax reform is mainly focused on increasing the corporate tax rate from 12.5% to 15%, horizontally for all businesses subject to corporate tax, in accordance with existing tax legislation"."
The increase of the corporate tax to 15% was announced by the Minister of Finance Konstantinos Petrides himself, in the context of the presentation, last year, of this year's budget, as a result of the agreement reached within the framework of the G7 and the OECD. However, until recently, the business world proposed exceptions to the increase in the rate, so that it does not concern all businesses, and had proposed a series of compensatory measures.
In its letter, the YPIK does not exclude, however, the latter – after all, this was the purpose of the information on the subject – but limiting the range of suggestions for compensatory measures. Specifically, the addressees of the letter, in the context of the public consultation on the issue, were invited to send suggestions by the end of February on measures that could be taken to compensate for the increase in corporate tax, informing that their recommendations should cover measures regarding the taxation of dividends, interest and the deemed distribution of profits.
Based on data cited by the Ministry of Finance, in the three-year period 2016-2018 the average revenue from corporate tax was €470 million, from the deemed distribution of dividends of €43 million, from the actual distribution of dividends of €59 million and from the taxation of interest of € 60 million.
As noted by the Ministry of Finance, the aim of amending the tax framework it processes is for it to respond to the new data, while remaining competitive and attractive. At the same time, it is added, it seeks to comply with the commitments arising from the Recovery and Resilience Plan (SDS) of the Republic, as well as with other international developments.
With the same letter, its recipients are also informed about the following milestones that have been agreed in the framework of the SDS and which will affect the country's tax framework:
• Within the 4th quarter of 2024, legislation on withholding tax on interest, dividend and royalty payments to jurisdictions with a low tax rate will come into force (the definition of "jurisdictions with a low tax rate" has not been finalized). With regard to interest and royalty payments, consideration could be given to applying the non-deductibility rule instead of withholding tax.
• By 31 December 2024, a study (by an independent firm) must be completed, which will examine the possibility of a horizontal assessment of the tax framework of Cyprus, in terms of extreme tax planning. In the event that provisions leading to extreme tax planning are identified in the tax legislations, relevant decisions should be taken within the 2nd quarter of 2026 to eliminate the provisions in question.
• Within the 4th quarter of 2022, a report will be prepared that includes an action plan with specific incentives to promote mergers and acquisitions of companies (the incentives may also be non-tax).
Expanding incentives to attract companies
The Ministry of Finance also informs in relation to the tax reform that it is working on legislation to improve the framework for the taxation of investment funds and that other bills are being promoted in the context of the incentives that are already in operation to attract companies and research.
Among those promoted is the renaming of "The Extraordinary Contribution for the Defence of democracy law", to "The Contribution for Development and Sustainability Law", a development that was also expected for a long time.
A bill is also being promoted with the aim of granting an increased discount of 120% of the actual expenditure incurred for scientific research as well as research and development, for 3 years, with the aim of encouraging businesses and natural persons who carry out a business to invest in research and development, as well as legislation for the extension (until 31/12/2023) of the tax relief on expenses incurred by a natural person who is an independent investor, either directly or through an investment fund to an approved small and medium-sized enterprise.
In addition, the extension of the existing framework is promoted, so that investment by corporate investors under certain conditions is deductible from taxable income. Also, in the context of efforts, the tax framework to make it more attractive for young workers in the Republic, within the framework of the action plan to attract companies for the activation or expansion of their activities in Cyprus, is promoted such as the 50% exemption in personal income tax to concern salaries of more than €55,000 instead of over €100,000.
