Filenews 24 February 2025 - by Eleftheria Paizanou
An increase in tax-free income and the granting of tax relief to individuals, after taking into account the composition of the family as well as the current housing loans for a primary residence, are included in the tax reform that is on the doorstep.
At the same time, additional relief will be given to businesses, tax brackets will be differentiated, as well as tax rates.
Finance Minister Makis Keravnos, in a long interview with Insider, published in the February issue released on Sunday 23/2, outlines the axes of the tax reform, which will be presented on February 26. According to Mr. Keravnos, the main direction of the Government is the fairer distribution of the tax burden, while providing incentives to businesses, as well as individuals, to enter the labour market.
The finance minister also reveals the compensatory measures under consideration regarding the green taxation that will be implemented next May. Among the measures are subsidising student and pupil transport and electromobility.
Regarding the debts of football companies to the state, the minister states that enormous tolerance has been shown over time, pointing out that the Christodoulides government gave them two opportunities, which they did not take advantage of. At the same time, he notes that he did not receive any pressure and did not break with any of his colleagues over the issue.
At the same time, he reveals that supplementary health plans will be implemented for civil servants within the year. These schemes will complement the GHS and will cover services not covered by the general health plan. According to Mr. Keravnos, the supplementary health care plans will be in line with those applied in semi-governmental organizations. As he argues, with the operation of these plans for public sector employees, there will be rationality, as they have been wronged for so many years. He admits, however, that those who are most disadvantaged are private sector workers. Finally, he does not hide his concern about the expenses related to the GHS, pointing out that, in cooperation with the Ministry of Health, a strategic plan for solving the problems is being implemented.
On the 26th of the month, Minister, the tax reform will be presented, as proposed by the Centre for Economic Studies of the University of Cyprus.
What is the timetable for the submission of bills to Parliament?
On February 26, the final presentation will be made by the Centre for Economic Studies of the University of Cyprus, which was commissioned, in collaboration with other experts, to prepare the proposal for tax reform. On February 26, the final proposal will be presented and then it will be examined at Government level and will be submitted to the Council of Ministers for approval.
Have all stakeholders been consulted?
There were three public consultations with all stakeholders and one-on-one meetings and consultations with a huge number of stakeholders. Therefore, there are views and this will be the JIT's last proposal.
What will the tax reform generally involve?
The main axis and direction of the Government is the fairer distribution of the tax burden and at the same time the granting of incentives to businesses to continue their growth and invest. Of course, incentives are also given to individuals to enter the labour market. There will be reductions in relation to the composition of the family, that is, the number of children.
There will also be tax breaks in relation to primary home loans. As far as businesses are concerned, there will be reductions in existing taxes and, at the same time, there will be a differentiation in minimum tax rates and perhaps a differentiation in tax brackets. These are all general guidelines and we expect to hear more concrete opinions from experts.
Does the tax reform also include the pre-election commitments of the President of the Republic to increase the tax-free allowance to €24,000?
The work that is being done is to increase tax-free income, along with tax relief. Surely the announcement will have real substance.
You mentioned granting tax breaks to those who have mortgages. Will these relate to existing loans or new loans?
These are details which have not been worked out, and I have referred to the main thrust of the reform.
Will the income of both spouses count towards the taxable income of the family? (DISY proposal)
That sentence is quite different. In the Government's proposal, there will be household income criteria for granting relief. Beyond that, who will get the tax breaks, i.e. either husband or wife, various scenarios are made to see how these can be implemented.
When will the tax reform be implemented?
The tax reform will be implemented in 2025 so that tax returns for 2025 can be submitted in 2026. Therefore, it will cover the 2025 tax year.
Recently, the President of the Republic had said that businesses would receive tax breaks. These will concern corporate tax, given that corporate tax has been increased to 15% for multinational companies with an annual turnover of €750 million;
The European directive, pillar 2 remains, for the rest I have repeated the direction mentioned by the President of the Republic, that there will be some tax relief for our businesses. Where the matter will be finalized we will see in the course with the experts.
In relation to the corporate tax that falls under the European pillar 2 directive, it was reported in Parliament that the Ministry of Finance is preparing compensatory measures for these businesses...
At the moment, with the election of Donald Trump and his statements, the issue will be discussed at the level of the European Commission, so it remains unchanged. In Cyprus it will be implemented in 2026. For now, the European Commission insists that the Directive is in place. Beyond that, there is great concern in relation to the statements of the American President and this is also among our concerns.
How will the revenues lost by the state from tax reform be replaced?
I have said it many times that the new tax reform will be neutral.
What will be the impact of tax reform on taxpayers?
The desired impact is a fairer distribution of the tax burden.
GREEN TAXATION
The green tax will also come into effect in May. What will it include?
There are past commitments for Cyprus on this issue, stemming from the Green Deal, which then took legal status with Fit For 55. Therefore, we have an obligation to apply some taxes to tackle climate change and environmental protection. Some of these taxes have been incorporated into the Recovery and Resilience Plan, which is why we are talking about May 2025, despite the fact that the milestones were for October 2022 and through our efforts we managed to transfer the measure two years later.
The green tax applies to motor fuels. The hotel fee and the water levy are included in green taxes, however, they are not included in the milestones of the Recovery Fund. The imposition of a water levy is implemented, a proposal was passed by the Council of Ministers. For hotels, it is not included in the May milestone, but it will also be implemented soon. Those included in May's milestone include a carbon tax on motor fuels, at 0.5 cents a litre.
For energy-intensive industries, the carbon tax will be 0.7 cents and the green overnight stay tax in hotels is still being worked out. What is considered will be per hotel category and per season, either summer or winter. But all revenues will be returned in the form of compensatory measures, in parallel and simultaneously, to society.
Are compensatory measures ready? What will they include?
The compensatory measures are under preparation. It is in the direction of subsidizing pupil and student transport, promoting electromobility, as well as increasing the subsidy for certain measures.
As far as hotels are concerned, the thoughts we are making are to subsidize shelters, in which photovoltaics will be installed, and to strengthen existing plans to further reduce gas emissions.
You have previously expressed your disagreement with this tax, the carbon tax, as Cyprus does not have the public transport that other countries have, for citizens to use.
You are absolutely right, in Cyprus there is no public transport, which will essentially be able to serve employees and the whole public. Therefore, it is an oxymoron to impose taxes on motor fuels to force people to use public transport, which is in its infancy in Cyprus.
THE TAX DEPARTMENT AND REVENUE
The state's tax revenues increased. Is this due to the collection measures applied by the Tax Department? Are you satisfied with the performance of the measures or do they need to be strengthened?
I believe that the collection capacity of the Tax Department has improved significantly, for two reasons. In the installation of the electronic system and because of this system, tax returns that have been frozen for years are cleared. It is also due to the on-the-spot checks carried out by the Department, in relation to some old weaknesses, such as the 5% VAT on the primary residence. Many taxpayers had benefited from this measure, but they were not eligible. Audits are being carried out by the Tax Department and a few million euros have been collected. I believe that the high growth rate of tax revenues is not expected to continue, as with the strengthening of the electronic system of the Tax Department we will be able to make the clearances in the same year that the tax returns are submitted.
Will the bill to criminalize non-payment of tax be reinstated? This provision was included in a multi-bill that was discussed in Parliament in 2019, but was removed after the reactions of the affected bodies.
It is an issue that we have looked at. We weigh up the fact that the period you refer to was a period after the financial crisis, when many people found themselves in a difficult situation to meet their obligations, also due to the haircut on deposits. Then we had the coronavirus pandemic, so for now we are monitoring the issue and considering how, when and if this measure should be put in place.
Tax debts of football companies. Apparently, the Government will not back down. Will there be a new plan to settle union debts?
What exists now is the Government's position that all companies and all individuals who have income tax debts should be treated in the same way. Over time, an enormous tolerance has been shown. This Government in its two years of government gave two great opportunities to the unions but unfortunately there was no response. The matter is handled by the Commissioner of Taxation, who has the competence deriving from the law.
The football companies have forwarded a letter with their written proposal. Will the state accept the unions' proposal? Normally, until now, clubs should have paid the first instalment of €500,000. Who proposed to pay off their debts?
The matter is handled by the Commissioner of Taxation, based on his responsibilities, as he handles all similar matters. Hundreds of letters arrive to the Minister of Finance every day, you realise that many do not concern the Minister and neither can the Minister reply to so many letters. Every day, dozens of individuals and legal entities who owe to the Tax Department send letters. These matters are handled by the Commissioner of Taxation.
The leaders of the football clubs have asked to meet you, and pressure is also being exerted on the Presidential Council on this issue. If people go to court, will the state collect?
I cannot comment hypothetically on whether people will go to court and whether the state will collect. The matter is handled by the Commissioner of Taxation. I have not been put under any pressure on this, nor do I accept pressure being put on me.
Nor were there any frictions or confrontations with your colleagues, who may be included in the indictments?
I do not know what you are referring to, I have not broken with any of my colleagues.
Do you want to send a message to the unions?
I have no message to send. The messages I am sending concern the Government's economic policy to ensure the viability of our state, amid very serious geopolitical developments.
BANKS AND BORROWERS
How do you comment on the measures announced by banks to borrowers to compensate for high interest rates? Are you satisfied with the measures taken? Do you think further measures should be taken?
Through constant consultations with the banks there has been some response. At this stage the measures they have announced are a positive step.
Before some things changed, the ECB had announced that there would be further rate cuts.
It was an assessment based on this data, the data today is diversifying rapidly, so all we have to do is monitor developments and evaluate them.
TRUMP'S TARIFFS AND REFLECTION
You mentioned that with the imposition of tariffs by the US there is a risk of causing inflationary pressures. How will Cyprus be affected? Has the Ministry of Finance done paper exercises?
The Ministry of Finance is closely monitoring developments, of course it is doing exercises on paper. We have already done a small preliminary study on the subject. The policy of imposing tariffs certainly does not help international trade and does not particularly help countries of the European Union that are large economies and have a strong export character to the USA.
Therefore, when the prices of products and raw materials rise due to tariffs, it is possible, gradually, for the multipliers in the economy to bring about increases and cause pressure. Directly for Cyprus there is no risk, however, we are monitoring the situation because there are large EU countries with which we have trade and other relations, such as Germany, where a significant number of German tourists visit Cyprus. We import a great many products from Germany and France, and today countries such as Germany and France see that they can be directly affected by the imposition of tariffs.
My view is that these issues are resolved through serious and frank dialogues and discussions, while a policy of measures and countermeasures with tariffs certainly does not lead to a desirable situation in the global and European economy and, of course, in our own economy.
THE STATE PAYROLL AND THE IMF
The Ministry of Finance has commissioned the IMF to conduct a study on the state payroll. What did the study show? What was the purpose of the study? Will the ministry implement some of the IMF's recommendations?
The studies are done to see the picture, the reasons and the parameters that shape this image and from then on the issues and suggestions are processed and we take our own measures. This study has not yet been finalized, in the sense that additional information is requested and we ask for additional explanations. There is a discussion of the study. At the same time, however, as the Ministry of Finance, we are proceeding with our own actions, in cooperation with other experts, because the goal in the medium term is to reduce the rate of increase of the state wage bill.
How will the wage bill be reduced?
Through the diversification of employment structures in the public service and the differentiation of scales and surcharges.
In other words, will the salary scales and the way the increments are granted change?
It is all parameters that are considered.
However, during the presence of the IMF team in Parliament, he had also asked for a cut of the 13th salary. Is this included in the IMF's recommendations?
As I said, nothing has been finalised. It does not matter what the various experts to whom we assign work from time to time suggest. Their advice is for the Government to evaluate and weigh it and make its own decisions,
COMPLEMENTARY HEALTH CARE
Recently, the Ministry of Finance has agreed to lift the bans on first appointment recruitment and restore health care to civil servants and pensioners for services covered by the GHS. We have also seen increases in the salaries of civil servants, does all this not conflict with the purpose of the study?
They do not conflict at all, nothing to do with the study. The de-icing of positions, in my opinion, is a process, it has no burden whatsoever, because all positions are included in the state budget and approved by Parliament. Once these positions have been approved, the process of coming back to Parliament and starting a debate and ending in an extreme populism makes no sense.
We have submitted a bill to abolish this procedure, which creates problems because after the approval of the budget the National Health Service cannot schedule its meetings and recruitment procedures, so that we have the necessary staff needed by the public service in time. And today, while we are an EU Member State, with rapid developments on all fronts and at all levels, it takes a year and a half to hire an employee.
Regarding the issue of supplementary health care, by decision of the Council of Ministers of the previous Government, all employees of the general government and semi-governmental organizations that had health care funds have maintained a supplementary and very limited health care fund, for a few that are not provided by the GHS. The only ones left out are the civil servants, this is a different treatment that does not stand up to logic and the cost of removing it is minimal.
Since you are referring to the supplementary health plans of semi-governmental organizations, shouldn't an end be put to them, as the GHS exists? Isn't it a challenge for the public sector worker for semi-public workers to enjoy extra benefits?
That is why we should make the supplementary fund for civil servants in order to achieve rationality. Those who are being disadvantaged are the workers in the private sector, who do not have this possibility. In other words, we will make supplementary plans for benefits for civil servants.
Will these projects take the form of those of semi-governmental organisations?
In all semi-public organizations and in the Public Service there was a health plan with specific conditions, but when the GHS was established, the semi-public organizations had negotiated with their unions and with the approval of the Council of Ministers of the previous Government, they were given the freedom to create small supplementary health care plans for the employees of the semi-public organizations. This will also be done for civil servants, who are the only ones who have been exempted.
When will the supplementary health plans be implemented?
A bill will soon be submitted to Parliament.
Minister, there will be reactions, as some may argue that the GHS is being undermined.
From whom will there be the reactions? The fact that the GHS has problems is known to have. It has semi-governmental organizations that also cover the frames of glasses. He has some elderly civil servants who want to put a tooth and the GHS does not cover them and they want €2k. and €3k. It is a matter of equal treatment, as for employees in semi-public organizations they made supplementary health plans and civil servants, who had the largest pay cuts at the time of the crisis, were left behind.
You have expressed your concern many times about the inflated expenditure related to the GHS. Will any measures be taken?
The GHS is a blessing for the world, but there is an issue regarding the level of healthcare in Cyprus, which after the GHS was not as expected. On the other hand, the Cyprus Health Organization, although it should have been autonomous by May, no satisfactory steps were taken, with the result that the state continues to cover deficits and pay salaries of medical and nursing staff, which we are talking about many tens of millions. Therefore, if all these are not addressed in time, we will certainly be faced with some problems and dilemmas, which is why the Ministry of Finance, in cooperation with the Ministry of Health, are implementing a strategic plan to solve the problems of the SHSO, which has begun to be implemented and is being monitored, and I would like to hope that everything will be on track in a timely and smooth manner.
ASSESSMENT, ATA, MULTIPLE PENSIONS
Following the changes made by Parliament, the new way of evaluating civil servants will return in 2026. Are the guilds demanding that the evaluation remain unchanged?
There is no such discussion, these issues are discussed at ministry level and within the Joint Staff Committee.
Will there be a correction of the ATA institution?
This issue is handled by the Minister of Labour and there are no scenarios on the part of the Ministry of Finance. When the Ministry of Labour elaborates on the issue and enters into consultation with the social partners, there will certainly be a discussion with the Ministry of Finance.
The first payments of compensation payments to haircut depositors and securities holders will be made in May. How much of the impairment they had will be returned to them?
No planning has been made yet, the evaluation of the applications has only just been completed and then the elaboration of a plan will begin on how to implement the government's announcement, which will be put before the Board of Directors of the Solidarity Fund and then a discussion will take place at Government level. The goal from May is to start some repayments to the extent of the economy's capabilities.
Regarding the abolition of multiple pensions?
A bill has been submitted to Parliament. It provides that someone who completes his office, whether he is a minister, MP, etc., through a formula will receive a sum. By today's standards, until his death an official receives a pension in addition to the lump sum he receives. The tip received by state officials will be taxed. Only for state officials will it be the one-off tax. It will concern future officials of the state. Whoever after the enactment of the bill receives an office or occupies a parliamentary seat or is elected mayor, the provisions of the legislation will apply, provided that it is approved by Parliament.
In relation to the voluntary renunciation of the pension?
This is unconstitutional. Everything that has been suggested has been examined and the only thing that has been judged by the Legal Service to have no legal and constitutional problems is the proposal we have submitted.
With regard to the payment of the pension at the age of 65 instead of at the age of 60 as it is today?
Now it has nothing to do with th 65th year, as whenever you leave the position you will receive the tip. For existing officials, another processing is taking place, which is not at a mature stage. Because there was an issue being discussed for existing officials whether they would receive a pension at 6 years old, this issue is being studied.
Given the reactions from the parties, do you think the bill will pass the House hurdle?
We'll see along the way.
What stage are flexible forms of work at?
This issue was passed by the Council of Ministers and its implementation is pending. In order for it to be implemented, several things must be ensured, in terms of equipment, when and how and the control that will be carried out while the employee will work from home, as is done in the private companies that apply this measure.
Regarding the electricity interconnection between Cyprus and Greece, have the concerns of the Ministry of Finance regarding the economic cost been allayed? There is great concern on your part about the issue of costs. What will be the position of the ministry when the decision has to be taken for the state to participate in the share capital of the company?
We are awaiting the answers of the experts, who will put a report before us and then the Government will discuss the issue.
The growth rates of the Cypriot economy were high, despite exogenous risks. Are there any estimates that the good course of the Cypriot economy and the reduction of public debt will continue?
This is the commitment of the Government and the economic policy that we will continue to implement. The economic policy of budgetary discipline, balanced and preventive which weighs all the risks, so that if some issues arise we can deal with them.
From February INSIDER magazine
