Tax Reform in Jeopardy

Overview of the Proposed Tax Reform and Legal Concerns

The proposed tax reform in Cyprus has sparked significant concern among legal professionals and accountants, who have submitted numerous objections to the government’s draft legislation. These objections, part of a broader public consultation process, could potentially alter the government's blueprint if their suggestions are adopted. The reform is expected to be implemented early next year and involves six key bills aimed at overhauling the country’s tax system.

According to a report by Philelefheros, the bar association and the Institute of Certified Public Accountants submitted a total of 432 comments. These associations, representing influential business interests, thoroughly examined each article in the draft legislation. Their concerns span multiple areas, including legal validity, financial impact assessments, and potential consequences for taxpayers.

Key Legal Concerns

One of the primary issues raised by the bar association is the legality and constitutionality of several clauses within the government’s proposed bills. They argue that some provisions may not align with existing laws or constitutional principles. Additionally, they criticize the lack of transparency surrounding the financial impact studies conducted by the University of Cyprus, which they claim are not accessible to the public.

The bar association also opposes the proposal to increase the corporate tax rate from 12.5% to 15%. They reference examples from other countries, such as Estonia, where only distributed profits—like dividends, fringe benefits, and taxable expenses—are taxed. This contrast highlights their belief that the proposed changes could negatively affect businesses and investors.

Another major point of contention is the expansion of the definition of a tax resident. Under the current proposal, a person would be considered a tax resident if they spend more than 183 days outside of Cyprus in a single tax year. Lawyers warn that this change could lead to uncertainty, double taxation, or external taxation in cases where no double taxation avoidance agreements exist.

Disputes Over Tax Deductions and Enforcement Powers

The method of calculating taxable income for tax deductions has also drawn criticism. According to the government’s legislation, families with an income of up to €80,000 would be eligible for deductions, while single-parent families would qualify for deductions up to €40,000. Critics argue that this approach may not fairly reflect the economic realities of different households.

Additionally, the proposal to grant the tax commissioner the power to seal (suspend the operations) businesses with tax arrears has been labeled unconstitutional by legal experts. They believe this measure could unfairly target businesses without due process.

Employee Bonuses and Retirement Schemes

The government’s plan to tax bonuses or gratuities provided to employees through retirement schemes has also generated opposition. Under the proposal, such payments exceeding €20,000 would be taxed at a rate of 20%. Both lawyers and accountants oppose this provision, arguing that it could discourage companies from offering retirement benefits and place an unfair burden on employees.

Similarly, the accountants’ group has expressed concerns about increasing fines for tax debtors and raising the corporate tax rate. These measures, they argue, could deter investment and harm the economy.

Business Community’s Concerns

The Chamber of Commerce and Industry (Keve) has also voiced its concerns regarding the proposed tax reform. In particular, they worry about the risk of creating dual tax residency, which could deter foreign investors. This issue underscores the broader implications of the reform on Cyprus’s attractiveness as a business destination.

Government’s Perspective

In response to these criticisms, the government claims that the proposed reforms will broaden the tax base, strengthen enforcement mechanisms, and reduce the tax burden on households and businesses. Finance Minister Makis Keravnos stated that under the new system, 60% of people would not pay taxes, compared to 45% currently. Cyprus already has one of the highest tax-free rates in the European Union, set at €19,500, which is set to increase to €20,500.

Despite the government’s assurances, the ongoing debate reflects the complex nature of tax reform and the need for careful consideration of all stakeholders' perspectives.