Stakeholders have shared their thoughts and interpretations of the provisions introduced in the tax reform bills currently under public consultation, and which have caused significant disruption and great concern among the business world of Cyprus, as they are considered to greatly alter the philosophy of the reform and have been found not to be consistent with what was presented at the Presidential Palace last February.
This is about looking at the other side of the story, which suggests that the provisions that have been introduced do not alter the reform and do not remove its generous, as it has been described, character towards the country's business ecosystem, but continue to serve the necessity of simultaneously taking specific measures to combat tax evasion and building a tax culture.
At the same time, speaking to InBusinessNews, the same sources strongly reject the prevailing perception of granting superpowers to the Tax Commissioner, emphasising that all tax authorities around the world have power to be able to exercise their duties.
Why the surprise about salaries?
Regarding the criticisms made about the ability of the Tax Commissioner to determine what salary is considered reasonable, the sources who spoke to InBusinessNews initially expressed wonder why this should be surprising, referring to the presentation made by the University of Cyprus's Economics Research Centre (CypERC) and the members of the advisory committee.
In particular, they referred to suggestion 2, which concerns the increase in corporate tax from 12.5% to 15% and anti-abuse measures for "closed-structure companies ", where reference is made to the possibility of lifting the corporate veil and taxing a shareholder as a natural person with abusiness, as well as the possibility of adjusting salaries to market rates.
In this context, the same sources questioned why this should be surprising since something like this is in the proposals and they should have known about it, while going a step further, they emphasised that it was the Tax Department that set the transitional period (2028), so as to give the market time to adapt to the new data and then allow the Tax Commissioner to intervene.
Additionally, they clarified in essence that it is not the salaries that will be paid that will be determined, but the taxable salary. The issue, as they indicated, is what will be considered for taxation and not the actual salary, noting that this concerns directors who are shareholders of the company.
The concept of dividend tax
The same sources described as misguided the reactions regarding the timing of the entry into force of the reduced tax, 5%, on dividends, which essentially, based on the provisions included in the bills, will apply from 2027 for the profits of 2026.
As they argued in this regard, for the profits of the years before 2026 when, provided everything goes smoothly, the start of the tax reform is set, is logical, since the income tax was at 12.5%, for them to be taxed at the corresponding rate that applied to the defence tax (17%), while with the entry into force of the 15% income tax rate on 1 January 2026, the 5% rate for defence should also apply.
As they pointed out, this is considered fair and appropriate for the purposes of safeguarding public revenues, while the six-year transitional period, during which the 17% rate will apply to dividend payments from profits before 2026, is set precisely, as we were told, to avoid phenomena of deliberate delay in the distribution of dividends from profits before 2026 with the aim of benefiting - at the expense of public revenues - from the reduced 5% defense tax.
And this, given that these profits were made with income tax at 12.5% and not 15%.
Lifting the corporate veil…
The sources who spoke to InBusinessNews referred to CypERC's recommendations , and specifically to the reference made to "the possibility of lifting the corporate veil and taxing a shareholder as a natural person running a business", under the heading of anti-abuse measures for "closed-structure companies", and in response to the criticisms expressed regarding the discretion granted through the bills to the Tax Commissioner to abolish companies and tax their shareholders based on the rates for natural persons.
Explaining the reasoning, they gave a specific example of professional groups ( e.g. doctors), to which the legislation grants the right to create companies, which, however, are essentially personal and not with a regular business structure.
This specific provision concerns the profits of companies that, while practically belonging to one person, instead of the owner and sole shareholder being taxed as an individual, want to be taxed as a company.
"They are partly right about the funds ..."
Regarding investment funds and the proposed exemption of Units from non-taxation, the same sources described the concerns as partially justified, explaining that provisions for taxation were introduced, both concerning income tax and defence tax.
As they pointed out, the provision for taxation with income tax should not have been introduced, as it affects foreign investors. On the other hand, the same sources consider the introduction of the provision for the defence tax to be absolutely correct.
"The income tax provision should not have been introduced; it hurts the fund industry, so this needs to be changed and corrected," InBusinessNews was told.
"The status of non-doms is becoming more favorable"
The same sources consider the reactions regarding non-domiciled residents and the introduced fee of 250 thousand euros per year for five years to be misleading.
Explaining the data, they noted that if a foreign non-dom has currently been in Cyprus for 17 years, they are entitled to not pay defence tax on dividends and interest, while if 17 years pass, they pay normally as if they were a Cypriot.
Underlining that the above current regulation is not affected by the reform, they pointed out that the non-dom status is not negatively altered, since any foreigner who comes to Cyprus is still entitled to the 17 years of non-payment of the above taxes.
As explained to InBusinessNews, what the reform provides is for those who have already been in Cyprus for 17 years to have the additional option of continuing, if they wish, to maintain the non-dom status, paying 250 thousand per year for five plus five years.
This, as the portal was told, is a new option that is provided to them without affecting the first 17 years and their zero cost, and concerns an extension and not an abolition of the status. “The status of non-doms is becoming more favourable,” was the emphatic suggestion of the sources who spoke to us.
"It closes a tax avoidance window"
Regarding the proposed abolition of the incentive concerning the exemption from taxation of interest that arises when a Cypriot company acquires 100% of another company and when a loan is acquired, the sources who spoke to InBusinessNews initially explained that currently in Cyprus there are various incentives that lower taxation (i.e. income tax) from 12.5% to 2.5%, while with 15% it will drop to 3%.
The interest parametre, as they added, consists of a large window of tax avoidance and a window that allows the tax to be lowered to 0%, which is considered absurd and therefore the specific measure proposed prevents companies from being subject to zero taxation.
"An end to tax evasion through the New Market of the CSE"
An end to an injustice which, as InBusienssNews was characteristically told, is being perpetrated to the detriment of the country, is being put in place by the provision in the tax reform bills to abolish the non-payment of capital gains tax for the sale of shares of companies that own real estate and are listed on the New Market of the CSE.
As indicated, this is a regulation introduced to address the phenomenon that - according to the sources who spoke to InBusinessNews - is observed, large real estate developments entering the New Market of the CSE, where there are no strict specifications comparable to the two other Markets of the Stock Exchange, with the sole motive of the tax-free sale of their shares over time.
According to the same sources, this specific abolition cannot in any way be interpreted and does not constitute a deterrent factor, either for local or foreign investments in the country, since the non-payment of capital gains tax on the sale of shares is not something that can be claimed to be evaluated as a priority in making any investment decision.
"Tax evasion through the Stock Exchange is offered ''a great deal''", was the relevant characteristic statement made in InBusinessNews, to further highlight that such real estate properties that are not included in the New Market normally pay capital gains tax.
An opinion on the collaborations between Cypriots and foreigners in real estate
The measure, introduced purely for the purpose of combating tax evasion and not at all discouraging, is highlighted by the sources who spoke to InBusinessNews as a provision concerning investments in real estate made with the cooperation of Cypriot and foreign businessmen.
The provision in question has to do with the capital tax that the Cypriot businessman who invests the land will now have to pay every time the foreign businessman invests money in the company, regardless of the fact that, in essence, the percentage of the local businessman who invested the land will be reduced and he will not earn any amount of money from these specific transactions.
The Tax Department's reasoning for no longer considering it as profit for the Cypriot businessman and for paying capital tax relates to the interpretation it gives that it is an indirect disposal of shares, in contrast to the position of the businessmen who put up the land, that it is not a sale of shares, but money that is being invested to implement development.
Behind the current practice, the sources spoke of the existence of loopholes that create tax distortions to the detriment of state coffers, placing the introduction of the new measure within the context of the overall effort to end tax evasion.
They further emphasised as extremely important the fact that a three-year period is provided for payment of the tax.
The eight-year philosophy for archives
Regarding the issue of record keeping and the extension of the relevant obligation from six to eight years, what has also been described as a paradox is that while the Tax Department is entitled to go back for twelve years, the Law only provides for record keeping for six and for the plus six it must be accepted in court - something that is extremely difficult.
The proposal being made is that the records be kept for eight years instead of six, and that "six plus six" become "eight plus four", which, as InBusinessNews was told, on a practical level means that it will be eight, since it is not considered that there will be any reason to return any further back than that.
In fact, as InBUsinessNews was informed, the idea is to submit a proposal to abolish the "plus years" and allow the Tax Department to go back for only eight years.
As for the criticisms of further complexity and bureaucracy, the sources who spoke to InBusinessNews dismissed them as invalid, pointing out that everything is now done electronically.
"Delivery of data for proper controls"
They disagreed with the view that banking and professional secrecy is being abolished, as a result of the right of the Tax Commissioner to request information about their clients.
As we were told - and rejecting the idea that any confidentiality is being abolished -, as far as banks are concerned, at the moment the Tax Department knows through the information exchange system the balances of all Cypriots abroad (banks give us data outside Cyprus in a similar way), while it is not in a position to know their balances in Cyprus.
The effort being made, according to the same sources, is to correct this "distortion" so that the Department has a complete picture of the bank balances of Cypriots in order to be able to make decisions and carry out proper audits.
In relation to the delivery of data by professionals, the requirement here, as indicated to us, is to obtain information exclusively and only for commercial transactions, in order to carry out precisely correct audits and combat tax evasion phenomena.
Sealing of premises by the Court and not by the Commissioner
Regarding the sealing of premises, what was emphasized to us is that it is not the Commisioner who will decide on such a thing, but the Court. To this end, as InBusinessNews was told, a provision was consciously incorporated into the bills that in order to seal a premises, a decree from the Court will be required.
Explaining in more detail the procedure that will be followed, after three visits during which the owner of the premises is found not to have issued invoices and receipts, the Tax Department will be able to go to Court and convince the Judge to seal the premises for 48 hours.
After the 48-hour seal, if the entrepreneur still does not comply, the Department will have to convince the Judge again that he continues to violate the law, requesting the seal for seven days.
The permanent sealing, as we were told, comes in an extreme case in which the entrepreneur continues to fail to comply after the first two sealings of his premises and always by decision of the Court and not of the Commissioner.
It is noted that this is a measure that is also valid in Greece, without requiring a Court decision there.
The indictment subsidy…
Regarding the electronic submission of indictments, the clarification is that it will not only be done via email, but also by sending SMS, with the aim of using the Tax Department's electronic system to end the phenomenon of deliberate non-receipt of indictments from cases that must be brought to Court.
Taxation as a person and not as a "company"
Moreover, the position regarding the envisaged criminal liability of directors, officers and company consultants is rejected by the same sources as not corresponding to reality.
As they explained in this regard, when a former state or federal official is approached by a company upon retirement or completion of his term to provide services, it is observed that the specific official registers a company and instead of being paid as an individual, his company issues an invoice for the services he provides.
With this specific provision in the legislation, what is provided is that from the moment the person who actually provides the services is the natural person, he or she is taxed as a natural person and not as a company, which in essence has no activities.
This measure also falls, as indicated by the sources, within the framework of the JOC's proposal for "the possibility of lifting the corporate veil and taxation of a shareholder as a natural person carrying on a business".
Lien on movable property as well
Regarding the freezing of property for debts over three thousand euros, the clarification is that it already exists in the legislation.
As explained, if someone owes a certain amount of tax, the Tax Department is entitled to impose a lien on their real estate.
However, because some companies do not own real estate, but rather movable property - such as shares in other companies - the proposed legislation provides for the possibility of imposing a lien on movable property, i.e. shares, as an additional tax collection measure.
Transfers and tax culture
Regarding the right of the Tax Department not to consent to a transfer of ownership if both the seller and the buyer are not fully compliant with their tax obligations, the whole reasoning as explained to us is as follows:
If someone who owns a large real estate property and does not pay their taxes wants to transfer a property, the Tax Department may not issue the transfer certificate or, if they have not submitted their tax returns, they may not provide them with the relevant form (N313) to contact the Land Registry.
"All of this is a philosophy. When everyone knows that in order to conduct their transactions they must be tax compliant, this builds a tax culture," was the final message of the sources who spoke to InBusinessNews, giving their own response to the concerns and criticisms about provisions introduced in the tax reform bills.
(Source: InBusinessNews)
