Towards the end of 2023, the Cyprus government commenced a two-year project that entailed the long-anticipated comprehensive reform of Cyprus’s tax system. This project was assigned to the University of Cyprus Economics Research Centre with the aim of modernizing the tax system, while retaining the competitiveness of the economy and safeguarding the sustainability of public finances and arriving at a fairer distribution of national income.
The Association has long been an advocate of the necessity for a comprehensive tax reform, given that the last time this occurred was in 2002. Since then, the Association has actively promoted for improvements in the tax system to iron out distortions, reduce the administrative burden and improve the competitiveness of Cyprus.
It is noted that the tax contribution of banks (taxes paid and collected) amounts to approximately 5% of the total tax revenues in Cyprus while, in addition, banks make a significant contribution to the state’s actions to combat tax evasion through their due diligence and compliance with data submission procedures. Therefore, the banking sector consists of one of the main stakeholders in the tax reform project and, as such, the Association has been involved in the deliberations since the start of the project and discussed the recommendations of its members with the project’s steering committee.
The main recommendations of the Association consisted of:
- The abolition of the special banking levy, as the reasons for its introduction in 2011 are no longer in place.
- The abolition of the stamp duty, or at the very least its significant overall simplification and its elimination regarding shipping transactions, which will boost shipping finance as well as the competitiveness of Cyprus as maritime centre.
- The abolition of deemed dividend distribution, which is a disproportionate burden on Cypriot investors.
- Extension of loss carry-forward, in line with the practice in other jurisdictions.
- Alignment of the tax treatment of provisions to their IFRS accounting treatment to simplify tax computations and resolve the deferred tax implications.
- Offsetting bank group losses with subsidiary profits for subsidiaries (SPVs) that own real estate due to loan restructuring.
- Modernization of indirect taxation, the introduction of the option to tax (VAT) for financial services and allowance of VAT groupings for financial entities.
- Upgrading of the role of the Tax Tribunal based on best practice in competitive jurisdictions.
- Reduction of the tax administration burden on all companies, in relation to the computation and payment of taxes, and specifically the reduction of the administration burden of banks related to withholding and payment of taxes on behalf of their clients as well as on client checks regarding tax evasion.
The key preliminary proposals were presented in February 2025 to all the relevant stakeholders and the Association took part in the process of giving follow-up feedback and suggestions. The proposals are expected to be finalized during 2025, and once the reform package is reviewed by the Ministry of Finance, it will be forwarded to the House of Representatives for ratification. The Association is anticipating further changes and clarifications to be announced in the coming months and will be involved in the consultation of the various legislative proposals.
Introduction of Local Government Reform
The Local Government Reform was introduced on 1st July 2024, which encompassed the merger of municipalities and communities, the creation of Provincial Self – Government Organisations to take over public utilities such as water supply and waste management, the introduction of new service providers for communities and the merger of school boards.
The Association and its members have been collaborating intensively, for many months, with the State services, the House of Representatives, the supervisory authority, as well as representatives of the Municipalities, the Communities, the provincial self-government organizations (EOA) and JCC Payment Systems, with the aim of ensuring the smooth transition and operation of the new local government organizations.
Following the introduction of the Local Government Reform and the feedback of relevant stakeholders, it became apparent that the preparatory work of the members of the Association paid off and contributed effectively to a smooth transition regarding the banking and payments aspect of the reform. Throughout the transition, the Association stayed in touch with all parties to quickly resolve some minor practical issues that emerged and facilitated co-ordination between members to establish best practices regarding the new organizations.
After the introduction of the reform and with the experience of the first months of operation of the new local government framework, the Ministry of Interior proceeded to re-examine the legal framework to fine-tune certain issues. The Association processed and communicated to the competent Ministry and to the House of Representatives its recommendations regarding the relevant legislation, which aimed to improve the operation of the new organizations as well as to address some practical issues that emerged.
Directive concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (2010/24/EU)
The Association took part in the consultation of the Ministry of Finance to amend the legal framework implementing EU Directive 2010/24/EU concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures. This amendment occurred due to recommendations sent by the European Commission.
Following the input given by the Association and its participation in the relevant Parliamentary Committee, the House of Representatives voted for an amendment to the Law Concerning Mutual Assistance for the Recovery of Claims Relating to Taxes, Duties and Other Measures, as well as an amendment to the Business of Credit Institutions Law.
In addition, the Association liaised with the Ministry of Finance and the other four competent authorities to arrive at the procedures for implementing the required exchange of information between the competent authorities and the credit institutions. Through the Association and its relevant working groups, members identified workable solutions to legal, data protection, operational and technical issues that arose. The Association discussed these proposals with the competent authorities and is now waiting for the feedback of the Commissioner for Personal Data Protection on the draft Decree. The Association will then take part in the finalization of the Decree and the conclusion of bilateral cooperation agreements between each bank and each competent authority. Additionally, the Association will facilitate the development of the relevant technological infrastructure and testing for implementation of the data exchange.
