31 August 2011, Parliament approved the Cyprus government’s first package of austerity measures aimed at tackling its high deficit without putting at risk the competitiveness of Cyprus as a financial centre.
Authorities say the measures could pull the deficit down to 5.5% of GDP this year from a projected 6.5%, and below 3% next year.
The measures are as follows:
1. New top rate for personal income tax
Cyprus resident individuals or individuals exercising an employment or profession in Cyprus will be taxed at the rate of 35% (from 30%) on their taxable income exceeding 60,000 euros as from the current tax year 2011.
2. Tax incentives for highly-paid employees
In order to encourage the relocation of new businesses to Cyprus, 50% of the income of employees relocating to Cyprus and with an income exceeding 100,000 euros, will be exempt from tax for the first five years following the relocation. This will apply from 2012 onwards.
3. Defence Contribution on dividends and interest
The Special Defence Contribution on dividends is increased from 15% to 17% with immediate effect. This will mostly affect individuals resident in Cyprus earning or deemed to be earning dividends, and groups of companies ultimately held by Cyprus tax resident individuals.
The Special Defence Contribution on interest is increased from 10% to 15% with immediate effect. This measure will again mostly affect individuals resident in Cyprus earning bank interest. Individuals whose total income does not exceed 12,000 euros as well as Provident Funds continue to be taxed at 3%. Special Defence Contribution on interest earned by individuals from government bonds also remains at 3%.
Companies will generally remain unaffected as their profit from interest should in most cases be subject to income tax at 10% and be exempt from Special Defence Contribution.
4. Fixed annual duty for companies
All companies (except for dormant and those not owning any assets) are required to pay an annual fixed duty of 350 euros to the Registrar of Companies. For groups of companies the total duty is capped at 20,000 euros.
The duty for 2011 is due by 31 December 2011 and for subsequent years by 30 June. Financial penalties of 10 to 30% will be levied for late payment within 2 to 5 months from the due date. The Registrar may strike off the company in case of further delay. The fee for reregistering is 500 to 750 euros depending on the circumstances.
Audit professionals said the package, that aims to raise some 700 million euros, was “balanced”, but warned that a 2% hike on the VAT rate to 17% would probably come through in the second package expected later next month, raising a further 160 million euros.