CYPRUS

Part III - Developments in the Member States
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CYPRUS
2006
1995
2000
2001
2002
2003
2004
2005
11.4
4.6
2.7
2.9
1.2
12.4
5.8
2.5
3.0
1.1
13.0
6.2
3.2
2.7
1.0
13.3
7.1
2.8
2.3
1.0
16.4
8.8
3.8
2.0
1.7
17.0
9.1
4.4
1.7
1.9
% of GDP
17.1
17.9
9.7
10.4
4.0
3.9
1.4
1.4
1.9
2.2
Direct taxes
Personal income
Corporate income
Other
8.8
3.9
4.0
0.9
11.0
3.6
6.2
1.2
11.2
3.9
6.2
1.1
11.2
4.3
6.0
0.9
9.6
4.4
4.3
0.9
8.7
3.5
3.7
1.5
10.2
3.9
4.6
1.7
10.8
4.6
5.5
0.7
1.6
0.7
0.8
0.1
15
23
1
12
Social Contributions
Employers´
Employees´
Self- and non-employed
6.5
-
6.5
-
6.8
-
6.7
-
7.0
-
7.7
5.3
2.0
0.3
8.3
5.9
2.0
0.3
7.8
5.6
1.9
0.3
1.1
0.8
0.3
0.0
23
17
22
19
B. Structure according to level of government
Central Government
19.8
State Government2
n.a.
Local Government
0.4
Social Security Funds
6.5
EU Institutions
n.a.
23.0
n.a.
0.4
6.5
n.a.
23.7
n.a.
0.5
6.8
n.a.
24.1
n.a.
0.4
6.7
n.a.
25.5
n.a.
0.4
7.0
n.a.
25.1
n.a.
0.5
7.7
0.2
% of GDP
26.6
28.0
n.a.
n.a.
0.4
0.5
8.3
7.8
0.2
0.2
4.1
n.a.
0.1
1.1
0.0
4
n.a.
25
20
23
C. Structure according to economic function
Consumption
10.4
10.6
11.8
12.4
14.7
15.2
% of GDP
15.2
15.4
2.3
3
Labour
Employed
Paid by employers
Paid by employees
Non-employed
10.3
10.0
-
9.8
9.6
-
10.3
10.0
-
10.3
10.2
-
11.0
10.9
-
10.5
10.5
6.2
4.3
0.1
11.3
11.2
6.8
4.5
0.1
11.1
11.1
6.5
4.6
0.1
1.6
1.6
1.0
0.7
0.0
23
23
15
25
23
6.0
4.6
4.2
0.3
0.1
1.4
9.6
7.1
6.2
0.8
0.1
2.5
8.9
7.1
6.2
0.7
0.1
1.8
8.5
7.0
6.0
0.8
0.2
1.5
7.3
5.6
4.3
1.1
0.2
1.7
7.7
5.3
3.7
1.1
0.5
2.5
9.0
6.3
4.6
1.2
0.4
2.7
10.0
7.7
5.5
1.7
0.4
2.3
1.5
1.1
0.8
0.3
0.1
0.3
7
2
1
3
22
10
26.7
30.0
30.9
31.2
33.0
33.4
35.5
36.6
5.3
13
Of which environmental taxes
Energy
Transport
Pollution/Resources
2.9
0.5
2.3
0.0
2.7
0.7
2.0
0.0
3.0
1.0
2.0
0.0
2.9
1.0
1.9
0.0
3.7
1.9
1.8
0.0
4.0
2.1
1.9
0.0
% of GDP
3.5
3.3
1.9
1.8
1.6
1.5
0.0
0.0
0.5
0.3
0.2
0.0
4
16
3
24
D. Implicit tax rates
Consumption
Labour employed
Capital
Capital and business income
Corporations
Households
12.6
23.1
-
12.7
22.3
26.2
19.5
24.3
8.6
14.3
23.6
24.3
19.4
22.5
9.5
15.4
23.0
25.2
20.6
22.1
14.7
18.9
23.4
24.4
18.6
22.0
12.2
20.0
22.8
26.2
17.9
19.6
14.8
20.0
24.5
31.0
21.7
27.1
13.9
%
20.4
24.2
36.6
28.1
33.9
19.7
-
5.0
2.5
4.0
3.4
2.1
1.9
1.9
-0.3
4.2
-1.0
4.0
-1.6
4.0
-1.4
A. Structure of revenues
Indirect taxes
VAT
Excise duties and consumption taxes
Other taxes on products (incl. import duties)
Other taxes on production
Capital
Capital and business income
Income of corporations
Income of households
Income of self-employed (incl. SSC)
Stocks of capital / wealth
TOTAL
2006
€ bn Ranking
2.6
3
1.5
2
0.6
3
0.2
13
0.3
7
p.m.:
Real GDP growth (annual rate)
Output gap (potential)
See ANNEX B for classification of taxes and ANNEX C for explanatory notes.
1) The ranking is calculated in descending order. A "1" indicates this is the highest value in the EU-27. No ranking is given if more than 10 % of data points are missing.
2) This level refers to the Länder in AT and DE, the gewesten en gemeenschappen / régions et communautés in BE and comunidades autónomas in ES.
n.a.: not applicable, - : not available
Source: Commission Services
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Taxation trends in the European Union
1
Ranking 1
15
25
Part III - Developments in the Member States
Overall trends in taxation
Structure and development of tax revenues
As of 2006, with a total-tax-to-GDP ratio of 36.6 % (including social security contributions), Cyprus' tax burden
was 0.6 percentage points lower than the EU-27 average. The level of taxation in Cyprus currently ranks 13th in the
Union.
The tax structure of Cyprus stands out in several respects. Cyprus displays the third highest reliance on indirect
taxes in the Union after Bulgaria and Denmark. In Cyprus, indirect taxes supply 49 % of total tax revenue compared
with a 38.9 % EU-27 average in 2006, while the shares of direct taxes and social contributions account only for
respectively 29.6 % and 21.4 %; this is due to the high share of consumption in economy as VAT rates are moderate.
The low level of direct taxes is due to low personal income taxes (merely 4.6 % of GDP in 2006), whereas corporate
income taxes have historically been high, around double the EU average.
In Cyprus, the share of taxes collected by local government is negligible (0.5 % of GDP in 2006). The share of
revenue received by the social security funds have decreased markedly since the late 90s.
The tax-to-GDP ratio has increased substantially since 1995, when it was the lowest of the EU-25. The increases
took place in several steps, most notably in the years 1998, 2000, 2003 and 2005, when the pick-up amounted every
time to about 2 percent of GDP. Compared to 1995 revenue went up in all major categories of taxes, but the increase
was strongest in indirect taxes.
Taxation of consumption, labour and capital; environmental taxation
Cyprus has followed a strategy of raising primarily consumption taxes. In 1995, the implicit tax rate on
consumption (12.6 %) was the lowest of the EU-27 Member States; it now ranks close to the median. However the
ITR is, at 20.4 %, still 1.7 percentage points lower than the EU-27 average.
Cyprus exhibits the second lowest ITR on labour in the Union after Malta (24.2 %, EU-27 34.8 %). There has been
a slight increase (by 1.1 percentage points) in the level between 1995 and 2006, with some modest fluctuation in
between.
Taxation of capital stocks is somewhat above the EU-27 average (2.3 % of GDP, EU-27 2.0 %). The aggregate
'capital income taxation of corporations', which includes the Defence Contributions, has declined from 2002 to
2004, also owing to a tax reform that cut revenues by more than half a percentage point of GDP. Since 2004,
however, revenue went back up by 1.8 percentage points, largely owing to increases in the Defence Contributions.
As a result, the 2006 ratio has become the highest in the Union.
The share of environmental taxes in GDP in Cyprus (3.3 %) is the fourth highest in the Union, following Denmark,
the Netherlands and Malta. This is mainly due to the large share of transport taxes (1.5 % of GDP), 0.8 percentage
points above the EU-27 average. Revenue from energy taxes has more that tripled since 1995 as a proportion of
GDP, but has been trending downwards in the past few years.
Current topics and prospects; policy orientation
The restructuring of the tax system in order to achieve a more efficient allocation of resources and support the
supply side of the economy, is a key policy priority for Cyprus. To this end, a major step was the comprehensive
2002-04 reform, which aimed at harmonising the tax system with the EU's code of conduct on business taxation,
simplifying the income tax law, and adjusting VAT and excise rates in line with EU minimum levels.
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Part III - Developments in the Member States
Despite the fact that the tax system is fairly simple and the tax burden relatively low, improving tax collection
remains a key challenge for policymakers. Following the tax reform, policies have focused on the need to raise tax
collection and enhance tax compliance. A tax amnesty has yielded considerable revenues, and is expected to help
future tax compliance and boost tax collection in the future. The tax administration services are being strengthened
with a series of measures designed to facilitate the collection of taxes and discourage tax evasion. A partial lifting of
bank secrecy has commenced and is expected to improve the tax authorities' ability to obtain information on
individual cases. Furthermore, with effect from 1 January 2006 the House of Representatives revised the existing
legislation. On record keeping, the new legislation includes:
• Introduction of a self-assessment system for self-employed individuals. This system requires payment of taxes
concurrently with submission of tax returns;
• Compulsory submission of tax returns for all persons earning more than the tax-free threshold; a further
increase of penalties for late submission of tax returns was also realised;
• Compulsory maintaining of accounting records by companies and self-employed individuals earning income
above a certain threshold.
Finally, it should be noted that in 2008, Cyprus joined the euro area.
Main features of the tax system
Personal income tax
Cyprus applies a personal income tax with a progressive rate structure. Since 1991, three brackets were used, with
rates set at 20 %, 30 % and 40 %. The rates were, however, reduced in 2003 to 20 %, 25 % and 30 %. There is a
standard relief (basic allowance) which has been progressively raised from € 8 500 in 1995 up to € 19 500 in 2008,
as a result of which the number of people subject to personal income tax has decreased substantially.
Capital gains are, in general, not taxable. Gains on the disposal of immovable property located in Cyprus are taxed
at 20 %. The capital gain is the difference between the sales proceeds and the original cost, adjusted to take into
account increases in the cost of living index.
Corporate taxation
Cyprus has lowered its corporate tax rate from 20-25 % (stable since 1991) to 10 % from 1 January 2003. For the
years 2003 and 2004 there was an additional 5 % corporate tax for chargeable income exceeding € 1.7 million.
Alongside the reduction of the tax rate, several tax incentives have been abolished. Special regimes apply, however,
to the shipping sector. Companies can carry forward trading losses indefinitely (up to 2002 a five-year limit
applied), but carrying back is not allowed. Inventories may be valued at the lower of cost or net realisable value.
VAT and excise duties
The current VAT rate is 15 % (the standard rate was 10 % until the second half of 2002, but was increased to 13 %
on 1 July 2002 and to 15 % in January 2003). Reduced rates range from 0 % to 8 %. Cyprus has requested
transitional measures, a zero VAT rate on foodstuffs and pharmaceuticals, a reduced VAT rate on restaurants and a
VAT exemption for land. The excise duties on unleaded petrol and on diesel fuel will be gradually aligned with the
EU minima.
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Taxation trends in the European Union
Part III - Developments in the Member States
Wealth and transaction taxes
There are neither net wealth taxes nor inheritance and gift taxes in Cyprus. Immovable property located in Cyprus is
subject to a real estate tax, which is levied on the estimated market value of the property in 1980. Rates range from
0 % to 0.4 %.
Social contributions
Employers' social security contributions are due for the Social Security Fund, redundancy insurance and for the
Training Development Fund. Altogether, the employers' contribution rate amounts to 8 %. Employers must also pay
a payroll tax (2 % of gross wage), which is not deductible for corporate income purposes. Employees pay 6.3 % of
their salary as social security contribution up to a monthly ceiling of € 4000.
Other taxes
All residents are subject to the Defence Contribution, which is a final levy and not deductible for income tax
purposes. It is applied with different rates on dividends, interest and rental payments. Dividends are subject to the
Defence Contribution at a rate of 15 %, with the contribution on domestic dividends withheld at source. Interest
payments not accruing from ordinary business activities are subject to the Defence Contribution at a rate of 10 %.
Individuals with an annual income not exceeding CYP 7 000 (€ 11 960) may apply for a 7 % refund. A 3 % rate
applies to interest on savings certificates issued by the government; however, dividends and interest are not subject
to personal income tax. Rental payments are subject to the Defence Contribution at a rate of 3 %. Defence
Contributions have gone through many permutations and the current system has existed only since 1 January 2003.
This reform changed the tax from a levy on earned income (salaries and profits) to the current levies on unearned
income.
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