August 5, 2021
Cyprus to introduce new tax measures as part of its National Recovery and Resilience Plan
On 26 July 2021, the Economic and Financial Affairs Council (ECOFIN) approved Cyprus' National Recovery and Resilience Plan (RRP). The RRP sets out the measures that will be supported by the Recovery and Resilience Facility (RRF). The RRF is supported by the NextGenerationEU which will provide €800 billion across the European Union (EU) to help EU Member States recover from the COVID-19 pandemic.
In relation to Cyprus, the RRP includes several reforms and investments ranging from accessibility and overall resilience of the healthcare sector to furthering the green economy. The RRP also sets forth measures to improve tax collection and combat aggressive tax planning. These measures include a set of milestones for their enactment and assessment.
Specifically, the most important measures which will affect the Cyprus taxation system include:
This Alert summarizes the key measures.
— Component 2.1 – Climate neutrality, energy efficiency and renewable energy – Reform 1: Green Taxation
The objectives of this component are to improve the environment policy through measures relating to green taxation.
This component aims to promote a shift towards a more efficient use of environmental resources, reduce greenhouse gas emissions and to increase the penetration of renewable energy.
The proposed legislative changes will be based on the findings of an independent study and are expected to be implemented by 30 June 2026. These include:
— Component 3.2 – Enhanced Research and Innovation - Reform 2: Incentives to encourage and attract investments and human capital in Research and Innovation
The objectives of this component are, among others, to strengthen links between research organizations and enterprises and increase intensity in research & development (R&D) activity and investments by both public and private organizations. Furthermore, it aims to enhance financial support to start-ups, scale-ups, SMEs and internationalize the local research and innovation (R&I) ecosystem.
Reform 2 of C3.2. relates to the extension of the application of the tax scheme for investing in innovative companies to legal entities (from physical persons currently) and will be implemented by 30 September 2022.
— Component 3.5 – Safeguarding fiscal and financial stability
The aim of this component, apart from safeguarding financial stability, is to ensure fiscal stability by combating tax evasion, tax avoidance and aggressive tax planning. It is also intended to provide policy makers with comprehensive data in order to design a fair tax system. The envisaged measures are expected to make revenue collection more efficient and Cyprus' tax system fairer, reducing the spill-over effects from aggressive tax planning.
— Reform 9: Improving tax collection and effectiveness of the Tax Department
The objective of this measure is to make tax collection more efficient and effective, through a higher level of digitalization and tax compliance as well as improving customer service.
The reform will consist in integrating different tax units, procedures, and processes, so as to offer single point of taxpayer service. It also will include legislative changes and implementation of a new IT system and digitalization of the Tax department.
The latter will include: (a) a single registration point for the tax base and Taxisnet (for electronic submission of Income Tax Returns by Individuals, Legal Persons and Employers); (b) an integrated tax auditing process based on risk assessment; (c) an integrated refunds audit; (d) an integrated and enhanced single point of service, including the direct payment of Value Added Tax and connecting businesses to a server held within the Tax Department, without the use of specialized mechanisms; (e) a process to issue single tax clearances; (f) possibility for immediate adjustments of the system to accommodate any changes in the legislation and/or procedures and extension of secure interfaces with other information systems; (g) data analysis capabilities; and (h) scanning and electronic storage of all taxpayer paper documents regarding real estate (immovable property) and capital gains with relevant security, integrity and confidentiality parameters.
The legislative changes should be implemented by 31 December 2025 and will include:
— Reform 10: Addressing aggressive tax planning
The overall objective of the measures under Reform 10 of C3.5 is to increase the effectiveness, efficiency and fairness of the tax system by combatting tax evasion and aggressive tax planning by multinational enterprises.
The first reform sub-measures, which will be enacted by 31 December 2021 and will enter into force by 31 December 2022, consist of:
The second reform sub-measure, which is expected to be enacted by 31 December 2024, consists of:
The third reform sub-measure, which should be enacted by 30 June 2026, consists of:
For additional information with respect to this Alert, please contact the following:
Ernst & Young Cyprus Limited, Nicosia