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Our View: Many positives from tax scheme to attract more professionals

fin min constantinos petrides
Finance Minister Constantinos Petrides

The government in May of this year announced a new tax incentive scheme designed to attract foreign companies and workers to Cyprus. The scheme also seeks to repatriate Cypriot professionals by offering them the same benefits as those available to foreign nationals. At the time, the government said the scheme was crucial for its strategy of increasing the number of international companies that relocate to Cyprus as it would enrich the domestic talent pool with high-quality professionals.

The scheme includes a 50 per cent tax break for workers receiving upwards of €55,000 in annual wages, while the time period for which the tax break would be applicable has been extended to 17 years from 10 years. The time period for the tax break kicks in during the worker’s first year of employment in Cyprus. In addition, the above terms will also be applied retroactively to current eligible workers making more than €55,000 in annual wages, provided that they resided abroad for 12 straight years before they started working in Cyprus. Moreover, a grace period of two years will be given to new employees, as well as a period of six months to existing workers in order for them to gain the necessary prerequisite criteria for the scheme. This concerns cases where an employee’s initial salary started at an amount below the minimum annual amount of €55,000.

The scheme was broadly well-received, however, recently, there have been some dissenting voices. The thinking behind those questioning the scheme revolves around the fact that it creates distortions in the domestic labour market. Objectors say that by maximising the take-home pay of foreign nationals and repatriated Cypriots, local workers, and by extension their employers, are being placed at a disadvantage.

While the above notion has some merit, mostly in terms of costs across a longer period of time, it fails to look at the bigger picture. Cyprus has been trying to boost its credentials as a business, entrepreneurial and technology hub in the region for quite some time. This effort has already started to bear fruit, with many companies moving their headquarters and operations to the island. This brings new jobs to the local economy and also enables young professionals with specialised degrees to find more rewarding roles, since these companies have a wider range of positions in innovative fields, catering to more niche and modern market demands.

Crucially, since it is also applicable to Cypriots who are currently based abroad, it also serves to reverse the extremely damaging human capital flight, commonly referred to as ‘brain drain’, which took place during and after the financial crisis of 2013. According to a relevant study, which rates human capital flight from 0 (low) to 10 (high), Cyprus’ brain drain index peaked in 2014 at 4.8 and fell to its lowest point in a decade in 2019 at 3.5 before the pandemic distorted the figures in 2020. This coincides with the arrival of many foreign companies in the years leading up to 2019, bolstering the job market and making Cyprus a more attractive market for both locals and foreign nationals.

Furthermore, attracting high-quality international companies, along with their employees, helps boost tax revenue and fill up the state’s coffers, something which the finance minister, Constantinos Petrides, explicitly touched upon. “The employees and companies that will settle in Cyprus because of this programme will bring direct and indirect benefits to the local economy, while the administrations of international businesses are also encouraged to move their headquarters to Cyprus, thus creating a real infrastructure on the island,” Petrides said. “Through this relocation, the tax base is expanded and consequently the state’s tax revenues,” he added. Indeed, according to global finance analysts Trading Economics, Cyprus’ tax revenue went from under €1.5 billion in 2014 to surpassing the €2.5 billion mark in three instances between 2020 and 2022, while also managing to exceed €3 billion on one occasion.

Finally, Cypriot companies can also benefit from the incentives. Firstly, they can use them to attract high-quality professionals to their own organisations, especially as they could offer somewhat lower packages that would ultimately amount to higher take-home salaries due to the tax breaks. Secondly, by attracting such companies and workers and creating the aforementioned professional infrastructure domestically, Cypriot companies can gain from the synergies and partnerships formed by more varied and diverse business ecosystem on the island.

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