Selk warns against rushed tax reforms

The Institute of Certified Public Accountants of Cyprus (Selk) has expressed reservations over certain provisions in a set of tax law amendments currently under review by the House finance committee.

The changes aim to enable the Republic of Cyprus to recover €43 million withheld by the European Commission due to legislative shortcomings.

The funds were withheld after deficiencies were identified in the implementation of legislation linked to two key milestones necessary for the disbursement of Recovery and Resilience Plan funds.

Discussions on the three bills, which amend the “Income Tax Laws of 2002 to 2024,” the “Special Defence Contribution Laws of 2002 to 2024,” and the “Assessment and Collection of Taxes Laws of 1978 to (No.3) 2022,” began last week and will continue today with an article-by-article review.

In a memo submitted to the parliamentary committee, Selk acknowledged the importance of the issue, noting that the proposed legislation must be passed within the next few weeks and no later than May 14, 2025.

This is necessary to allow Cyprus to reclaim the €43 million withheld by the European Commission.

However, Selk insists that any legislative changes should be conditional on addressing distortions, particularly those that tarnish the country’s reputation, create tax inequalities, and foster unfair tax competition.

One of Selk’s primary concerns is the proposed immediate implementation of the new tax measures. It argues that the legislation should take effect on January 1, 2026 instead.

While acknowledging Cyprus’ commitment under the Recovery and Resilience Plan to introduce withholding tax rules, Selk points out that the bills were first published in late February 2025, giving taxpayers very little time to prepare.

It warns that the immediate enforcement of withholding tax provisions and non-deductible expenses for interest and royalties could have a serious negative impact on Cyprus’ image and credibility as a business hub.

“We believe it is reasonable and fair for taxpayers to have sufficient time to restructure their ownership structures,” Selk said.

“This is a process that naturally takes time, as it requires submission to both the registrar of companies and the tax department, with the ultimate goal of either shutting down entities in low-tax jurisdictions or relocating their tax residency to Cyprus or other countries,” it added.

It further stressed that corporate restructuring cannot always be accomplished within a few weeks, as such changes often require legal and tax reviews.

What is more, Selk pointed out that “internal decision-making processes must be completed, along with other procedural and structural matters”.

It added that “ethically, we believe that taxpayers should be given the necessary deadline to comply”.

Regarding the withholding tax on dividends, Selk referenced the government’s recent tax reform plan, which proposes lowering this rate to 5 per cent.

However, the draft legislation sets the withholding tax rate at 17 per cent—the same rate applied to dividends paid to Cypriot tax residents.

“Selk’s position is that, for the sake of uniformity and equal treatment, the same rate should apply to dividends paid to low-tax jurisdictions,” Selk said.

Moreover, Selk also raised objections to specific provisions in the proposed legislation.

It said that the withholding tax and non-deductibility rules could apply even when the recipient company’s income is subject to taxation—just not necessarily in the jurisdiction of that company.

For example, income could be taxed under Controlled Foreign Corporation (CFC) rules or under the global minimum tax framework (15 per cent).

Selk proposed an “escape rule” allowing taxpayers to avoid the withholding tax if they can prove that the income has already been included in the tax base of another jurisdiction that is not classified as a low-tax jurisdiction.

It also suggested exemptions for payments made by Cypriot companies subject to the tonnage tax regime, as well as payments to broadly owned investment funds, recognised pension funds, financial institutions, and similar entities not engaged in aggressive tax planning.

Meanwhile, Cyprus had requested the release of €150 million as part of the second and third instalments of its Recovery and Resilience Plan.

However, an audit by the European Commission found weaknesses in meeting milestones 209 and 210, which require the implementation of withholding tax rules on dividend, interest, and royalty payments to companies in low-tax jurisdictions or non-cooperative jurisdictions.

The audit revealed that Cyprus’ existing tax framework included exemptions that could allow certain payments to escape taxation.

As a result, the European Commission concluded that the provisions failed to meet their intended purpose of combating aggressive tax planning.

“These weaknesses resulted in the Republic of Cyprus being deprived of €43 million from the €150 million requested under the second and third Recovery and Resilience Plan instalments,” Finance Minister Makis Keravnos stated in a memo to parliament.

He added that once the proposed legislation is passed and published before May 14, 2025—six months after the withholding—Cyprus is expected to receive the €43 million.

The finance ministry confirmed that the bills have been reviewed and agreed upon with the European Commission following extensive negotiations throughout 2024.

Finally, it should be mentioned that Cyprus had already legislated in line with milestone 209 within the required timeframe, specifically in the fourth quarter of 2021.