Association calls for 40 per cent tax on incomes above €120,000

The Cyprus Bar Association has expressed strong concerns over the proposed tax reform put forward by the University of Cyprus’ Economics Research Centre (CypERC).

The association has argued that it fails to achieve meaningful modernisation and lacks key mechanisms to ensure tax justice.

In addition, it called for an additional tax bracket of 40 per cent for annual incomes exceeding €120,000.

According to the association, the proposed reforms introduce outdated practices without providing mechanisms for resolving tax disputes, potentially undermining tax fairness.

It argued that the suggested framework does not constitute a comprehensive tax transformation plan but rather a set of fragmented improvements to certain aspects of the existing system.

“The CypERC proposals do not represent an action plan for a comprehensive tax transformation that could support Cyprus’ development strategy in the new era,” the association said in its statement.

“Instead, they are isolated recommendations for improving specific parameters of the current tax system,” it added.

While recognising CypERC’s efforts, particularly in a way that benefits Cypriot businesses and specific groups of citizens, the association said that the core pillars of the reform, as originally envisioned, have not been implemented.

The association also stressed that an effective modern tax framework should be based on fundamental tax and legal principles aimed at ensuring a “fair, definite, simple, and effective” tax system.

“Although the project framework initially indicated a focus on tax compliance and administrative costs, no measures or recommendations have been presented regarding tax system simplification or fair treatment of taxpayers, both individuals and legal entities,” the association said.

Instead, it criticised the reform for introducing “anti-abuse provisions and outdated practices” without offering dispute resolution mechanisms between the Tax Department and taxpayers, a factor it claims will “directly impact tax justice”.

The bar association also pointed out several deficiencies in the proposal, including the absence of public consultation on proposed legislation, interpretative circulars, tax rulings, and compliance procedures.

Additionally, it highlighted that the recommendations fail to address all relevant levies that burden taxpayers or provide details on how the reform would shift the tax burden from labour to alternative forms of taxation, such as consumption, green taxes, or property taxation, with the aim of encouraging employment.

The association also said that the CypERC proposals do not include any recommendations for simplifying the tax system or streamlining tax legislation.

It proposed that any new taxation or modifications should be incorporated into a unified legal text to enhance clarity and predictability.

“We consider it a fundamental principle that the simplification of legislative provisions is essential for the stability and predictability of a modern tax system, as taxpayers must be aware of the tax implications of their transactions,” the association stated.

Furthermore, the bar association criticised the proposals for failing to address the modernisation of the existing tax framework.

It suggested that the tax system should be codified in a single legal text with an official English translation to maintain Cyprus’ status as an international financial centre.

The association also noted the absence of any mention of measures proposed by the European Commission and the OECD.

This includes the adoption of a 15 per cent global corporate tax rate for multinational companies under OECD’s Pillar 2 framework and the EU’s plan for a common corporate tax base (BEFIT).

What is more, the association expressed disappointment that the proposals did not include any mechanisms for resolving tax disputes.

It argued that an effective tax system should enhance Cyprus’ competitiveness as a service hub by creating new tax planning opportunities for foreign investors and improving cross-border tax rules.

The bar association also took issue with the proposed increase in corporate tax from 12.5 per cent to 15 per cent, arguing that the justification for this hike is inadequate.

“We believe that the CypERC proposals regarding the corporate tax rate increase are not based on sufficient or clear reasoning, nor do they adequately consider the potential consequences of this change,” it said.

It added that some claims linking the increase to European and international compliance standards are inaccurate.

The association further pointed out that the CypERC proposals do not include any suggestions for revising Cyprus’ double taxation avoidance treaty network.

It warned that without a robust treaty framework, efforts to attract foreign investment and strengthen Cyprus’ position as a service centre could be undermined.

Another major concern raised by the association was the lack of focus on tax administration reform.

It noted that tax system efficiency is not just about modifying tax rates but also about adopting better internal processes and work systems.

“We believe that no adequate study has been conducted on tax administration matters,” it stated.

Furthermore, the association recommended the introduction of an additional tax bracket of 40 per cent for individuals earning over €120,000 annually.

“Such a modification would align with the general principle of vertical equity without being excessively punitive,” it explained.

Currently, under the CypERC proposal, the tax rate for taxable income exceeding €80,000 is set at 35 per cent.

The association suggested that the additional tax bracket could allow for an increase in the tax-free income threshold and prevent the proposed rise in the corporate tax rate to 15 per cent, which it believes would harm Cyprus’ competitiveness as a business centre.

The association also underlined the need to “revise legislation to encourage the repatriation of Cypriots who have worked abroad”, in order to combat brain drain and expand the tax base.

Finally, it argued for a more equitable distribution of tax deductions than what is currently proposed by CypERC.