Commentators have given the thumbs-down to the coming changes to the tax regime – not so much for any major errors in it, but because it falls short of the government hype. Even a cursory analysis indicates that, for all the talk of achieving a fairer distribution of the tax burden, those on low incomes will see little to no benefit.
First, the government line: the so-called tax overhaul is billed as a ‘flagship project’, an ‘emblematic reform’ that will strengthen the middle class and low-income households and promote the growth of small and medium-sized enterprises, which represent more than 90 per cent of the Cypriot economy.
Finance Minister Makis Keravnos has said the tax reform “is characterised by its social aspect”, as it provides relief for families, students, young people, and large families.
Making his pitch, the minister stresses that 55 per cent of employees will not be taxed on their income.
Weighing in, government spokesman Konstantinos Letymbiotis this past week insisted that the changes are “no mere accounting exercise”.
It has been 22 years since the tax regime was last revised. The current ‘tax reform’ consists of six bills, which the government is anxious to have passed so that the new system kicks in as of January 1, 2026.
That doesn’t leave parliament much of a window to debate the bills – also keeping in mind that at the same time MPs will have their hands full with the state budget bill.
MPs can approve the government tax legislation as is, amend it, or reject it. Should they tinker with it too much for the administration’s liking, it could mean missing the end-of-year hard deadline.
Let’s go over some of the main bullet points of the ‘tax reform’.
The tax-free threshold goes up from €19,500 to €20,500.
Families can get tax credits of €1,000 per child (or €2,000 for single-parent households); €1,000 per student child (in full-time education); a €1,500 deduction for interest on performing loans or rent for a primary residence; and a €1,000 deduction for energy upgrades or electric-vehicle purchases.
Eligibility for these deductions applies to households with annual family income below €80,000, large families below €100,000, and single individuals below €40,000.
The scope of allowable tax deductibles will be expanded. Insurance premiums covering permanent or partial disability may now be deducted (in addition to life insurance), and home insurance premiums against natural disasters qualify for a deduction up to €500 per year.
And the tax-exempt ceiling for voluntary retirement or ‘golden handshake’ payments rises significantly – from €20,000 to €200,000 – offering greater flexibility for employers and employees managing retirement schemes. Amounts exceeding €200,000 will be taxed at a flat rate of 20 per cent.
All individuals aged 25 and above residing in Cyprus will have to file an income tax return, regardless whether their income is taxable or not.
Meanwhile corporate tax will rise from 12.5 per cent to 15 per cent.
Businesses found with tax irregularities will receive three warnings, and if the issue persists for 30 days, the Tax Commissioner can petition the court for sanctions. The court will decide whether to order a temporary closure of a business or impose other sanctions.
“This is no comprehensive tax reform,” asserts categorically Marios Christou, an economist at the University of Nicosia.
“Rather, it focuses on income tax, and to a lesser extent on corporation tax. You could therefore call it a reform of income tax, but definitely not a reform of the tax system as a whole.”
For one thing, said Christou, there is nothing on VAT.
“And the endeavour clearly focuses on the middle class. The low-paid are unaffected, as the changes won’t touch them anyway.”
He cites another example of how the particulars don’t match the hype:
“Family income is not included in the tax changes. For example, I might earn €90,000 but my wife is unemployed. The tax system focuses on the individual income, not family income. It does not take into account the family status – the size of the household – when it comes to taxing income.”
Plus, the economist asks rhetorically, who is this vaunted ‘middle class’ that the government speaks of?
“The so-called middle class is an abstract concept – there’s no agreed-upon definition. Take someone who earns €100,000 and is single, OK they might be considered middle class. But if they earn €100,000 and have a large family, they’d barely make ends meet.”
The general understanding of ‘middle class’ is people with a relatively comfortable standard of living. In Cyprus, one would think of civil servants and persons employed in the broader public sector.
Another criticism of Christou’s relates to shifting the tax-free threshold by a mere €1,000 – from €19,500 to €20,500.
“That doesn’t really help, does it? It doesn’t take into account inflation since 22 years ago. For me, if you did factor in inflation, the tax-free threshold should be upwards of €25,000.
Another economist likewise told us he’s unimpressed with the much-vaunted ‘tax reform’.
Savvakis Savvides takes objection to how the government has sought to portray the tax changes as doubling as social policy.
“Look, a tax regime and any reform thereof should not be used as an instrument for applying social policy. It should be as simple and straightforward as possible to be understood and be applied by all concerned.”
But that’s hardly the case, he argues. He describes the new tax system as a “complex labyrinth of conditions and ifs and buts on the pretense of ‘applying social justice’ through it.
“The outcome of such tax systems is that they result in huge distortions in the economy both for businesses as well as for consumers and households.”
If the government is genuinely concerned about supporting certain people in the economy, this should be declared, justified on its own merits and dealt with directly – not through making the tax system an instrument for supposed social policies.
“The tax reform as proposed is at best a tedious and unrelated set of amendments with no clear purpose that is unlikely to bring about any real positive change,” Savvides told the Sunday Mail.
The analyst moreover points out that President Nikos Christodoulides seems to be “hiding behind” the amendments to the tax regime.
“What I mean by that, is that he has not kept his election campaign promise, where he undertook to raise the threshold of taxable personal income from €19,500 to €24,000.”
Coming back, Christou somewhat agrees with this assessment.
“To be fair, tax policy and social policy are two distinct things. The issue is not that the government is conflating them; it’s that it claims its tax policy has a heavy ‘social element’ to it. But it doesn’t.”
Social policy, he went on, would be the government easing the cost of living for the low-paid classes.
One way would be to make housing affordable. The government could make available state-owned plots of land for building. People would buy residential units on these plots and then gradually pay back the government in the form of rent – like a hire-purchase agreement.
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