Cyprus To Implement EU Tax Package By 2005

by Lorys Charalambous, Tax-News.com, Cyprus

13 June 2003

The Cypriot Finance Ministry confirmed earlier this week that Cyprus will be adopting in full the recently agreed European Union tax directive, and that it intends to implement the new rules by January 1 2005.

The tax package was finally adopted last week after years of deliberation between member states and other jurisdictions directly affected, most notably Switzerland. The three-pronged directive seeks to eliminate banking secrecy by allowing exchange of information between member states concerning individuals' savings income. It also seeks to do away with the double taxation of royalties and interest payments for companies, and establishes a business Code of Conduct aimed at preventing harmful tax competition.

Recent reports have suggested that the EU intends to give the ten acceding states, of which Cyprus is one, until 2007 to implement the directive. However, a statement released by the Cypriot Ministry of Finance stated that Cyprus will adopt the new code in full, and that it hopes to do so in time for the EU's January 2005 savings tax deadline. The royalties and company interest directive will be in place for January 2004, according to the ministry, which also pointed out that it was already compliant with the Code of Conduct rules as a result of recent tax reforms.

Currently, all residents who remain in Cyprus for more than 182 days in a year are liable for a 10% defence tax on their Cypriot savings accounts. Non-residents are not liable for this tax, although when the directive comes into force in 2005, if they are resident in another EU member state, then information regarding their bank accounts will be sent back to that state's tax department.

The statement emphasised that the directive on information exchange will not apply to residents of non-member states, a move likely intended to placate the vast Russian interest in the jurisdiction. Recent estimates have suggested that Russian deposits count for as much as 90% of all offshore money located in Cyprus.

Many observers believe that the directive will not have a significant impact on the island, given that a large proportion of money held in bank deposits comes from non-EU sources. Also, the legislation does not apply to companies, therefore much of the Cypriot offshore business sector will remain unaffected. Simon Hodson, Managing Director of CLR Regional Ventures told the Financial Mirror this week that the new tax reforms may even have a beneficial effect on Cypriot business.

"With the advent of the new tax legislation, there is likely to be a long term shift in bringing in quality business to Cyprus. The fiscal rules should be very attractive to genuine big business," Hodson observed.

New rules introduced in January 2003 mean that expatriates residing in Cyprus now have to declare their worldwide income regardless of whether that income is brought into the country. It is estimated that the amount of money held abroad by Cypriots amounts to around CYP3 billion.

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