In an effort to reduce the fiscal deficit and avoid a third downgrade of the sovereign debt, the Cyprus House of Representatives hastily voted on 26 August 2011, the first package of austerity measures which is expected to shore public finance by €318 million per year. Namely, the following amendments to the legislation were made:
1. The Income Tax Law: impacting personal income
2. The Special Defence Contribution Law: impacting interest and dividend income
3. The Immovable Property Law: related to immovable property tax
4. The Companies Law: fixed annual levy to companies
5. The VAT Law: related to immovable property
6. The Laws relating to the contributions and retirement benefit of government and semi-government employees
Besides quoting the changes of the law, there has been little analytical coverage on the changes and their impact on the taxpayers. Instead, much of the press has emphasised on the talk between the unions and government. Without going into the full details of the changes, which you can read in the press, here is a layout of what could matter to you.
If your personal income exceeds €60,000 per year, will be tax at 35% on the excess. In general, it could be said that except for highly paid expatriate and senior management, this change is not likely to have repercussions to the majority of employees and self-employed.
For those with interest income from bank deposits or from loans personally given to their company, special defence contribution (SDC) will be levied at 15%, instead of 10%. You should note that the new SDC rate is effective as from 31 August 2011 onwards. The tax on dividend income will be 17% and possibly require many business owners to revisit their tax plan.
If you own a home in Cyprus, the annual immovable property tax was significantly increased (doubled), so expect that your 2012 property tax may be higher. On the other hand, if you plan to buy or build a first-residence you will be subject to 5% VAT, instead of 15%.
As you may have already noticed, all changes (except that related to The Companies Law) impact the individual and not the corporate taxpayer. Even, with the second wave of austerity measure in mid-September, expected to hike VAT rates from 15% to 17% and reduce benefits to civil servants, the burdened will fall on the individual taxpayer. Within the contexts of the Cyprus economy, this is the right move; not upsetting the offshore companies and the recovery of the private sector. However, how will that play out with consumer spending and sentiment remains highly controversial.