Part II

Developments in the Member States

The share of taxes on capital in GDP (9.5 %) is - despite a considerable drop in 2009 - still over 40 % above the
EU-27 average. This is due to the capital income taxation of corporations, which includes the Defence
Contributions, and amounts to more than twice the EU-27 average. While these taxes continued to fall in 2010
other taxes on capital such as the capital income of households and taxes on the stocks of capital/wealth picked up
slightly.

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Albeit on a decreasing path, the share of environmental taxes in GDP in Cyprus (2.9 %) is still above EU-27
average. This is mainly due to the large share of transport taxes (1.1 % of GDP), which has been trending
downwards since 2007, but is still twice the EU-27 average. Revenue from energy taxes has almost tripled since
2000 as a proportion of GDP; the 2010 hike of 0.3 percentages points was bringing it in line with EU-27 average
(1.9 % of GDP). This development is also reflected in the ITR on energy.
Current topics and prospects; policy orientation
Given that despite tax increasing measures taken at the beginning of 2011 the budget deficit was expected to
increase further to around 6 %, three additional austerity packages were passed in 2011.
With the package of 26.8.2011 an additional tax bracket with a top rate of 35 % for personal income over 60 000
was introduced. Registered companies have to pay an annual levy of 350. The defence contribution on interest
payments on deposits of local banks was increase from 10 % to 15 % and the tax rate on dividends was increased
from 15 % to 17 %. Tax rates of the real estate tax were increased now ranging from 0 % to 0.8 %, depending on
the property value (previously 0 % - 0.4 %). The construction/purchase of first residences is now only subject to a
5 % VAT rate, while at the same time the existing funding scheme was abolished. Moreover, a permanent
contribution of 3 % on gross earnings of current government employees towards the government pension schemes
was introduced and the contribution to the widows and orphans fund was increased by 1.25 pp to 2 % of gross
earnings. A temporary special contribution to strengthen public finances was introduced. It is levied on gross
wages at progressive rates for 24 months, starting on 01.09.2011 for public sector employees. This special
contribution was extended to private sector employees and pensioners in the package of the 14.12.2011 coming
into effect on 01.12.2012. The rates for public and private sector employees were set at 2.5 % for income between
2 501 - 3 500, 3 % in the tax bracket 3 501 to 4 500 and 3.5 % above. The defence contribution for
dividends was raised to 20 % for two years as of 01.01.2012. Finally, with the last austerity package that
completed the legal process on 16.12.2011 an increase of the VAT from 15 % to 17 % as from 01.03.2012 was
passed.

Main features of the tax system

Personal income tax
Cyprus applies a personal income tax with a progressive rate structure. After 1991, three brackets were used, with
rates set at 20 %, 30 % and 40 %. The rates were reduced, however, in 2003 to 20 %, 25 % and 30 %. In 2011 an
additional tax bracket with a top rate of 35% for income over 60 000 was introduced. There is a standard relief
(basic allowance) which was progressively raised from 8 500 in 1995 up to 19 500 since 2008, as a result of
which the number of people subject to personal income tax has decreased substantially. Special provisions apply to
high earning individuals not having been resident of Cyprus before taking up the employment for the first 5 years.
A special contribution to strengthen public finances is levied on gross wages at progressive rates for 24 months, at
rates of 2.5% for income between 2.501 - 3.500, 3% in the tax bracket 3501 to 4500 and 3.5% above. The
special contribution is shared equally between the employer and the employee and deductible from taxable income.
Capital gains, in particular dividends, interest income and income from the sale of securities are exempt from
income taxation. They are taxed under the Defence Contribution and a capital gains tax on the disposal of
immovable property.

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Taxation trends in the European Union