Part II

Developments in the Member States

CYPRUS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 12.2 5.5 2.5 3.1 1.1 11.2 3.7 6.2 1.3 6.6 4.5 1.8 0.3
n.a.

2010 bn 2.7 1.6 0.6 0.2 0.4 1.9 0.7 1.1 0.1 1.6 1.1 0.4 0.1 6.2

C y p r u s

A. Structure of revenues Indirect taxes VAT Excise duties and consumption taxes Other taxes on products (incl. import duties) Other taxes on production Direct taxes Personal income Corporate income Other Social contributions Employers Employees Self- and non-employed
Less: amounts assessed but unlikely to be collected

12.6 5.7 3.2 2.7 1.0 11.3 3.9 6.3 1.1 6.8 4.6 1.9 0.3
n.a.

12.9 6.6 2.8 2.4 1.1 11.3 4.3 6.0 0.9 6.8 4.5 1.9 0.3
n.a.

15.4 7.8 3.8 2.0 1.7 9.7 4.5 4.4 0.9 7.1 4.8 2.0 0.3
n.a.

16.4 8.4 4.4 1.7 1.9 8.8 3.5 3.7 1.5 7.8 5.3 2.1 0.4
n.a.

16.5 9.1 4.1 1.4 1.9 10.2 3.9 4.7 1.7 8.3 5.9 2.1 0.3
n.a.

17.2 9.7 3.9 1.4 2.2 10.8 4.6 5.5 0.7 7.8 5.5 2.0 0.3
n.a.

18.7 10.2 3.7 1.9 2.9 13.8 6.2 6.8 0.8 7.5 5.1 2.1 0.4
n.a.

17.9 10.6 3.3 1.6 2.4 12.9 5.0 7.1 0.8 7.8 5.3 2.1 0.3
n.a.

1) % of GDP Ranking 15.4 15.6 4 9.2 9.2 4 3.2 3.5 8 1.1 0.9 15 2.0 2.1 6 11.2 11.1 12 4.0 4.2 22 6.5 6.2 2 0.8 0.8 12 8.7 9.0 19 5.9 6.1 15 2.4 2.5 19 0.4 0.4 18

n.a.

n.a.

TOTAL Cyclically adjusted total tax to GDP ratio B. Structure by level of government Central government 2) State government Local government Social security funds EU institutions C. Structure by type of tax base Consumption Labour Employed Paid by employers Paid by employees Non-employed Capital Capital and business income Income of corporations Income of households Income of self-employed (incl. SSC) Stocks of capital / wealth D. Environmental taxes Environmental taxes Energy Of which transport fuel taxes Transport (excl. fuel) Pollution/resources E. Implicit tax rates Consumption Labour employed Capital Capital and business income Corporations Households Real GDP growth (annual rate)

29.9 29.6 76.4 n.a. 1.4 22.1 n.a. 10.3 9.6 9.3 4.6 4.7 0.2 10.0 7.6 6.2 0.9 0.4 2.5 2.7 0.7 : 2.0 0.0 12.6 21.6 24.7 18.6 29.9 6.2 5.0

30.7 30.2 76.2 n.a. 1.5 22.3 n.a. 11.4 10.0 9.8 4.7 5.0 0.2 9.3 7.4 6.3 0.7 0.5 1.8 3.0 1.0 : 2.0 0.0 14.0 22.9 23.3 18.8 30.7 5.4 4.0

30.9 30.9 76.8 n.a. 1.3 21.9 n.a. 11.9 10.0 9.9 4.7 5.2 0.1 9.0 7.4 6.0 0.8 0.5 1.6 3.0 1.0 : 2.0 0.0 15.0 22.3 24.0 19.8 31.9 7.4 2.1

32.2 32.8 76.7 n.a. 1.4 21.9 n.a. 13.8 10.8 10.7 5.6 5.1 0.1 7.7 6.0 4.4 1.1 0.5 1.7 3.8 1.9 : 1.8 0.0 18.0 22.8 24.1 18.7 28.3 9.8 1.9

33.0 33.2 74.4 n.a. 1.4 23.6 0.7 14.5 10.6 10.6 6.2 4.3 0.1 7.8 5.3 3.7 1.1 0.5 2.5 4.0 2.1 1.7 1.9 0.0 19.4 22.7 24.3 16.6 23.0 9.4 4.2

35.0 34.9 74.4 n.a. 1.3 23.7 0.7 14.6 11.3 11.3 6.7 4.5 0.1 9.1 6.4 4.7 1.2 0.5 2.7 3.5 1.9 1.6 1.6 0.0 19.7 24.4 27.2 19.1 26.2 9.9 3.9

35.8 35.2 76.1 n.a. 1.4 21.9 0.6 14.7 11.1 11.0 6.4 4.6 0.1 10.0 7.7 5.5 1.7 0.5 2.3 3.3 1.8 1.5 1.5 0.0 20.0 23.9 29.9 23.0 29.4 13.3 4.1

40.1 38.6 79.3 n.a. 1.3 18.8 0.6 15.2 10.8 10.8 6.0 4.7 0.1 14.0 10.6 6.8 3.3 0.5 3.4 3.4 1.8 1.5 1.6 0.0 20.5 23.9 41.0 31.1 35.8 21.7 5.1

38.6 35.3 35.7 36.6 34.9 35.6 % of total taxation 77.9 73.3 73.0 n.a. n.a. n.a. 1.4 1.4 1.4 20.1 24.6 25.1 0.6 0.6 0.5 % of GDP 15.2 13.5 13.5 11.1 12.3 12.7 11.0 12.2 12.6 6.2 6.9 7.1 4.8 5.3 5.5 0.1 0.1 0.1 12.3 9.6 9.5 9.7 7.8 7.6 7.1 6.5 6.2 2.1 0.8 0.9 0.5 0.6 0.6 2.6 1.7 1.9 % of GDP 3.2 2.9 2.9 1.6 1.6 1.9 1.4 1.4 1.6 1.6 1.3 1.1 0.0 0.0 0.0 % 20.4 19.2 18.8 24.6 26.2 27.0 32.5 29.8 31.1 25.7 24.4 24.9 32.5 35.9 37.1 13.9 7.4 8.7 3.6 -1.9 1.1

13

4 n.a. 25 20 21 6 20 19 12 23 24 4 4 2 10 22 11 6 14 12 4 26 19 22

4.5 n.a. 0.1 1.6 0.0 2.3 2.2 2.2 1.2 1.0 0.0 1.7 1.3 1.1 0.2 0.1 0.3 0.5 0.3 0.2 0.0

See Annex B for explanatory notes. For classification of taxes please visit: http://ec.europa.eu/taxtrends 1) The ranking is calculated in descending order. A "1" indicates this is the highest value in the EU-27. No ranking is given if more than 10 % of data points are missing. 2) This level refers to the Lnder in AT and DE, the gewesten en gemeenschappen / rgions et communauts in BE and comunidades autnomas in ES. n.a. not applicable, : not available Date of extraction: 13/01/2012

Source: Commission Services and Eurostat (online data code gov_a_tax_ag)

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Cyprus
Overall trends in taxation
Structure and development of tax revenues In 2010, the overall tax burden (including social contributions) increased by 0.4 percentage points to 35.7 % of GDP. It hence only partly offsets last year's drop of more than 3 percentage points. These developments bring Cyprus' tax burden back to the EU average of 35.6 %. The tax structure of Cyprus' tax system stands out in several respects. Cyprus displays the fifth highest share of indirect taxes in the EU-27. It derives 43.8 % of tax revenues from indirect taxes (EU-27 38.6 %), of which VAT accounts for almost 60 %. This is due to the high share of consumption in the economy, as VAT rates are among the lowest in the EU. Direct taxes account for a proportion of revenue (31.1 %) slightly above the EU average. However, they are more heavily based on CIT revenues (17.4 %) than in all other EU-27 countries except for Malta; the steady increase since 2004 is only interrupted in 2010. On the contrary, PIT taxes do not contribute much more than half of EU-27 average to the total tax revenues (11.6 %, EU-27 20.6 %). Social contributions account for one quarter of receipts, six percentage points below EU-27 average. The share of taxes received by local government is negligible (1.4 % of total taxation in 2010); only the Greek local government has a lower share in tax revenues, while Malta has no tax collection at local level. The tax-to-GDP ratio increased substantially (about 10 percentage points) from 2000 to 2007, albeit starting from a very low level. The increase was steady but most notable in 2007, when the pick-up amounted to more than four percentage points. While the fall in tax revenues in 2008 was against still relatively favourable economic conditions, the 2009 drop largely reflected the economic downturn. The 2010 increase was the result of increased social contributions (reflecting changes to social contribution rates introduced in April 2009), and rising excise duties due to tax rate increases on petrol and diesel. Compared to 2000, indirect tax revenue and social security contributions in percent of GDP went up considerably, but the increase was stronger in indirect taxes. VAT revenue almost doubled between 2000 and 2008, but fell considerably in 2009, stabilising in 2010. Corporate income tax revenues are on the same level as in 2000, despite the 2003 tax cut, and the recent economic downturn. Taxation of consumption, labour and capital; environmental taxation Revenues from taxes on consumption as a percentage of GDP (13.5 %) are well above the EU-27 average (11.9 %). As mentioned above, this level of revenues is largely due to a high consumption share in the economy, which is the second highest in the EU, only exceeded by Greece's consumption tax share. In addition, Cyprus has been following a strategy of raising primarily consumption taxes. VAT and excise duties revenues were boosted by increases in minimum tax rates prescribed by the acquis. With the 2010 increase of tax rates on transport diesel and petrol, these minimum rates have been attained. In 2000, the implicit tax rate on consumption was by far the lowest of the EU-27 Member States; it now ranks 19th. The 2009 drop in the ITR on consumption was sustained in 2010, now amounting to 18.8 % (EU-27: 21.3 %).These drops are likely to be at least partly due to the decrease in the construction boom of the last years, as VAT spent on building and renovation is counted as consumption tax revenue in this report(50), as well as to the reduction of tax rates for the tourism sector, which could not be offset by the increase in excise duty rates. Taxes on labour represented 12.7 % of GDP in 2010, constituting a bit more than one third of the overall tax burden. The increase in the ITR on labour by more than 5.0 percentage points since 2000 was driven by the 2.4 percentage point increase since 2008 resulting from an increase of social security contributions in April 2009. This marked increase results in an ITR on labour of 27.0 % - closer to the EU average of 33.4 % than ever before.
(50) The numerator of the ITR comprises VAT revenue on construction, whereas the denominator, in line with national accounts, excludes expenditure in construction, as that is considered investment rather than consumption. This results in an upwardly biased measure of the ITR on consumption. Owing to lack of data, it is at present not possible to correct for this effect.

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Part II

Developments in the Member States

C y p r u s

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. 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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Corporate taxation Cyprus has lowered its corporate tax rate from 2025 % (stable since 1991) to 10 % from 1 January 2003. For semi-governmental bodies the tax rate was only reduced to 10 % in 2009, bringing it in line with the CIT rate applied to non-governmental corporations. Alongside the reduction of the tax rate, several tax incentives were abolished. In the years 2003 and 2004, there was an additional 5 % corporate tax for chargeable income exceeding 1.7 million. Special regimes apply, however, to the shipping sector. Companies can carry forward trading losses indefinitely (up to 2002 a five-year limit applied), but carrying back is not allowed. Inventories may be valued at the lower of cost or net realisable value. An annual levy on registered companies of 350 applies since 2011. Other taxes (Defence Contribution) All residents are subject to the Defence Contribution, which has been a final levy on unearned income and not deductible for income tax purposes since 2003. It is applied with different rates on dividends, interest, rental payments and the taxable income of public corporate bodies. Dividends are temporarily subject to the Defence Contribution at a rate of 20 % for the years 2012 and 2013, after which the rate will decrease to 17 %, with the contribution on domestic dividends withheld at source. Interest payments not accruing from ordinary business activities are taxed at a rate of 15 %. Individuals with an annual income not exceeding 12 000 may apply for a 7 % refund. A 3 % rate applies to interest on savings certificates issued by the government; however, dividends and interest are not subject to PIT. Rental payments are subject to the Defence Contribution at a rate of 3 %. VAT and excise duties On 01.03.2012 the standard VAT rate was increased to 17 % (it had been 15 % since 2003), keeping the two reduced rates constant at 5 % and 8 %, respectively. In addition Cyprus exempts certain products letting of immovable property, cultural, sport, banking, insurance, medical and hospital services from VAT altogether, and applies a zero rate on supplies of goods and services to sea-going vessels, and international transportation, as well as exports and intra-Community dispatches of goods and services Since 2011 formerly exempt foodstuff and pharmaceutical products as well as the formerly higher taxed construction/purchase of the first residence have been subject to a 5 % VAT rate. The reduced VAT rates for hotel accommodation and restaurant services (5 % formerly 8 %) originally temporarily introduced in 2009 to fight the crisis were extended in 2012. The excise duties on energy, in particular on unleaded petrol and on diesel were aligned with the EU minima in 2010. The 2011 increase in excise duties focused on tobacco products namely an increase by 40 cents by packet. Wealth and transaction taxes There are neither net wealth taxes nor inheritance and gift taxes in Cyprus. Immovable property is subject to a real estate tax, which is levied on the estimated market value of the property in 1980. For natural persons, rates range from 0 % to 0.8 %, depending on the property value. A real estate transfer tax is levied in a progressive way at 3 %, 5 % and 8 % of the property value. Since April 2011 a bank levy is imposed on the total amount of deposits at a rate of 0,095 %, limited to 20 % of the total taxable profits of the financial institution. Capital gains are, in general, not taxable. Gains on the disposal of immovable property located in Cyprus are taxed at 20 %. The capital gain is the difference between the sales proceeds and the original cost, adjusted to take into account increases in the cost of living index. Social contributions Employers' social contributions are due for the Social Security Fund, redundancy insurance and for the Training Development Fund. Altogether, the employers' contribution rate amounts to 8.5 %. Employers must also pay a payroll tax (2 % of gross wage) to the social cohesion fund, which is not deductible for corporate income purposes. Employees pay 6.8 % of their salary as social contribution up to a ceiling of 52 104. Public sector employees pay 3% of their gross salaries towards the government pension scheme since 2011. The self-employed pay 12.6 % of notional income as social contribution. SSC of employed and self-employed are augmented by a 4.3 % payment of the state. In general, employers have to contribute to the Central Holiday Fund; the rates vary according to the annual leave entitlement of the employee.

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