ECONOMY

Cyprus prepares tax reforms to meet EU membership demands

NICOSIA (Reuters) – Cyprus unveiled an economic package yesterday that drops its preferential tax treatment of offshore companies, meeting a key requirement of the European Union as it prepares for membership. The proposals, which need ratification by Parliament, envisage a 10-percent across-the-board corporate tax on companies, a gradual increase in value-added tax to the 15-percent minimum required by the EU, and a reshuffle of income tax brackets to widen the tax-free income. The tax issue is considered one of the most difficult areas on which Cyprus must show progress in membership talks with Brussels. Cyprus has provisionally closed 23 of 29 negotiation topics and is set to conclude all chapters by the end of June 2002. The package was approved by the Cabinet yesterday and will soon be tabled in Parliament, where the governing party is in a minority, for the final vote. Offshore companies, entities based in Cyprus but with activities outside the island, now pay a 4.25-percent flat tax on corporate profits. Local companies now pay 20- or 25-percent corporate tax, depending on annual turnover. The EU considered the practice discriminatory against local companies and had urged Nicosia to change it. The island faces a delicate balancing act in bringing about a change that would not discourage the hundreds of offshore companies already registered here. Cyprus had in the past faced pressure on the same issue from the OECD, which deemed the different coefficients harmful. Value-added tax (VAT), now at 10 percent, will be raised to 15 percent in two stages during 2002, while the bill also calls for a change to the inland revenue bill by extending the tax-free income to 9,000 pounds per annum ($14,027) from 6,000 pounds. It also lowers the top tax category to 28 percent for income above 15,000 pounds, from a current 40 percent on income above 12,000 pounds a year. It means a tax allowance for the public worth a total of 78 million pounds, said Finance Minister Takis Clerides.