Areas of Strength
- Cyprus has made progress in digitalising its tax administration, reducing the tax compliance burden for taxpayers. In 2023, Cyprus rolled out an integrated tax administration system, which has modernised the interaction of taxpayers with the tax administration. The new portal is a comprehensive system with a single unified picture of taxpayers, thereby facilitating a consolidated monitoring, assessment and inspection of taxpayers. Cyprus plans to gradually add more Artificial Intelligence elements in the “Tax for All” system by end-2025. Cyprus, among others, has a high e-filing rate for VAT, PIT and CIT, above the EU average for all tax types.
- Cyprus has made progress in addressing its tax policy gap on Corporate Income Tax by tightening its tax rules on outbound payments of dividends, interests and royalties to associated companies in low-tax jurisdictions and non-cooperative tax jurisdictions and by introducing substance requirements. As of 1st January 2026, non-deductibility of interest and royalty payments towards zero and low-tax jurisdiction will apply, as well as a withholding tax on dividend payments. A withholding tax on interest, dividend and royalty payments to jurisdictions included in Annex I of the EU list of non-cooperative jurisdictions has been in place since 2023.
Areas for Improvement
- Cyprus does not currently perform personal income tax (PIT) and corporate income tax (CIT) gap estimations. In light of the level of activity of the shadow economy in Cyprus, undergoing research to identify the different tax gaps, in particular PIT and CIT could help to further understand the underlying drivers of the shadow economy. Moreover, measuring tax gaps would provide valuable insights into compliance levels, enforcement effectiveness, and priority areas for tax policy reform.
- Cyprus reports on tax expenditures (TEs) in the annex of its budget, but with limited coverage. Based on the available evidence CIT related tax relief has the biggest fiscal impact followed by VAT relief. Available tax expenditure reports however provide limited transparency and comparability. It is not possible to assess whether Cyprus is actively evaluating the effectiveness of its tax relief provisions. Currently available estimates suggest that the use of TEs is limited and below the EU average. Cyprus could enhance fiscal transparency and accountability by systematically reporting on tax expenditures.
- Cyprus could improve the efficiency of its tax collection operations by putting in place a tax recovery strategy. By classifying taxpayers based on their risk of non-payment, the strategy could tailor recovery efforts appropriately, focusing resources on areas where they will be most effective.
- Cyprus has faced difficulties with the processing of data resulting from automatic exchange on information. More systematic use of the available data and tools would enable Cyprus to strengthen tax compliance policies and improve revenue collection.
Tax Complexity
Cyprus ranks 14th out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Cyprus 17th among the Member States with regards to Tax Framework Complexity, and 11th with regards to Tax Code Complexity. This suggests an average performance of the country in both areas, although there seems to be room for improvement in some tax processes carried out by the tax authorities (e.g., audits, according to the authors), and some features of the structure of the tax regulations (e.g., alternative minimum tax, according to the authors).
The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Cyprus can be found here.
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