Why the Cyprus annual company levy should be repealed

In 2011, Cyprus introduced a law whereby all companies incorporated in the Republic were required to pay an annual levy to the Registrar of Companies of €350. What was intended, however, to be a temporary measure to help depleted state finances remains in place today, with no signs of the Cypriot government having any plans soon to repeal it. This is very short-sighted of them, and discourages inward investment in a country, whose economic credibility was so damaged by the 2013 bank bail-out and the resultant 10% haircut on investor deposits. Given, therefore, that the deadline for this year’s payment is fast approaching, it is surely time to revisit this issue and question the net benefit for the country of the continuation of the levy.

Per the current legislation – reflected in Article 391 of Cyprus Company Law (as amended Law No. 6 (I) 2013) – it is obligatory for all companies registered in Cyprus, whether active or dormant, and including non-profit companies, to pay an annual levy of €350 to the Registrar of Companies. All payments need to be made by 30th of June for the relevant years, with late payment attracting penalties escalating from 10% to 30%, depending on how overdue is the payment. In the worst case, the Registrar can decide to strike a company off the register in the event of non-payment.

While this levy has become an important and regular source of income, however, it should be argued that it has outlived its use – if it ever had one. When it was originally introduced, it was presented as a temporary measure, not something intended to be a regular part of the corporate tax landscape.

Businesses do not like it. It can be administratively difficult to collect and, for small businesses at least, a drain on cash flow. For those who own a number of companies, the sums involved can mount up as well. It also discourages the formation and registration of companies. Potential investors will hold off if they do not expect to begin trading immediately, as the levy applies to all companies, irrespective of status.

What the government fails to realise is the negative impact this tax has on business, and the business community. It harms Cyprus and its competitiveness compared to other tax regimes which do not impose such annual penalties on companies. This is especially unhelpful for a country desperately trying to regain it financial credibility and attractiveness after the unprecedented damage done by the 2013 bail-out. Foreign investors need reassurance after the hair-cut on bank deposits imposed 4 years ago, not an annual levy that is effectively a tax imposed on all Cyprus companies.

Perhaps it should not come as a surprise that the Cypriot authorities are too short-sighted to see the error of their ways. After all, this is the same government that imposed an additional income tax burden on private sector employees and self-employed individuals (the so-called special contribution) until it was abolished from January 1st this year. In other words, they chose to penalise and discourage the wealth creators in society by taxing them more so as to help fund a bloated public sector.

Arguably, the maintenance of the annual company levy is a continuance of the same policy, whereby the private sector and the self-employed bear a disproportionate share of the Cypriot economic and tax burden.

Abolishing the levy would go some way to show that Cyprus is open for business again, and restore some faith among a very disillusioned international investor community. The government would lose the annual €350 from each company, that is for sure. However, the increase in individuals and companies investing in Cyprus, would surely more than offset this in the form of increased revenue from corporation tax and VAT. It would also encourage more business to open offices and businesses in the country, creating more jobs, and, again more revenue from income tax (and, at the same time, lowering unemployment costs).

If the annual company levy ever had a use, it has now surely outlived it. The wisest course of action would be for the government to announce the abolition of the tax by the end of this year, signalling that Cyprus is a serious destination for external investment again. Unfortunately, it is likely that the current short-sighted and blighted policies will remain in place for some time to come yet.



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