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2012 Budget Designed to Reduce Deficit and Restore Investor Confidence
The Cyprus 2012 Budget, which was recently approved by the Parliament, is designed to reduce the deficit to 2.8 % of GDP with the objective of conforming to the requirements of the European Commission to cut Cyprus' deficit to below 3% of GDP, failing which the country will face financial penalties. Taxand Cyprus analyses the implications of the 2012 Budget to taxpayers and how the Government plans to restore investor confidence.
The 2012 Budget promises an increase in revenues, along with a decrease in expenditure and a resulting decrease in debt over time. The main provisions of the Budget are as follows:
- a two-year freeze on public sector wages
- a proportional levy on private sector salaries above EUR2,500
- increase in the tax rate of dividends from 17% to 20% (applies only to Cyprus tax residents)
- increase in the value-added tax rate from 15% to 17%
It is envisaged that revenue will reach EUR6.22 billion, as compared with EUR5.64 billion in 2011, while expenditure is estimated to decrease by 6% to EUR7.536 billion, as compared with EUR8.01 billion in 2011. The expected increase in revenue will largely be attributable to an increase in tax rates resulting in a tax collection of approximately EUR5.46 billion, representing a 10.9% increase in taxation income. It should be noted however that the rise in tax rates was designed in such a way as not to affect foreign investors but solely Cyprus tax residents.
With a budget that is designed to increase revenue and decrease expenditure, Cyprus is expected to successfully fight the current deficit and restore investors' confidence. Whilst the Budget appears to be very strict, foreign investors with investments in Cyprus should not be concerned that their tax costs will increase as the increase in tax rates will mainly affect Cyprus tax residents. The 2012 Budget was also carefully drafted so as to not adversely affect the country's competitive position as an investment jurisdiction.
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