Cyprus' tax framework is one of the most favourable in Europe.

It provides a wide range of advantages to both individuals and legal entities that have Cyprus as their tax residence.

The inflow of foreign capital into Cyprus is noteworthy for the Cypriot economy. Many foreign investors transfer their business activities to Cyprus, taking advantage of the low corporate tax rate of 12.5% (one of the lowest in Europe).

There are ways to further reduce the effective tax rate to as low as 2.5%, which is achieved by financing new capital to generate income through the notional interest deduction.

Reduced taxation is also achieved for those dealing with Intellectual Property products through tax regimes (IP box regime).

Furthermore, tax advantages are available to individuals who become tax residents of Cyprus.

Income from dividends for non – domiciled tax residents (which is the main source of income for foreign investors) is exempt from income tax.

It is also exempt from the Special Defence Levy for a period of 17 years, which for Cypriots is at 17%.

Pensions from abroad can be taxed at a rate of 5% for amounts above €3,420.

There is no doubt that by coming to Cyprus, individuals and businesses gain significant tax advantages that are difficult to gain from other European countries.

However, in recent years the need for a holistic reform and modernisation of the tax system has become essential.

A modern tax system has to take into account many challenges: it has to be fair, fiscally neutral, follow technological reforms and environmental trends, while keeping in line with the new EU directives and the global rules of the Organisation for Economic Co-operation and Development (OECD).

The expected tax reform should maintain or even upgrade the current incentives for foreign visitors to Cyprus, keeping the island as an attractive destination, while ensuring that the Cypriot economy is not deprived of significant tax revenues.

Digitisation and profit transfer as well as the erosion of the corporate tax base also need to be addressed.

At the same time, low-income earners and people with increased needs, e.g. state pensioners, large families, etc. should be taken into account. An increase in the tax-free threshold, e.g. to €25,000 would be a relief.

The introduction of a tax on environmental fees and pollutants can make a substantial contribution to the environmental challenges facing the authorities.

The role of the country's financial authorities and legislative body is extremely important and pivotal, as they will have to prepare the relevant legislation and at the same time identify any potential negative impact that any changes may have on the economy.

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