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Cyprus Prepares Emergency Tax Measures

August 2011 - Tax & Private Client. Legal Developments by Hassans.

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Cypriot Finance Minister, Kikis Kazamias has urged the adoption of proposals to rein in the country's deficit to avoid a European Union bailout, including an increase to the value-added tax rate and an annual registration fee for companies.

The package of measures, yet to be approved by parliament, would increase the VAT rate to 17% from 15% currently, hike withholding tax on savings interest derived by Cypriot residents from 10% to 15%, and add an additional top rate of personal income tax of 35% on income above EUR60,000 (USD41,750).

In addition, companies formed in Cyprus will be required to pay a EUR350 annual fee to the government.

Cuts to government spending, Kazamias has said, will include a reduction in the number of public sector workers through natural attrition and a hiring freeze. Public sector workers would pay an extra 3% on their wages but would retain their generous pensions; any new recruits to the public services would have 10% lower salaries.

The measures, whose timing is not yet clear, are aimed at achieving an additional 1% reduction in the fiscal deficit expected in 2011, to 5.5% of gross domestic product (GDP), and a European Union-assigned deficit target of below 2.5% of GDP by the end of 2012. However, it is far from certain that the fractious Cypriot parliament will accept these government proposals as they stand.

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