Parliament approved the Cyprus government’s first package of austerity measures aimed wrestle down its high deficit, which politicians said had been watered down in order to calm union leaders, particularly those representing civil servants and employees in the semi-government sector.

Authorities say the measures could pull the deficit down to 5.5% of GDP this year from a now projected 6.5%, and below 3.0% next year.

However, despite its members’ contributions to the state pension fund upped by MPs from the proposed 2.5% to 3%, the civil servants’ union Pasydy said in a statement that it would continue its dialogue with the Minister of Finance, hopeful that matters would not lead to a conflict in the labour market.
On the other hand, leading audit professionals said the package that aims to raise some 700 mln euros for the state, was “balanced”, but warned that a 2 percentage hike on the VAT rate to 17% would probably come through in the second package expected later in September, earning the state some 160 mln euros.

The measures are as follows:

New top rate for personal income tax (EUR 5 mln)
Cyprus resident individuals or individuals exercising an employment or profession in Cyprus will be taxed at the rate of 35% (from 30%) on their taxable income exceeding 60,000 euros as from the current tax year 2011. The initial ceiling was for 70,000 euros.

Tax incentives for highly-paid employees
In order to encourage the relocation of new businesses to Cyprus, 50% of the income of employees relocating to Cyprus and with an income exceeding 100,000, will be exempt from tax for the first five years following the relocation. This will apply from 2012 onwards.

Defense Contribution on dividends and interest (65 mln)
The Special Defence Contribution on dividends is increased from 15% to 17% with immediate effect. This will mostly affect individuals resident in Cyprus earning or deemed to be earning dividends, and groups of companies ultimately held by Cyprus tax resident individuals.

The Special Defence Contribution on interest is increased from 10% to 15% with immediate effect. This measure will again mostly affect individuals resident in Cyprus earning bank interest. Individuals whose total income does not exceed 12,000 euros as well as Provident Funds continue to be taxed at 3%. Special Defence Contribution on interest earned by individuals from government bonds also remains at 3%. 

Companies will generally remain unaffected as their profit from interest should in most cases be subject to income tax at 10% and be exempt from Special Defence Contribution.

Fixed annual duty for companies
All companies (except for dormant and those not owning any assets) are required to pay an annual fixed duty of 350 euros to the Registrar of Companies. For groups of companies the total duty is capped at 20,000 euros. 

The duty for 2011 is due by December 31, 2011 and for subsequent years by June 30. Financial penalties of 10-30% will be levied for late payment within 2-5 months from the due date. The Registrar may strike off the company in case of further delay. The fee for reregistering is 500-750 euros depending on the circumstances.

Property Tax (EUR 24.2 mln)
The bands and rates for immovable property tax for properties in Cyprus have been revised as follows as from the year 2012:
Property value as at January 1, 1980:
Up to 120,000 euros: 0%
120,000 – 170,000: 0.4%
170,000 – 300,000: 0.5%
300,000 – 500,000: 0.6%
500,000 – 800,000: 0.7%
Over 800.000 euros: 0.8%