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Can Cyprus afford to give up its 'selling point' of a 10% corporate tax rate in the context of closer eurozone fiscal integration?

Given the recent initiatives spearheaded by German Chancellor Angela Merkel for closer fiscal integration among the eurozone countries, many in Cyprus have been concerned that the eventual tax harmonisation that such integration would imply might oblige Cyprus to lose its distinction as the lowest corporate tax jurisdiction within the EU. Given that the government is now savouring the prospect of hydrocarbon revenues as a possible future epicentre of the Cyprus economy, it is perhaps more likely that concessions will ultimately be made in order to harmonise the island's tax regime with that of the rest of the eurozone. Gold asked a number of leading law firms and corporate services providers for their views on whether Cyprus can afford to give up its 10% corporate tax rate in the interests of closer eurozone fiscal integration.

The opinion of Dmitry Popov, the Director of Korpus Prava (Cyprus)

A pact among 26 European Union countries to enforce stricter budget rules will be finalised by March 2012, according to European Council President Herman Van Rompuy. The EU's aim is to have the intergovernmental treaty ratified by all countries, apart from Britain, by June 2012.

One of the core issues expected to be covered by the treaty is corporate tax rate unification within the Eu. Domestic and international investors could lose the current favourable corporate tax rate of 10% which appears to be the most significant advantage of Cyprus enabling its economy to survive these days. Given that the Cyprus economy is represented to a great extent by international business companies (IBC) generating considerable revenues for the state budget, any potential increase of the corporate tax rate will not simply undermine international business sentiment but could dramatically change the foundation of the whole Cyprus economy. We would imposing a lower tax burden (including the corporate tax rate) as a result of such a change. The Director of the Department of Inland Revenue has repeated at recent tax conferences that the current tax rate will remain unchanged and this leaves us with some optimism.

Thus, given the Cyprus government's understanding that any increase in the corporate tax rate is the equivalent of hara-kiri for the Cyprus economy, we would like to hope that Cyprus will retain the current tax rate of 10%, comforting local business and attracting Cyprus registered IBCs.