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Summaries of EU Legislation

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Commission Opinion [COM(1993) 313 final - Not published in the Official Journal]Commission Report [COM(1998) 710 final - Not published in the Official Journal]Commission Report [COM(2000) 702 final - Not published in the Official Journal]Commission Report [COM(2001) 700 final - SEC (2001) 1745 - Not published in the Official Journal]Commission Report [COM(2002) 700 final - SEC(2002) 1401 - Not published in the Official Journal]Commission Report [COM(2003) 675 final - SEC(2003) 1202 - Not published in the Official Journal]Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]


In its Opinion of July 1993, the Commission stressed that the VAT rate applied in Cyprus conformed to that of the Community, but that problems remained in the field of excise duties.

The Report of November 1998 was more critical of the VAT system, which still presented a number of major shortcomings, while also emphasising the progress made by Cyprus in this area. Significant problems remained in the field of excise duties.

The November 2000 Report considered that Cyprus had made progress in the field of indirect taxation even though the law on VAT involving substantial alignment with the acquis was not due to enter into force until 2001. The excise duties on alcohol and petrol produced in Cyprus were increased and duties were introduced for diesel, kerosene and imported alcohol. In June 2000, the specific duty on cigarettes rose closer to the minimum rate applied in the Community (57%). With regard to direct taxation, although there were no specific advances, Cyprus promised to meet the obligations resulting from the code of conduct on corporate taxation. As far as administrative capacity was concerned, a section had been created within the customs authority in order to implement the acquis effectively.

The 2001 Report states that Cyprus made only limited progress. In the field of excise duties, small consignments of a non-commercial nature from third countries benefited from import tax relief. However, there was no progress in the area of direct taxation nor in the area of administrative cooperation and mutual assistance. As far as administrative capacity was concerned, the Commission Report noted that the computerisation of the departments was continuing and the number of staff responsible for tax inspections had been increased.

The October 2002 Report stresses the substantial progress made by Cyprus in aligning its tax legislation with the acquis. This progress has mainly been due to the implementation, in July 2002, of a complete reform of direct and indirect taxation.

The 2003 Report finds that Cyprus is fulfilling the commitments it has made and meeting requirements under the accession negotiations as regards taxation. It should therefore be in a position to implement the acquis upon accession.

During the negotiations Cyprus was granted a transitional period (up to 31 December 2007) to apply the reduced rate of VAT on restaurant services and maintain the zero rate on foodstuffs for human consumption and on pharmaceuticals. Cyprus also obtained a VAT exemption on the supply of building land (until 31 December 2007) and was granted the possibility of applying a cash accounting scheme and a simplified procedure for the value of supplies between connected persons (until 1 year after accession). Cyprus obtained derogations concerning the application of a VAT exemption and registration threshold of EUR 15 600 for small and medium-sized enterprises, and VAT exemption for the supply of international passenger transport. Cyprus also obtained transitional periods (until 1 year after accession) for the exemption from excise duties on mineral oils used for the production of cement and continued application of reduced excise duty rates on all types of fuel used for local passenger transport.

The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.


The Community acquis in the area of direct taxation mainly concerns certain aspects of corporation taxes and capital duty. The four Treaty freedoms have a wider impact on national tax systems.

The legal framework for indirect taxation consists primarily of harmonised legislation in the field of value added tax (VAT) and excise duties. This includes the application of a non-cumulative general tax on consumption which is levied at all stages in the production and distribution of goods and services and requires equal tax treatment of all domestic and import transactions.

In the field of excise duties, the acquis comprises of harmonised tax structures and minimum rates of duty together with common rules on the holding and movement of excisable goods (in particular, the use of tax warehouses).


In the area of direct taxation, the two company tax Directives and the arbitration convention are based on reciprocal arrangements. It is therefore not necessary to adopt these measures prior to accession. In November 2000, the special system applied to de-localised companies in Cyprus was to be re-examined. Legislation aimed at simplifying the tax system and harmonising with the Community acquis (laws on income tax, capital gains tax, stamp duty and the collection of taxes in particular) was adopted in July 2002. In 2003 Cyprus still needs to transpose the Directives on indirect taxes on the raising of capital, interest and royalties and on taxation of savings income.

In the area of indirect taxation, the VAT system was introduced in July 1992. This system, based on the Sixth VAT Directive, does not comply in full with the acquis. Significant differences remain in areas such as exempt transactions, the definition of the place of supply and the provisions governing the right to deduct. The main problems concerning the acquis relate to the application of the rates. The broad use of zero ratings is still cause for concern. Moreover, there is a very wide gap with regard to the standard rate of 15% applied in the Community. In terms of tax reform, the VAT rate was increased from 10% to 13% in July 2002 and will be increased to 15% from January 2003. The new VAT law of the year 2000 and its implementing regulations entered into force in February 2002. This law includes the abolition of the VAT system for international companies and a system for refunding VAT to foreign nationals not established in Cyprus. At the end of 2003 Cyprus is almost fully in line with the acquis on VAT. Alignment in terms of the elimination of zero rates in some areas where no transitional arrangements were granted during negotiations still needs to be completed. Cyprus will also have to introduce VAT on immovable property and revise its provisions for VAT adjustments for capital goods.

However, it is in the area of excise duties that Cyprus is experiencing problems. It currently charges duties on a much wider range of products than the Community. This reliance on revenue from non-Community taxes is likely to cause problems after accession. Additionally, Cyprus does not currently charge excise duty on mineral oils other than petrol and operates a two-tier system of cigarette taxation, which is not compatible with Community law. The excise duty on spirits is lower than the Community minimum and imports are currently subject to very high rates of customs duty, which must be removed. Significant efforts will therefore be required in order to align the country's excise legislation to that of the European Community. Progress has therefore been made, but Cypriot legislation still does not comply with the acquis on key points. For example, imported goods are taxed more heavily than similar products manufactured within the country. Moreover, the customs and excise duty authorities have yet to introduce the tax warehousing system. In December 2001, the excise on imported beer was increased, as was that on cigarettes in May 2002. At the end of 2003 further effort is still needed to raise the rates of duty on certain categories of product and complete the duty suspension arrangements, particularly for movements of goods within the Community. Furthermore, Cyprus needs to address certain discrepancies with regard to the tax structure for sparkling wine and cigarettes and to complete the elimination of existing import duties and their replacement by excise duties.

As regards administrative cooperation and mutual assistance, Cyprus has yet to harmonise its legislation with the VAT information exchange system (VIES). At the end of 2003 the Central Liaison Office (CLO) is operational and the Excise Liaison Office (ELO) is in the process of being established. Cyprus' level of information technology is progressing satisfactorily and no problems are expected in achieving the required level upon the country's accession

Finally, in terms of administrative capacity, the project aimed at improving the computerised VAT system so that it complies with the new VAT law has been successfully completed. In the area of direct taxation, the administration of taxes has been reinforced thanks to the recruitment, in 2001, of 40 additional agents for the income tax department. At the end of 2003 administrative capacity, in particular the necessary human resources for effectively managing, implementing and applying the acquis, are in place. Although the necessary administrative structures for excise duties have been introduced, work on devising systems audit methods still has to be completed. As regards direct taxation, an official risk assessment system is still needed.

Last updated: 08.01.2004