Cyprus aims to boost shipping competitiveness with new tax exemption

Cyprus’ parliament this week approved legislation exempting, with retroactive effect from January 1, 2010, the remuneration of seafarers who are not permanent residents of the Republic from contributions to the social cohesion fund.

Supporters of the bill, which passed with 23 votes in favour and 19 against, said would remove a distortion in the law and strengthen the island’s shipping competitiveness.

The amendment to the social cohesion fund law concerns foreign seafarers, including those engaged in inland navigation, who are employed outside Cyprus by a Cypriot company and pay social insurance contributions. 

Under the current framework, employers pay a contribution of 2 per cent on the total remuneration of employees, without any upper limit, to the social cohesion fund. The fund is used to support vulnerable groups and social benefits. 

The proposal was tabled by Disy MPs Fotini Tsiridou and Efthimios Diplaros, Diko MP Panikos Leonidou and Dipa MP Alekos Tryfonides. 

According to the explanatory framework discussed in parliament, the amendment seeks to restore an exemption that had existed under the repealed merchant shipping law, but which no longer applied under the current legislation. 

At the same time, it aims to remove different treatment between seafarers in inland navigation employed by Cypriot companies but working exclusively outside the Republic, and seafarers serving on ocean-going vessels, who do not pay contributions to the Social Insurance Fund and for whom no contributions are made to the social cohesion fund. 

Lawmakers backing the bill argued that the change would ease the burden on Cypriot companies employing non-resident seafarers in inland shipping, while also giving them an incentive to keep their headquarters in Cyprus, continue contributing to the social insurance fund and attract other similar businesses to establish a base on the island. 

During discussion of the bill at the House labour committee, it was also argued that the exemption would not reduce state revenue. On the contrary, supporters said it could act as an incentive for higher revenue to the social insurance fund and to the Republic more broadly. 

The rapporteurs said the aim was to correct what they described as a distortion in the existing legal framework by reinstating the exemption for the remuneration of foreign seafarers, including those working in inland navigation, which had been in place until 2010. 

They also argued that these workers cannot benefit from the fund’s social benefits and said the proposed change was necessary, citing a similar arrangement under the general gealthcare system (GeSY) law, under which seafarers who are not permanent residents of the Republic are exempt from contributions. 

The measure, however, drew criticism from opposition MPs during the plenary debate. 

Akel MP Giorgos Koukoumas said the proposal effectively abolishes the obligation of shipping employers to pay the contribution and means that “600,000 to 800,000 euros per year are deducted from the social cohesion fund and we give them to big businessmen”. 

He also questioned whether the move could face constitutional or EU-related objections, and rejected comparisons with the GeSYexemption. 

Independent MP Andreas Themistokleous defended the proposal, arguing that the state had taken this money from companies unlawfully and questioning Akel’s opposition to its return. 

Akel MP Andreas Kafkalias said the labour minister had expressed disagreement with the retroactive element during committee discussions, while the state aid control commissioner had raised the possibility of state aid issues and the need to examine compatibility with EU guidelines. 

He added that reservations had also been raised by the Deputy Ministry of Shipping regarding compliance with the EU acquis on state aid. 

Defending the bill, one of the rapporteurs, Disy MP Fotini Tsiridou, said parliament had recently adopted a similar exemption in relation to the GeSY. She described the proposal as a “common sense” measure aimed at removing discrimination against seafarers, while also supporting the economy. 

Independent MP Alexandra Attalidou questioned why different rules were being introduced for one category of foreign workers, noting that other workers for whom social insurance contributions are paid are not entitled to receive such funds when they return to their home countries. 

Edek MP Elias Myrianthous said the social cohesion fund was a separate issue from other employer contributions linked to redundancy and related rights, adding that the proposal should perhaps have prioritised other funds instead. 

Disy MP Haris Georgiades rejected suggestions that the measure was suspicious or scandalous, saying not every tax incentive should be treated as problematic.  

He added that Cyprus had acted in a similar way on the GeSY and said the country needed to preserve its competitive advantage.