Last updated on December 6th, 2011 at 08:44 pm
On 14 December 2010, the Cyprus Parliament, in an effort to combat tax evasion and tax avoidance has passed a number of changes in the tax legislation.
We hereby summarise the main changes in the Cyprus tax legislation in the following sections:
A. Income Tax Law
B. Special Defence Contribution Law
C. The Assessment and Collection of Taxes Law
A. Income Tax Law
– Deductibility of expenses
For 2011 and subsequent tax years, expenses must be properly supported by invoices, receipts or other documentation set out in the Regulations issued under the Assessment and Collection of Taxes Law in order to be deductible.
– Shareholders’ debit balances
In the case where a company, controlled by not more than five persons, provides a loan or any other financial facility to a director or shareholder (or to a close relative of a director or shareholder) it may be subject to Special Defence Contribution (“SDC”) at 10 per cent on the deemed interest income on the loan (calculated at 9 per cent per annum).
As from 1 January 2011:
(a) the above provisions continue to apply in the case where loans or other financial facilities are provided to individuals whereas
(b) loans or other financial facilities provided to corporate shareholders will be dealt with on an arm’s length basis and assessed at a commercial interest rate (i.e. article 33 relating to arm’s length transaction between related parties will apply)
– Penalty for late payment of withholding tax
Payments to non-residents of Cyprus in respect of royalties, film rights, and other Cyprus’ sourced income are subject to withholding tax at 10 per cent. The payer is required to deduct the tax at source and pay it to the Inland Revenue not later than the end of the month following the month in which the payment was made.
Following the recent changes, a penalty of 5 per cent of the tax due will be payable in the event of late payment.
– Enforcement date
All of the above amendments are effective as of 1 January 2011, except for the additional penalty on late payment of withholding tax which is effective as from 1 July 2011.
B. Special Defence Contribution Law
– Gifts of assets to shareholders
As from 1 January 2011, if a company transfers an asset to an individual shareholder or close relative without any consideration, or at a consideration lower than the fair market value of the asset, the difference between the fair market value and the amount of consideration will be treated as a dividend distributed to the individual shareholder and taxed accordingly. This will not apply in the event that the company initially acquired the asset through a donation from the shareholder or close relative.
– Deemed dividend distributions
Calculation of deemed dividend:
In computing the accounting profit for deemed dividend distribution purposes, taxpayers are now entitled to deduct:
(a) corporate income tax
(b) SDC tax
(c) capital gains tax paid or payable
(d) any amount of foreign tax that is not credited against corporate income tax or SDC
In addition, any actual dividend that was distributed during the year to which the profits relate is allowed to be deducted in order to derive the accounting profit for deemed dividend distributions purposes.
Deemed dividend on voluntary liquidation or dissolution:
As from 1 January 2011, companies under voluntary liquidation or dissolution must submit the relevant return and pay the tax due in respect of the deemed dividend on the profit of the final year and the preceding two years, within a month from the date of the resolution to liquidate the company.
Moreover the deemed distribution provisions will not apply if the assets of the company are not sufficient for the repayment of its creditors and no amount is available to be distributed to the shareholders.
When assets are being distributed upon the dissolution or liquidation of a company, which have a fair market value exceeding the cost of their acquisition by the company, then it will be deemed that a dividend has been distributed to the shareholders, equal to the difference on the date of distribution between the market value of the asset and its cost of acquisition (after the deduction of any Capitals Gains Tax).
Deemed dividend on reduction of capital:
Until now the amount deemed as distributed to shareholders in the event of a reduction of capital was limited to the undistributed chargeable income of any year before any deduction in respect of losses brought forward from previous years. This ceiling has now been abolished.
– SDC on rents
Deduction at source:
As from 1 January 2011, companies, partnerships, the Government and local authorities are required to withhold SDC at 3 per cent on 75 per cent of the gross rent and remit it to the Inland Revenue with a statement containing full particulars of the circumstances as a result of which the deduction has been made and showing how the deduction has been calculated.
Payment dates:
SDC on rents from overseas will now be payable in two instalments before 30 June and 31 December of the year in which they are received.
– Main penalties *
There is a €100 penalty for failure to submit any return or meet any deadline prescribed by law. This is doubled to €200 if the taxpayer does not comply with the requirements of the law after being given written notice from the Director of Income Tax setting a deadline for compliance (which should be not less than 60 days). In addition, late payment of SDC tax is subject to an additional penalty of 5 per cent on the amount of tax due.
– Enforcement date
All of the above amendments are effective as of 1 July 2011, except for the gifts of assets to shareholders which is effective as from 1 January 2011.
(* The Director of the Inland Revenue announced on 30 June 2011, that an extension until 30 September 2011 is given before the penalties become effective)
C. The Assessment and Collection of Taxes Law
– Obligation to register for a Taxpayer Identification Number
Companies are now required to submit the relevant return and obtain a Taxpayer Identification Number within 60 days after the date of incorporation or, in the case of companies incorporated overseas, within 60 days after becoming tax resident in Cyprus.
Companies are also required to notify the tax authorities of any changes that affect their tax status within 60 days. Existing companies which have not yet obtained a Taxpayer Identification Number are required to do so prior to 30 June 2011.
– Bank confidentiality
After obtaining the written consent of the Attorney General and notifying the person under investigation in writing, the Director of Income Tax may require any bank to provide any information in its possession in respect of a period of up to 7 years preceding the date of his request concerning any existing or closed bank account of a person under investigation by the tax authorities.
In addition, the Director of Income Tax is required to inform the Attorney General of the purpose and the reasons for which the information is sought. The Director must notify the person under investigation of the Attorney General’s decision immediately. If the request is approved by the Attorney General the bank is required to provide the information within 60 days.
– Electronic filing
Any person required under the Income Tax Law to submit a tax return by 31 December of the year following the tax year concerned (i.e. companies and traders with an annual turnover in excess of €70,000) may file their tax return electronically or by any other means the Director of Income Tax may stipulate from time to time. If the return is filed electronically an additional 3 months will be allowed for filing.
– Bookkeeping requirements
Accounting records must be updated no later than the end of the fourth month following the month in which a transaction takes place.
– Invoices
Invoices must be issued within 30 days of the sale transaction unless the Inland Revenue Department agrees a longer period. Businesses holding inventories must conduct a verification of inventory and evaluation at each financial year-end and make it available to the Director of Income Tax on request.
– Main penalties *
There is a €100 penalty for failure to submit any return or meet any deadline prescribed by law. This is doubled to €200 if the taxpayer does not comply with the requirements of the law after being given written notice from the Director of Income Tax setting a deadline for compliance (which should be not less than 60 days). In addition, late payment of tax is subject to an additional penalty of 5 per cent on the amount of tax due.
– Enforcement date
All of the above amendments will come into force as of 1 July 2011.
(* The Director of the Inland Revenue announced on 30 June 2011, that an extension until 30 September 2011 is given before the penalties become effective)