read moreInformation for Cyprus Expats on the recent tax changes made by the Cy
Information for Cyprus Expats on the recent tax changes made by the Cyprus government
On December 14 2010, the Cyprus Parliament introduced several amendments to Cypriot Tax Legislation, which were published in the Official Gazette on December 31 2010. Accordingly, imposition of penalties introduced with these changes, were due to take effect on June 30 2011. However, recently this date has been delayed for three months until September 30 2011 with the announcement made by the Inland Revenue Department.
Changes were introduced are as follow:
Income Tax Law
Invoices and receipts for deductible expenditure
In effect from 1 January 2011 all expenditure needs to be supported by invoices or relevant receipts, otherwise these will not be treated as deductible expenditure for income tax purposes.
Payments to non-Cypriot Residents
Taxes withheld from payments to non-Cypriot residents, for income on intellectual property rights for use in Cyprus or from royalties or fees of professional artists and athletes, not remitted by the end of the month following the month of the withholding will be subject to an additional penalty of 5% of the tax due with effect date 1 July 2011
Notional Interest
The “burden” of notional interest (9%) on receivables from shareholders as of 1 January 2011 will only apply to individuals and not companies. For legal entities, Article 33 of Income Tax Law applies and the application of the arm’s length principals for the transactions between related parties. In this case the interest should be calculated at the market rate.
Special Defense Contribution Law (from July 1, 2011)
Deemed Dividend Distribution
If a Company disposes an asset to either its shareholder (individual) or relative up to the second degree (including spouse) at a consideration price below the market value of the asset, then the difference between the market value and the consideration price will be deemed as distributed dividend to its shareholder. This will not apply if the asset was initially
acquired by way of gift.
The accounting profit should be adjusted for deemed distribution of dividend after deducting:
• Corporation Tax
• Special Defence Contribution (SDC)
• Capital Gains Tax (CCT)
• Any foreign taxes (paid or provided for)
• Transfer to reserves specifically required under any law and before taking into account any:
• Amount which emanates or is the result of revaluation of assets
• Payments between companies for the purpose of the group tax relief
• Additional depreciation due to revaluations of assets
• Losses brought forward
Voluntary dissolution or liquidation
Companies which are under voluntary dissolution or liquidation are required to submit the relevant resolution within 1 month from the date of its approval, declare any deemed dividend and pay any SDC applicable to the accounting profits of the specific tax year and the two preceding tax years. Realized deemed dividend distribution should not exceed the assets of the company.
The above will not apply if the assets of the Company are not sufficient enough to repay its creditors and no residual amount is available for shareholders distribution.
Capital Reduction
Any capital reduction in excess of the share capital which was initially paid by the shareholders will be treated as deemed dividend and taxed accordingly.
Special Defense Contribution on Rents
Companies, Partnerships, the Republic or any local authorities that pay rent are now required to withhold the special defence contribution on the rent paid (3% on 75% of the rent)
Assessment and Collection of Taxes Law (from July 1, 2011)
Obligation of Companies to register with the Cypriot Tax Authorities
A newly incorporated company is now obliged to send notice of registration to the Tax Authorities immediately after its incorporation (or within 60 days following its incorporation). For companies incorporated outside the Republic, the notice needs to be sent after the company is incorporated or immediately after it becomes a Cyprus Resident (or within 60 days following the day the Company became tax resident of Cyprus)
Requests for information from Banks and other government departments
The Commissioner of Inland Revenue is granted powers to request information from Banks. However the prior consent of the Attorney General will need to be obtained subject to certain conditions. These conditions are essentially there to ensure that no fishing expeditions take place.
In addition, the Commissioner is empowered to request information for specific tax purposes from almost any civil servant with the exclusion of civil servants working with the Central Bank or the Department regulating cooperative companies.
Inspections by the Commissioner
Tax inspections by the Commissioner at offices or any other facilities whereby a business is conducted are introduced. The visit needs to be within normal working hours and it can only take place after sending a reasonable notice to the taxpayer.
Tax Returns and Tax Assessments
Electronic filing system of tax returns is introduced. To encourage such practice an additional 3 month extension is given when filling electronically.
Imposition of administrative penalties
The following administrative penalties are introduced:
• Delay in the submission of tax returns in accordance with the tax deadlines will be subject to €100 penalty.
• Failure or delay in submission of returns to the Inland Revenue Department in accordance with the deadlines and failure to comply within the specified period given with the written notice for compliance issued afterwards by the Commissioner of the Income Tax will be subject to €200 penalty
• Failure or delay in submission of information requested by the Commissioner of the Inland Revenue Department within the specified period will be subject to €200 penalty even though no tax deadline exist
• Third party failing to comply with the tax deadlines set by the Commissioner of Income Tax in respect of the provision of information will be charged with €100 penalty
• Failure to pay the due or withheld taxes in accordance with the tax deadlines as set by the Inland Revenue Department will result to additional tax equal to the 5% of the tax due
The above administrative penalties will be applicable from 30 September 2011.
Intra Group Loans (back-to back loans) through Cyprus – Revised rules
After years of negotiations between the Inland Revenue Department and the Institute of Certified Public Accountants of Cyprus, the Commissioner of Income Tax has clarified in writing the conditions that needs to be satisfied in back to back financing arrangements involving a Cyprus entity as intermediary company.
The profit margins are set as follows:
Loan amount Profit Margin
EURO %
Up to 50 millions 0.35
From 50 millions up to 200 millions 0.25
More than 200 millions 0.125
Interest free loan agreements would be subject to a deemed interest margin of 0.35% and shall apply irrespective of the loan amount.
The above margins are applicable for the tax years 2008 onwards. For the tax years 2003-2007 the acceptable margin is 0.3% irrespective of the amount and whether it is interest bearing.
The above margins are subject to the following conditions:
1. The intermediary company should be a Cyprus resident company.
2. The write off of the loans, either the loans received by the Cyprus company or the loans granted by the Cyprus company should not create any tax liability or tax benefit for the Cyprus company. In addition in the case that the Cyprus company writes off a loan granted then any interest expense relating to the loan received is not an allowable expense for tax purposes.
3. The time elapsed from the date that the Company receives a loan and the date it grants the loan should not exceed 6 months.
4. For the purpose of calculation of the profit margins, any expenses (except exchange difference) relating to acquiring the loans and granting the loans should be deducted.
5. The above rules are also applicable in the case the Cyprus company receives a loan from a Bank and it grants the loan to a related Company on which the bank holds collaterals from other related companies.
6. These rules will also apply and in the situation that instead of a loan other financial products are used. In this case a prior approval of the Tax Authorities is required.
Cyprus Parliament Approves austerity package
At the beginning of August this year, the rating agency Fitch has downgraded the Cyprus’ long-term local and foreign currency rating by two points bringing it to “BBB” which is considered to be nearly a junk level. Along with previous downgrades by Standard & Poor and Moody’s, the new government of Cyprus was pushed to take immediate action.
As a result, on August 10 2011, the Government announced an austerity package that is intended to be implemented in 2012. The austerity package includes measures such as;
• Income tax to be increased from 30% to 35% on the income of high earners that is 60,000.00 Euro and over.
• The Special Contribution to Defence Tax on interest to increase from 10% to 15%.
• The Special Contribution to Defence Tax on dividends to increase from 15% to 17%.
• Tax on interest on banks deposits to be increased from 10% to 15%.
• Immovable property tax to be increased and the tax-free amount on immovable property to be decreased.
• The civil service newcomers’ pay scale to be lowered. Furthermore newcomer civil servants to be included in the social insurance fund on same conditions with that of private sector workers. 0,75% that is contribution to widows and orphan funds paid by state workers to be increased to 2.0%.
• The current and retired civil servants to pay, temporarily for three years, social insurance contribution at 3.0% to the social insurance fund which to this date social insurance contributions were not applicable to civil servants despite that they receive pension fund. This measure can be extended after three years upon agreement with unions.
• VAT to rise from 15% to 17%.
Proposed measures, in total, are expected to bring approximately 750 million Euro to the state budget.
The opposition parties, which hold the majority of votes in the Parliament, have raised questions relating to the effectiveness of the proposed austerity measures. Nevertheless on August 26 2011, which was last Friday, the Parliament approved the austerity package but a vote to raise VAT was postponed for further discussion in September.
On December 14 2010, the Cyprus Parliament introduced several amendments to Cypriot Tax Legislation, which were published in the Official Gazette on December 31 2010. Accordingly, imposition of penalties introduced with these changes, were due to take effect on June 30 2011. However, recently this date has been delayed for three months until September 30 2011 with the announcement made by the Inland Revenue Department.
Changes were introduced are as follow:
Income Tax Law
Invoices and receipts for deductible expenditure
In effect from 1 January 2011 all expenditure needs to be supported by invoices or relevant receipts, otherwise these will not be treated as deductible expenditure for income tax purposes.
Payments to non-Cypriot Residents
Taxes withheld from payments to non-Cypriot residents, for income on intellectual property rights for use in Cyprus or from royalties or fees of professional artists and athletes, not remitted by the end of the month following the month of the withholding will be subject to an additional penalty of 5% of the tax due with effect date 1 July 2011
Notional Interest
The “burden” of notional interest (9%) on receivables from shareholders as of 1 January 2011 will only apply to individuals and not companies. For legal entities, Article 33 of Income Tax Law applies and the application of the arm’s length principals for the transactions between related parties. In this case the interest should be calculated at the market rate.
Special Defense Contribution Law (from July 1, 2011)
Deemed Dividend Distribution
If a Company disposes an asset to either its shareholder (individual) or relative up to the second degree (including spouse) at a consideration price below the market value of the asset, then the difference between the market value and the consideration price will be deemed as distributed dividend to its shareholder. This will not apply if the asset was initially
acquired by way of gift.
The accounting profit should be adjusted for deemed distribution of dividend after deducting:
• Corporation Tax
• Special Defence Contribution (SDC)
• Capital Gains Tax (CCT)
• Any foreign taxes (paid or provided for)
• Transfer to reserves specifically required under any law and before taking into account any:
• Amount which emanates or is the result of revaluation of assets
• Payments between companies for the purpose of the group tax relief
• Additional depreciation due to revaluations of assets
• Losses brought forward
Voluntary dissolution or liquidation
Companies which are under voluntary dissolution or liquidation are required to submit the relevant resolution within 1 month from the date of its approval, declare any deemed dividend and pay any SDC applicable to the accounting profits of the specific tax year and the two preceding tax years. Realized deemed dividend distribution should not exceed the assets of the company.
The above will not apply if the assets of the Company are not sufficient enough to repay its creditors and no residual amount is available for shareholders distribution.
Capital Reduction
Any capital reduction in excess of the share capital which was initially paid by the shareholders will be treated as deemed dividend and taxed accordingly.
Special Defense Contribution on Rents
Companies, Partnerships, the Republic or any local authorities that pay rent are now required to withhold the special defence contribution on the rent paid (3% on 75% of the rent)
Assessment and Collection of Taxes Law (from July 1, 2011)
Obligation of Companies to register with the Cypriot Tax Authorities
A newly incorporated company is now obliged to send notice of registration to the Tax Authorities immediately after its incorporation (or within 60 days following its incorporation). For companies incorporated outside the Republic, the notice needs to be sent after the company is incorporated or immediately after it becomes a Cyprus Resident (or within 60 days following the day the Company became tax resident of Cyprus)
Requests for information from Banks and other government departments
The Commissioner of Inland Revenue is granted powers to request information from Banks. However the prior consent of the Attorney General will need to be obtained subject to certain conditions. These conditions are essentially there to ensure that no fishing expeditions take place.
In addition, the Commissioner is empowered to request information for specific tax purposes from almost any civil servant with the exclusion of civil servants working with the Central Bank or the Department regulating cooperative companies.
Inspections by the Commissioner
Tax inspections by the Commissioner at offices or any other facilities whereby a business is conducted are introduced. The visit needs to be within normal working hours and it can only take place after sending a reasonable notice to the taxpayer.
Tax Returns and Tax Assessments
Electronic filing system of tax returns is introduced. To encourage such practice an additional 3 month extension is given when filling electronically.
Imposition of administrative penalties
The following administrative penalties are introduced:
• Delay in the submission of tax returns in accordance with the tax deadlines will be subject to €100 penalty.
• Failure or delay in submission of returns to the Inland Revenue Department in accordance with the deadlines and failure to comply within the specified period given with the written notice for compliance issued afterwards by the Commissioner of the Income Tax will be subject to €200 penalty
• Failure or delay in submission of information requested by the Commissioner of the Inland Revenue Department within the specified period will be subject to €200 penalty even though no tax deadline exist
• Third party failing to comply with the tax deadlines set by the Commissioner of Income Tax in respect of the provision of information will be charged with €100 penalty
• Failure to pay the due or withheld taxes in accordance with the tax deadlines as set by the Inland Revenue Department will result to additional tax equal to the 5% of the tax due
The above administrative penalties will be applicable from 30 September 2011.
Intra Group Loans (back-to back loans) through Cyprus – Revised rules
After years of negotiations between the Inland Revenue Department and the Institute of Certified Public Accountants of Cyprus, the Commissioner of Income Tax has clarified in writing the conditions that needs to be satisfied in back to back financing arrangements involving a Cyprus entity as intermediary company.
The profit margins are set as follows:
Loan amount Profit Margin
EURO %
Up to 50 millions 0.35
From 50 millions up to 200 millions 0.25
More than 200 millions 0.125
Interest free loan agreements would be subject to a deemed interest margin of 0.35% and shall apply irrespective of the loan amount.
The above margins are applicable for the tax years 2008 onwards. For the tax years 2003-2007 the acceptable margin is 0.3% irrespective of the amount and whether it is interest bearing.
The above margins are subject to the following conditions:
1. The intermediary company should be a Cyprus resident company.
2. The write off of the loans, either the loans received by the Cyprus company or the loans granted by the Cyprus company should not create any tax liability or tax benefit for the Cyprus company. In addition in the case that the Cyprus company writes off a loan granted then any interest expense relating to the loan received is not an allowable expense for tax purposes.
3. The time elapsed from the date that the Company receives a loan and the date it grants the loan should not exceed 6 months.
4. For the purpose of calculation of the profit margins, any expenses (except exchange difference) relating to acquiring the loans and granting the loans should be deducted.
5. The above rules are also applicable in the case the Cyprus company receives a loan from a Bank and it grants the loan to a related Company on which the bank holds collaterals from other related companies.
6. These rules will also apply and in the situation that instead of a loan other financial products are used. In this case a prior approval of the Tax Authorities is required.
Cyprus Parliament Approves austerity package
At the beginning of August this year, the rating agency Fitch has downgraded the Cyprus’ long-term local and foreign currency rating by two points bringing it to “BBB” which is considered to be nearly a junk level. Along with previous downgrades by Standard & Poor and Moody’s, the new government of Cyprus was pushed to take immediate action.
As a result, on August 10 2011, the Government announced an austerity package that is intended to be implemented in 2012. The austerity package includes measures such as;
• Income tax to be increased from 30% to 35% on the income of high earners that is 60,000.00 Euro and over.
• The Special Contribution to Defence Tax on interest to increase from 10% to 15%.
• The Special Contribution to Defence Tax on dividends to increase from 15% to 17%.
• Tax on interest on banks deposits to be increased from 10% to 15%.
• Immovable property tax to be increased and the tax-free amount on immovable property to be decreased.
• The civil service newcomers’ pay scale to be lowered. Furthermore newcomer civil servants to be included in the social insurance fund on same conditions with that of private sector workers. 0,75% that is contribution to widows and orphan funds paid by state workers to be increased to 2.0%.
• The current and retired civil servants to pay, temporarily for three years, social insurance contribution at 3.0% to the social insurance fund which to this date social insurance contributions were not applicable to civil servants despite that they receive pension fund. This measure can be extended after three years upon agreement with unions.
• VAT to rise from 15% to 17%.
Proposed measures, in total, are expected to bring approximately 750 million Euro to the state budget.
The opposition parties, which hold the majority of votes in the Parliament, have raised questions relating to the effectiveness of the proposed austerity measures. Nevertheless on August 26 2011, which was last Friday, the Parliament approved the austerity package but a vote to raise VAT was postponed for further discussion in September.
Source: www.cyprusexpat.co.uk