CYPRUS TAX UPDATE

February, 2011

Amendments to the Cyprus Tax Legislation

The Cyprus Parliament has passed several amendments to the Cyprus tax legislation on 14 December 2010, as part of measures taken by the Government to fight the economic crisis through anti-avoidance and anti-evasion provisions, but also seizing  the opportunity to simplify certain provisions.  A summary of the most important changes are shown below:

Income tax law

Disallowed expenditure

With effect from January 2011, any expenditure which is not supported by invoices and relevant receipts or other supporting documents as required by relevant regulations will not be deductible under income tax.  In practice all auditing firms applied this principle even before this amendment.

Notional interest on receivables from directors or shareholders

Notional interest of 9% was imposed on directors and shareholders on debit balances by directors and shareholders hitherto.  As from 1 January 2011, this provision will not apply where the directors and shareholders are companies.  In this case such related party transactions will be assessed under other provisions relating to arm’s length conditions as per article 33 of the law.

Payments to non Cyprus residents

Tax withheld on payments to non Cyprus residents should be paid to the tax authorities by the end of the month following the month of payment.

Special Defense Contribution Law

a) Amendments of deemed distribution  provisions

• Disposal of assets
  Where the company disposes of an asset to its shareholder who is an individual or relative for consideration which is below the market value, it will be deemed that the company had paid a dividend and special defense contribution is payable.
• Companies under dissolution or liquidation
  Companies under voluntary dissolution or liquidation are required to submit within one month of the relevant resolution, the deemed dividend declaration and pay any applicable special defense contribution on the accounting profits of the specific tax year and the preceding two years.
  Any accounting profits arising during the dissolution or liquidation will not
  be subject to a deemed dividend distribution 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.
• Capital reduction
  Where the company has reduced its capital, any amounts paid to the share-holders in excess of share capital which had actually been paid, will be treated as deemed dividends and taxed accordingly.

b) Payment of rents

Companies, partnerships, the Government or any local authorities that pay rents should withhold special contribution for defense at source at the rate of 3% on 75% of the amount of the rent, to be paid one month following the month of payment of the rent.

The above provisions will apply 6 months after the publication of the relevant amending law in the Government Gazette.

Assessment and Collection of taxes

The following  provisions will apply 6 months after the publication of the relevant amending law in the Government Gazette:

Registration with tax authorities

Companies which are incorporated or registered or become tax resident in Cyprus should register with the tax authorities and obtain their T.I.C. (Tax Identification Code) within 60 days from their incorporation or registration or from the date they become tax residents in Cyprus. Moreover existing companies have an obligation to inform the tax authority within 60 days of any amendments to their records.
Existing companies which are not yet registered must do so by 30 June 2011 without suffering any penalties.

Lifting of banking secrecy

For the purpose of imposition of taxation on Cyprus tax residents banking secrecy may be lifted only after obtaining approval by the Attorney General of the Republic.  In order to obtain such approval, the Commissioner of Income Tax is obliged to supply to the bank and to Attorney General, the following;

• Name of the person under investigation
• Nature and the form of information requested
• The reasons the Commissioner believes that the bank is in possession of the information
• The period to which the information relates
• A statement that the tax authorities have exhausted all available means for collecting information
• The justified tax reasons for which the information is requested

Electronic submission of returns

The tax returns of companies or other persons who prepare audited accounts may be submitted electronically.  In such a case, the deadline for submission is extended by 3 months.

Issuance of assessments - Objections

Where in any tax year,  the taxpayer has not submitted a return within the specified deadline or where the taxpayer does not maintain proper books and records the Commissioner if empowered to issue an assessment for that year.
Any objections against assessments raised by the tax authorities should outline the specific reasons for the objection and should be accompanied by the appropriate documentation and a computation of the amount of tax as per the position of the taxpayer.

Exchange of information

It has been clarified that the tax authorities may ask for information for the purpose of imposing taxation, from other government departments, local authorities and other semi-government organizations, excluding the Central Bank of Cyprus and the Supervisor of the Co-operative Societies of Cyprus.

Field audits

The Commissioner is empowered, during normal working hours to enter any space used by the business and inspect any goods or documents situated therein.  Private residences are excluded from these provisions.

Updating of accounting records

The accounting records of a business should be updated within 4 months from the date of each transaction.

The business should issue invoices within 30 days from the date of the transaction.

All business which maintain stocks, should carry out an annual stock take and the related documentation should be made available to the tax authorities.

Payment of disputed tax in the case of litigation

Where the taxpayer has taken recourse at the Supreme Court against an assessment raised by the tax authorities, the payment of the disputed tax only will be postponed until the Court takes a decision.

Imposition of additional penalties

Administrative penalties between €100 - €200 will be imposed for non-submission of declarations, non provision of evidence or non performance of any compliance obligations within the relevant deadlines that apply.  These penalties apply for Income tax, Special Defense contribution, Capital gains tax and Immovable Property tax.

Where there is a delay in the payment of taxes by the due date, an additional 5% on the unpaid tax will be imposed.

This provision will apply 6 months after the publication in Official Gazette of the relevant legislation.

Changes to Vat legislation

The most important change is the imposition of 5% Vat on foodstuffs and pharmaceutical products (w.e.f. 10/1/2011) which was previously zero-rated.

VASSOS MARATHEFTIS FCCA