Amendments to Cyprus Tax Legislation

INTRODUCTION

The Cypriot Parliament voted on 14 December 2010 certain amendments to the following Cyprus tax law:

• Income Tax Law
• Special Defense Contribution Law
• Tax Assessment and Collection Law
• Capital Gains Tax Law
• Immovable Property Tax Law
• Value Added Tax Law

This will come into force 6 months after the publication of the law in the State Gazette of the Republic.

INCOME TAX LAW

(a) Disallowed expenses:

Any expenses not supported by appropriate invoices or receipts or other supporting information will not be treated as a deductible expense for income tax purposes.

(b) Withholding tax on payments to non-Cyprus residents:

Tax withheld on payments to non-Cypriot residents must be paid to the Income Tax authorities at the end of the following month. If the tax is not paid within the time limit, an additional 5% tax will be charged on the withholding tax in addition to the interest charged (today at 5%). Such payments must be made in connection with the following:

1. Copyright for use in Cyprus is 10%;
2. 5% rights to cinematographic films;
3. Income of physical persons in connection with professional services, artist and athlete fees of 10%.

(c) Notional interest on receivables from shareholders or directors:

Notional interest, according to Article 39 of the Income Tax Law, will only be charged on the balance of debits or loans to shareholders or directors of 9%. If the shareholder is a company, the market interest rate will apply according to the related party transactions.

SPECIAL DEFENSE CONTRIBUTION LAW

(a) Dividend distribution considered:

In the event that dividends are not paid by a company within two years from the end of the financial year, the dividend distribution provisions are deemed applicable whereby 70% of the profits, after tax, are deemed to be distributed to the shareholders of the company as dividends and special defense contributions are paid on 15% rate.

In the event that a company releases an asset to its shareholders (legal entity that is not a legal entity) at a price below the market price of the assets released, it is considered that the company has distributed dividends to its shareholders in the amount of the difference between the market value of the assets and the amount of compensation. In such cases, special defense contributions are also paid at a 15% rate.

It should be noted that the statutory provisions for the distribution of deemed dividends will not apply where the shareholder is not a tax resident in Cyprus.

(b) Definition of “Tax”:

The definition of “Taxation” has been amended for the purpose of calculating the profits of companies subject to special defense fees, among others as follows:

• Special defense contribution
• Capital gains tax
• Any tax paid overseas that has not been credited against income tax and/or special defense tax payable for the year concerned.

(c) Capital Reduction:

In the event that the share capital of the company is reduced, any amount paid to the shareholders of the company which exceeds the amount of share capital actually paid up by the shareholders will be considered as a taxable dividend of 15%.

(d) Voluntary Liquidation:

In the case of a company under voluntary liquidation, a statement of dividends deemed necessary to be submitted (within one month from the date of the liquidation decision) to the relevant authorities in relation to the profit of the specified year and the two previous years.

TAX ASSESSMENT AND COLLECTION LAW

(a) Registration at the Income Tax office:

The company has an obligation to register with the Inland Revenue Department and obtain a tax identification code within 60 days from the date of its establishment with the Registrar of Companies in Cyprus.

(b) Banking Secrets

The Income Tax Commissioner has the right to request the bank to provide information held by the bank for a period of seven years from the date of the request. This power of attorney can only be used as long as there is written approval from the Attorney General of the Republic. Accordingly, special requirements must be met by the Commissioner before receiving such approval.

(c) Submission of Tax Returns, Assessments and Objections:

1. Provisions have been introduced for filing electronic tax returns where these have been prepared by professional auditors. The submission deadline in the case of returns submitted electronically is extended by three months.
2. In the event that a person (individual or company) does not submit an SPT within the time limit specified in the Act and if the Commissioner decides that the person has an obligation to pay taxes, the Commissioner may continue to issue a tax assessment letter. for that person based on available information.
3. The objection filed against the tax assessment mentioned above must state the reasons that the assessment is incorrect, the reasons according to which there is no obligation to pay the tax and provide supporting documents. The objection must be made within one month of the assessment.
4. The Commissioner has the right to request information from civil servants to provide details in relation to any person for tax purposes.
5. Companies that have the obligation to maintain books and records for each tax year are required to update them within four months from the date of the transaction. Furthermore, companies are required to issue invoices within 30 days from the transaction date unless written approval has been obtained by the Commissioner.

CAPITAL PROFIT TAX & IMMOVABLE GOODS TAX

An administrative fine of EUR 100 or EUR 200 will be imposed for late submission of the declaration or supporting documentation requested by the Income Tax Commissioner. In the case of late payment of capital gains or immovable property tax payable, an additional 5% tax will be imposed on the unpaid tax.

VALUE-ADDED TAX

The zero tax rate applicable to foodstuffs, pharmaceutical products and vaccines has been increased to 5%. The amendments are effective from 10-01-2011.

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