Accounting for Investments Tax Consequences in Cyprus

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Joan Parker
6 years ago
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1 Accounting for Investments Ta Consequences in Cyprus

2 Accounting for Investments and Ta Consequences in Cyprus Accounting for Investments Introduction Investments acquired by Companies as investors should be recognized in their books on the date of the contract. If the investment is acquired in a currency other than the presentation currency then it should be recorded in the books of the Company using the spot rate i.e. the foreign echange rate on the date of the acquisition, which is the contract date. The investment is a nonmonetary Balance Sheet item and therefore is never retranslated at the year-end using the closing rate. The investments are generally acquired by the investors for a long-term basis in order to earn dividends or for capital appreciation and then to divest at a considerable profit or for short-term period, which is the daily trading in securities for short-term profits. It is very important for accounting purposes to understand and determine the intention of the investor over its investments in order to classify the investment properly in the books. Categories of Investments In accordance with the IAS 39 Financial Instruments: Recognition and Measurement, the investments acquired can be classified in the following categories: Financial Assets at Fair Value through Profit or Loss: This category includes the investments, which are held for trading. These investments are recognized initially at cost and they are reported at fair value on the Balance Sheet date based on the market price. The fair value adjustment is written off in the Profit and Loss. Investments held for maturity: This category includes mainly the investments acquired by the Company with the intention to keep them until the maturity date (i.e. like bonds, loan stock, debentures etc.) and claim the interest income on a yearly basis and the cash upon redemption of the bond and/or conversion to shares. It should be noted that these investments should be listed on a stock echange otherwise this category cannot be used. The investments held for maturity are reported using the amortised cost. If there is doubt that the intention is to keep until maturity then the investment cannot be classified in this category. Available for sale investments: This category includes the investments that the investor is planning to keep over a long period of time for capital appreciation for future capital gains and/or dividends interest. The available for sale investments are initially recorded at cost and they are reported at fair value on the Balance Sheet date. The fair value adjustment is recorded in the Reserves of the investor until the year of disposal where in such a case the Fair Value Reserve is realized and is transferred to the Retained Earnings of the Company. Fa: info@cpvcorp.com

3 The investments can be classified also in the following categories: Investment in Subsidiary: - if the investor generally owns 50% plus 1 share of the share capital of the investee. This is defined as controlling the investee. Investment in Associate: - if the investor owns between 20% to 50%. This is defined as the investor has significant influence over the investee in taking the operating and financing policies. Investment in Joint Venture: - if the investee is mutually controlled by investors. This mainly applies in situations where the investee is owned by 50% from two investors. The above categories apply mainly in cases where the investor will hold the shares over a long period of time it is therefore imperative for the accountant to study very well the contract and apply considerable knowledge for the correct accounting and classification of the investment. The accountant must also have a comprehensive knowledge of the IFRSs/IASs and to apply these standards appropriately. Classification in the Statement of Financial Position and Profit & Loss The investments should be classified appropriately in the Statement of Financial Position either as Non-Current Assets or as Current Assets. In general, the investments, which are held over a long period of time, are reported in the Non-Current Assets and those, which are held over a short period of time, are reported in the Current Assets. The illustration below is relevant: Non-Current Assets: Eur Investment in Subsidiary Investment in Associate Investment in Joint Venture Held to maturity investments Available for Sale investments Current Assets: Financial Assets at Fair Value through Profit or Loss Other investments intended to be kept for short period Any transactions costs incurred are generally written off to the Profit and Loss ecept those transaction costs which directly relate to the acquisition of long term investments which can be capitalized. Upon disposal of the investment the resulting gain or loss is written off to the Profit and Loss. Fair value adjustment on the Financial Assets at Fair Value through Profit or Loss is written off to the Profit or Loss. Also, any interest income earned from bonds is written off to the Profit and Loss. If the activity of the Company is that of investments, then the above Profit and Loss items should be reported in the turnover of the Company. If investments do not constitute part of the Company s activities then the above Profit and Loss items should be reported in the other operating profit for the gains and in the other operating epenses for the losses. The interest income should be reported in the finance income. It is therefore very important the accountant to understand the nature of the profit and loss item and to determine the appropriate classification. Fa: info@cpvcorp.com

4 Ta Consequences Holding and trading in securities has a number of ta incentives in Cyprus. The following are relevant: Gains from disposal of titles qualifying as securities are not taable. Titles, as per the Income ta law, include: a. Ordinary shares. b. Preference shares. c. Founder s shares. d. Options attached to on titles. e. Debentures and bonds. f. Swaps on titles, short position on titles and futures/forwards on titles. g. Participation in Companies such as the Russian OOO and LLC, the American LLC (provided that it is subject to taation on their profits), the Romanian SA and SRL and the Bulgarian AD and OOD. h. Repurchase agreements or Repos on titles. i. Units in open-end or closed-end collective investment schemes provided that they are incorporated, registered and operating according to the provisions of a specific and relevant legislation of the Country in which they were founded. In case where it is not clear whether a title falls within the definition of securities, a request for ruling can be submitted to the Commissioner of Income Ta. It should be noted that the list above does not include promissory notes and Bills of Echange as well as comple investments like swaps, futures/forwards, gold etc. Therefore gains from such titles will be subject to corporation ta at the rate of 12,5%. It should be noted that losses from trading in titles qualifying as securities are not treated as ta deductible. In addition, any epenses relate to the acquisition of titles are not treated as ta deductible (i.e. legal fees, interest epense etc.) as well as a portion of the administrative epenses is added back in the ta computation in proportion to the cost of investments in relation to the Total Assets of the Company. The only eemption to this rule is interest epense, which directly relate to the acquisition of wholly owned subsidiary provided that the assets of the subsidiary constitute business assets. Dividends received by a Cyprus Company eempt from corporation ta. They also eempt from Special Defence Contribution (SDC) if one of the two criteria below is satisfied: a. The income of the Company paying the dividends derives by more than 50% from trading or b. The ta rate burden payable by the Company paying the dividends is not significantly lower than the ta rate applicable in Cyprus i.e. not less than 50% of the corporation ta rate of 12,5%. If both criteria are not satisfied then SDC at the rate of 17% will be imposed in Cyprus. In such a case, any withholding ta paid overseas can be deducted from the SDC paid in Cyprus. Fa: info@cpvcorp.com

5 Interest income: The interest income is subject to taation based on whether is classified as active or passive interest. Active interest is the interest, which is directly related or is closely related to the ordinary activities of the Company. The active interest is subject to 12,5% corporation ta and eempts from Special Defence Contribution. Passive interest is the interest, which is not related or closely related to the ordinary activities of the Company. The passive interest eempts from corporation ta but it is subject separately to 30% special defence contribution. It is therefore very important the auditors and ta consultants to classify correctly the interest in the proper category in order the Company to pay the correct ta rate. It is ta advantageous the interest to be treated as active since the ta payable is much less than the passive interest. The active interest should be classified in the Financial Statements within the Turnover of the Company where the passive interest is generally classified within the finance income. Fair value gains on titles are not taable as well as fair value losses are not ta deductible. The above Article sets out the fundamentals for correct treatment of the investments acquired by a Cyprus Company for both accounting and ta levels. The accountants, auditors and tapayers should be aware of these issues and determine the correct treatment. For any further clarifications on this Article please do not hesitate to contact our office. Olesya Chrysanthou Managing Director Fa: info@cpvcorp.com

The Portfolio Service Personal Investment Plan

The Portfolio Service Personal Investment Plan The Portfolio Service Ta guide 2016 The Responsible Entity of The Portfolio Service Personal Investment Plan is Questor Financial Services Limited ABN 33