Professional Level Options Module, Paper P6 (CYP) 1 Lambros Grain Trading Limited. (a)

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1 Answers

2 Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) December 2014 Answers 1 Lambros Grain Trading Limited (a) (b) Value added tax (VAT) treatment of purchases The grain purchased from France constitutes an intra-community acquisition of goods. The French supplier will raise an invoice to Lambros Grain Trading Limited (LGT), which will include all the costs of purchasing and transporting the grain. The invoice will be zero rated, following validation of LGT s VAT registration number in Cyprus. LGT will apply the reverse charge to the value of the invoice received and, given that the goods are purchased for the purposes of undertaking a taxable supply: the resale of the grain, LGT will be able to deduct the input VAT on applying the reverse charge. The grain purchased from Russia constitutes an import because Russia is outside the EU. Given that the importation is LGT s responsibility, it will pay VAT to the Customs Office on importation and claim that as input VAT through its next VAT declaration. The value of the grain for VAT purposes will include the cost of the grain, the cost of transportation and any insurance costs. MEMORANDUM To: Tax Partner From: Tax Senior Date: 18 December 2012 Re: Meeting with Panikos, CFO, Lambros Grain Trading Ltd I detail below the matters discussed during the meeting with Panikos, CFO of Lambros Grain Trading Ltd (LGT), and explain the related tax implications. (i) Demetris and Evgenia salary split If Demetris and Evgenia each receive gross emoluments of in 2013, between them they would pay total tax of for the year (as per Appendix W1). However, if one of them received a salary of , this salary would attract tax exemption on 50% of this gross salary, being the exemption for employees who were not tax resident in Cyprus before commencing their employment in Cyprus, and who receive a gross annual salary exceeding The other spouse would then receive the remaining as salary, which is sufficient for the working visa requirements. Under this scenario, the total tax payable between them is for the year (Appendix W2). This is a tax saving of over the tax payable if they received an equal salary. If the couple would like to receive the same amount of money in the end, I would still recommend the option shown in W2, but that the person earning the higher salary simply gifts the difference to the spouse (such a gift would not attract any taxation). (ii) Evgenia tax consequences of Africa travel No tax exemption arises for Evgenia from the business travel she will undertake during 2014, visiting clients of LGT in Africa for three to four months. The 90-day rule applies only for employees travelling abroad for the purposes of a non-cyprus based employer, which is not the case here given that LGT is based in Cyprus, or for an overseas permanent establishment of a Cyprus employer, which also is not applicable as LGT does not have any overseas permanent establishments in (iii) Demetris Ildorian pension If Demetris receives a pension from Ildoria in 2014, this will have to be included in his taxable income in the year it is received, given that he will be a Cyprus tax resident and so taxable on his worldwide income. However, there is a special mode of taxation available with regards to overseas pensions by which they can either be included as taxable income and subject to the normal tax bands and rates or, alternatively, be taxed at the flat rate of 5% following deduction of an amount of The choice is that of the taxpayer and can be exercised every year. Demetris would benefit from electing for the 5% flat rate mode of taxation given that he will receive income from LGT which will certainly be higher than the tax free band of Any tax paid in Ildoria will be credited against the equivalent Cyprus tax on this income. 15

3 (iv) Invoice to Israeli company application of value added tax (VAT) The transport of grain from LGT s Limassol silo to the Larnaka establishment of the branch of an Israeli company constitutes a domestic transportation of goods service. The use and enjoyment provisions apply for the place of supply of a domestic transportation of goods. As such, given that the transport takes place entirely within Cyprus, then Cyprus VAT should be charged on the invoice, regardless of the invoice being raised on a company which is established outside the EU. Tutorial note: An equally valid argument to charge VAT is that the goods are transported for the purposes of the Cyprus branch of the Israeli company and thus, due to the force of attraction of the Cyprus fixed establishment on the transaction, Cyprus VAT should be charged. Although this is considered outside the scope of the P6 CYP syllabus, full marks were awarded for any answers to this effect. (v) Christonys Grain Cyprus Ltd (CGC) tax issues regarding Proposal Number 1 Transfer pricing Christonys Grain Cyprus Ltd (CGC), a newly incorporated Cyprus company, will be owned 50% by Nekta-Kyri Grains Ltd (NKG) and 50% by LGT. CGC will trade in grains but use the facilities belonging to NKG and LGT, being the silos and warehouses, for free. CGC is a related party to both NKG and LGT by virtue of their shareholdings. As such, any transactions between them should be made at arm s length. This would not be the case if the silos and warehouses were used for free. NKG and LGT should charge CGC a market rent for the use of the silos, otherwise the tax authorities will impose a deemed rent and tax the deemed rental income accordingly, imposing penalties and interest where applicable. Group relief In order to benefit from group relief, the companies must be part of a tax group. This requires a minimum direct or indirect shareholding of at least 75%, and for the claimant and the surrendering companies to be Cyprus tax resident and part of the group for the entire tax year. NKG, LGT and CGC do not form a tax group, given that they do not satisfy the minimum shareholding requirement of 75%. Also, in the first year (2014), when the losses are expected to arise, CGC will not have been part of the tax group for the entire tax year. (vi) Christonys Grain Cyprus Ltd (CGC) tax implications regarding Proposal Number 2 Panikos has stated that he believes that the transfer of the silos and warehouses to CGC in return for share capital would not create any tax implications as they would constitute a reorganisation scheme. The reorganisation schemes which are afforded tax exemptions in the tax legislation are specific and have prerequisites which must be met. The scheme under Proposal Number 2 cannot be considered a merger as defined in the tax legislation as this would require that NKG and LGT should be dissolved without going into liquidation, and that all of their assets and liabilities should be transferred to the new company, CGC. This is not the case given that both NKG and LGT will retain some of the silos and warehouses and continue to trade in other forms of grain (barley, soya and rye). Also, for the scheme under Proposal Number 2 to qualify under an adaptation of the transfer of assets scheme, it would be necessary to successfully argue that trading in soft and hard wheat grains is a separate branch of activity from the sale of the other grains. This is unlikely to succeed given that they all constitute trading in food grain for human and animal consumption. The result is that the transfer of the silos and the warehouses would be a disposal for capital gains tax purposes, so we would need to prepare balancing statements for NKG and LGT. In addition, CGC would be liable for land transfer fees on the acquisition of the immovable property. (vii) Christonys Grain Cyprus Ltd (CGC) expansion through branch or subsidiary Any profits arising in Ildoria, whether made by a branch or a subsidiary of CGC, would be subject to 12,5% corporation tax in Ildoria and no further withholding tax would be payable on dividend distributions. The profits of the overseas branch would specifically be exempt from corporation tax in Cyprus. However, they would be included in the accounting profits of CGC for the purpose of the deemed distribution rules, as would any dividends received from a foreign subsidiary. Thus there is an argument to prefer a subsidiary so that the group could decide when a dividend should be paid and thereby control when the income will be included in the Cyprus accounting profits for the deemed distribution rules. A stronger argument, however, is that a subsidiary is a separate legal entity whereas a branch is a legal extension of CGC. As such, any legal claims made against the branch could impact the branch s parent company, being CGC, whereas the subsidiary would offer a legal buffer against such claims. For both reasons, a subsidiary should be preferred over a branch. 16

4 Appendix I W1 Demetris and Evgenia tax payable in the 2013 tax year if they each receive a gross salary of Gross salary Less Social insurance contributions Maximum insurable income 6,8% x (3.699) Chargeable income Calculation of tax on income Tax bands and rates Tax at 0% at 20% at 25% at 30% at 35% 630 Total tax payable per person Total combined tax payable W2 Demetris and Evgenia tax payable in the 2013 tax year if one receives gross salary of and the other receives Gross salary 1/2* Less 50% exemption of gross salary due to emoluments in excess of (50.500) Social insurance contributions Maximum insurable income 6,8% x /6,8% x (3.699) (2.040) Chargeable income Calculation of tax on income Tax bands and rates Tax Tax at 0% / at 20% at 25% at 30% Total tax payable per person Total combined tax payable *Tutorial note: As the 50% tax exemption in the law applies to emoluments which exceed , the split could also be slightly different to the and proposed in the model answer. This was taken into consideration in marking the answers. 2 Gruli Systems Ltd (a) A company is tax resident in Cyprus if it is managed and controlled from Cyprus. The term managed and controlled is not defined in the tax legislation, but is generally taken to mean the place where: the majority of the board of directors are resident; and the board meetings take place; and the strategic decisions relating to the company s operations are taken. The co-existence of all three criteria is essential. 17

5 (b) (c) A permanent establishment (PE) is a fixed place of business through which the business of an enterprise is wholly or partly carried on, and can include: a place of management; a branch; an office; a factory; a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; a building site or construction or installation project or supervisory activities if they last for more than three months. Questions from Mona Question 1: Structuring the holding of the desalination plant General matters The first point to note is that the Boxorian government requires that the desalination plant be owned by a Boxorian tax-resident company. As such, NewCo 1 must be managed and controlled from Boxoria. It is to be owned by Milania Investments Ltd (MIL) and Gruli Systems Ltd (Gruli) in equal proportions. Milania Investments Ltd (MIL) MIL will own 50% of NewCo 1. It will be required to invest 30m. MIL has stated that it is happy to commit the capital on a long-term basis, which would be the case if the investment is entirely in the form of equity. MIL equity If the funds were to be provided as equity, the resulting dividend income would not be subject to tax because dividends between Boxorian tax-resident companies are exempt from tax. MIL debt If MIL were instead to provide a loan to NewCo 1, the interest income would be taxed at the flat rate of 10%. Given that the minimum rate of interest in Boxoria is 2%, this would result in a minimum interest income of ( 30m x 2%), with tax of thereon. Conclusion MIL has an incentive to provide the funds in the form of equity and to receive dividend income. Gruli Systems Ltd (Gruli) Gruli will also own 50% of NewCo 1 and will be required to invest 30m, which it will borrow from the Cyprus bank at an annual interest rate of 5%. Gruli equity If Gruli were to invest the funds as equity, it would receive dividend income. However, if the investment is made directly in NewCo 1, Gruli will not be able to claim a tax deduction for the interest in Cyprus given that it is for the purchase of shares in a company which is not a 100% subsidiary. In addition, any dividends paid from NewCo 1 to Gruli would be subject to withholding tax in Boxoria of 10% of the gross dividend. NewCo 1 would have gross lease income of 3m, on which it would pay tax at 6%, leaving net distributable income of Gruli would receive 50% of this, being and the withholding tax would be 10%, i.e Both these issues could be avoided if Gruli were to incorporate a 100% Boxorian subsidiary company (say NewCo 3) which, in turn, would subscribe for 50% of NewCo 1 s share capital. Gruli would borrow from the Cyprus bank and inject the 30m as the share capital of NewCo 3 which, in turn, would inject it as equity in NewCo 1, in exchange for 50% of NewCo 1 s shares. Then Gruli would be able to deduct the interest payable on the loan from the bank given that it would have been made for the purchase of a 100% subsidiary company (NewCo 3). The funds would be used indirectly to construct a desalination plant, generating rental income and, as such, the assets would be used for the purposes of the business. This structure would result in tax saving to Gruli of ( 30m x 5% x 12,5%). Also, NewCo 3 would receive dividends from NewCo 1 free of any taxation given that they are both Boxorian tax-resident companies. NewCo 3 can then distribute the same profits to Gruli without any withholding tax given that Gruli is its 100% parent company. Thus Gruli would save on the Boxorian withholding tax of In Cyprus, the dividend received by Gruli will not be subject to corporation tax as dividend income is specifically exempt from corporation tax. It will also not be subject to special defence contribution (SDC) because, although the tax paid in Boxoria is substantially less than the Cyprus tax would be (given that the 6% Boxorian rate is less than 50% of the Cyprus corporation tax rate), the income is derived from trading and not investment activities. 18

6 Gruli debt Gruli will receive a loan from the Cyprus bank with 5% annual interest. If the loan were to be provided directly to NewCo 1, the minimum interest rate acceptable under Boxorian law would be 6%, leaving a margin of 1% in Cyprus, taxable at the corporation tax rate of 12,5%, and resulting in Cyprus tax of ( 30m x 1% x 12,5%) before any relief for foreign tax. Boxoria would apply a 5% withholding tax on the gross income, which would result in tax of ( 30m x 6% x 5%). This would more than cover the Cyprus tax due so no further tax would be paid in Cyprus. The total tax payable under a direct funding approach would therefore be Gruli could also provide the loan to NewCo 1 indirectly through a 100% Boxorian subsidiary company (say NewCo 3) which, as above, could be 100% equity financed. As described above, this would result in the dividends between NewCo 3 and Gruli not being subject to withholding tax, and the interest payable in Cyprus being tax deductible for Gruli. NewCo 3 could then lend the funds on to NewCo 1 at the minimum interest rate of 2% applicable between Boxorian companies, and pay tax on the interest income at the flat rate of 10%. As in the case of MIL, this would result in a minimum interest income for NewCo 3 of on which tax of would be payable (as opposed to a dividend of ). The net tax benefit to Gruli (via NewCo 3) of investing in NewCo 1 in the form of debt rather than equity is , being the saving of Cyprus tax on the loan of less the Boxorian tax payable on the interest received of Conclusion It is better for Gruli to receive dividend income and structure the equity through a 100% Boxorian subsidiary company, as this has the potential to result in a higher net income, and a tax benefit of ( ). Question 2: Whether an element of debt financing would be beneficial For an annual interest rate of 2% to apply (as per the question), any loan to NewCo 1 would need to be provided by a Boxorian tax-resident company. This implies that Gruli will provide the loan through a Boxorian tax-resident subsidiary, say NewCo 3. NewCo 1 s rental income of 3m per year will be taxed at a flat rate of 6%. No capital allowances exist under Boxorian tax legislation. Any interest expense would reduce the taxable income of NewCo 1; however, in the hands of NewCo 3 and MIL the interest income would be taxed at the flat rate of 10%. This means that for every 1 of interest expense, NewCo 1 would reduce its tax by 0,06 whereas the resulting interest income would result in tax payable by the recipients of 0,10, i.e. an overall tax liability of 0,04. It would thus not be in the best interests of the parties involved for NewCo 1 to receive any financing in the form of debt. Question 3: Tax position of NewCo 2 The fact that five employees of NewCo 2 will be stationed at the desalination plant indicates that the plant itself will constitute a permanent establishment of NewCo 2 in Boxoria, regardless of where NewCo 2 is managed and controlled. Therefore, the Boxorian tax authorities will attribute the income of NewCo 2 to that permanent establishment and subject it to tax in Boxoria at the 20% rate. 3 Ntinos and Pavlina (a) (b) (c) A Cyprus international trust (CIT) is a trust in respect of which: the settlor must not have been a Cyprus resident in the year preceding the year of creating the Cyprus international trust, although he/she may become tax resident subsequently; the beneficiaries, except a charity, must not have been Cyprus tax residents in the year preceding the year of creating the Cyprus international trust, although they may become Cyprus tax residents subsequently. Given that Ntinos and his twin daughters are already Cyprus tax residents, it will not be possible for him to settle the shares of Semeli Ltd into a CIT. He will have to settle them into a Cyprus trust. A trust is a transparent entity for tax purposes. The beneficiaries are liable for the tax, and can claim any exemptions or deductions which are available for the specific type(s) of income. The tax assessment is raised in the name of the trustees in a representative capacity. The cessation of the silk and cotton trade and the commencement of the dress designing service will constitute a substantial change in the nature of the business of Semeli Ltd. However, this will not impact the losses brought forward unless, within a three-year period, there is also a change in the ownership of the shares of Semeli Ltd. The settlement of the shares into the trust does not constitute such a change because the trust is a transparent entity for tax purposes. Through the trust, Ntinos has gifted the shares in Semeli Ltd to his twin daughters, and a change arising from a gift by a parent to a child is not treated as a change of ownership. As a result, Semeli Ltd will be able to carry forward its tax losses and set them off against the first available future taxable profits. However, no such losses can be carried forward following the passing of five years from the end of the tax year in which the losses were incurred. 19

7 (d) (e) (f) (g) Semeli Ltd owns immovable property in Cyprus. However, given that the trust is a transparent entity for tax purposes, the settlement of the shares of Semeli Ltd will be regarded as a gift by Ntinos to his twin daughters. A gift from a parent to a child is an exempt disposal for capital gains tax. Alexia is a self-employed professional who will be coming to Cyprus to advise on, and oversee the design of, wedding dresses. She will be a non-cyprus tax resident professional earning Cyprus source income, which will be taxable in Cyprus. Semeli Ltd will need to deduct 10% withholding tax from the gross emoluments payable to Alexia, and submit this amount to the tax office by the end of the month following the month of withholding, together with a full statement analysing how the income and tax arose. BalCas Ltd s income is comprised of the gross insurance premiums and the net income from investments, including any profits from the sale of such investments. From this income, it can deduct the premiums for re-insurances, net claims, surrenders and expenses made wholly and exclusively for the generation of income. It is also allowed to deduct head office expenses not exceeding 2% of the premiums in Cyprus, less the premiums paid on re-insurance. In addition, the taxable income is adjusted to take into account any increase or decrease in reserves for unexpired risk. Losses can be set off against any type of income of the company in the current year and carried forward, following the normal rules governing losses. BalCas Ltd, as a life insurance company, will have to pay a minimum tax of 1,5% of the gross premiums. Pavlina is a director and thus an officer of BalCas Ltd. The loan will create a debit balance in Pavlina s ledger account in the books of the company. Pavlina is deemed to derive a benefit from this loan, which constitutes taxable income. The value of the benefit will be 6,5% per annum on the value of the loan, being the difference between the statutory rate for the benefit of 9%, and the 2,5% rate charged by the company. The benefit is added to Pavlina s gross emoluments and any tax arising is deducted through the pay-as-you-earn (PAYE) system on a monthly basis. Given that Pavlina is a higher rate taxpayer, the total tax for the six-month period which will arise will be equal to x 6,5% x (6/12) x 35%= Eleni and Paris (a) (i) Eleni s taxable income for 2013 Income from employment Benefit-in-kind Less social insurance contributions 6,8% x (1.224) Taxable income (ii) The obligation to file an income tax return exists where the gross income of the taxpayer exceeds the tax-free bracket, which is Eleni s gross emoluments from her employment will be As such, although Eleni has net taxable income less than this amount, her gross emoluments exceed the tax-free bracket, and she must therefore submit a tax return. (iii) As an employee, if Eleni submits her income tax return manually, the return for the 2013 tax year must be filed by 30 April (b) (i) As a self-employed individual with gross annual turnover of less than , if he will submit his income tax return manually, Paris should submit his income tax return by 30 June (ii) Paris has until the end of the month following the month in which he received the tax assessment to submit an objection, i.e. until 30 November

8 (c) (d) (e) Partnerships are transparent entities for income tax purposes, with the profits of the partnership taxable directly on the partner, in accordance with that partner s percentage of participation in the partnership. Gross taxable income attributable to each partner in 2014: Gross price for lectures inclusive of VAT x VAT element ( x 18/118) (9.153) Gross price for lectures net of VAT Taxable income attributable to Paris at 75% Taxable income attributable to Eleni at 25% Eleni s taxable income for 2014, before taking into account the income from the joint business with Paris, is within the tax-free bracket (see part (a)). Therefore, the expected additional income from the partnership would be taxed mostly at 20% ( 8.500) with being taxed at 25%. If a company were incorporated, the effective tax rate of receiving the joint income would be 27,375%. This is calculated as 12,5% (corporation tax) + 14,875% (17% special defence contribution on the remaining 87,5% of the after-tax profits). Thus the income which Eleni would receive as a dividend would be taxed at a higher effective tax rate (27,375%) than in the case of her income from a partnership (20% and 25%), so incorporating a company would not be tax efficient for her. On the other hand, Paris is already paying tax at the marginal rate of 30% on his income of Additional income from the partnership would be taxable at the 30% and 35% rates, which is greater than the effective tax rate of 27,375% from using a company. It is thus beneficial for Paris to incorporate. The solution would be for Paris to create his own company and participate in the partnership through that company, rather than as a physical person, and for Eleni to participate as a physical person. Income tax consequences The income received from licensing the course materials constitutes income from intellectual property (IP) and benefits from the special tax provisions regarding IP. All direct costs relating to IP income can be deducted from the gross income. The specific IP belonging to Eleni and Paris does not have a cost as it was generated by them, as such there is no amortisation allowance. In addition, a deemed expense of 80% of the income less direct costs is also deductible. The amount remaining is considered to be taxable income, and will be apportioned to the partners based on their percentage participation and taxed in accordance with their normal income tax brackets. Value added tax (VAT) consequences The licensing of the IP rights is a service. Given that it is provided to universities, it is considered to be a business-to-business (B2B) service so the place of supply is where the recipient is based. For the universities based in the USA, no Cyprus VAT is charged as the supplies are outside the scope of Cyprus VAT. For the universities based in the UK, these are intra-community supplies so no Cyprus VAT will be charged provided the UK universities are registered for VAT in the UK and their VAT number is validated by the Cyprus partnership. If the UK universities are not VAT registered, or if the VAT registration number cannot be validated, then the partnership should charge Cyprus VAT on its invoices to them. 5 Gregory (a) The badges of trade, used to decide whether a transaction is of a trading or capital nature, are as follows: subject matter of the transaction; length of ownership; frequency of similar transactions; supplementary work; motive; circumstances responsible for the sale; method of financing the cost; knowledge of the owner; method of acquisition; and what happens with the sale proceeds. 21

9 (b) (i) Income tax computation for the 2013 tax year Sale of plot of land in Limassol (N1) Sales price: VAT = x Cost of purchase of land ( ) Land transfer fees on purchase of land: On first at 3% (2.563) On next at 5% (729) Profit from sale of land Rental income from preserved building exempt 0 Rental income from house in the UK Rental income from flat in Indonesia (N2) Less Statutory deduction on rent: 20% x ( ) (6.200) Capital allowances: on UK house: over 33 years old 0 on UK house renovations: 3% x (600) on Indonesia house: 3% x ( ) (2.700) Chargeable income subject to income tax Tax on chargeable income On first at 0% at 20% at 25% at 30% at 35% Less double tax relief On UK rental income as per double tax treaty Cyprus tax on income x [ (being the 20% statutory deduction) 600 (capital allowances)]/ UK tax on rental income restricted to Cyprus tax (3.048) On Indonesia rental income unilaterally Cyprus tax on income x [ (being the 20% statutory deduction) (capital allowances)]/71.608] Indonesia tax on rental income (1.000) Total tax payable following double tax relief Notes: N1 The plot of land in Limassol was purchased and sold within two weeks. The short period of time will be decisive to the determination that the transaction is a trading transaction. Gregory only purchased the plot because it was being sold at a good price, as such his motive was to make a profit. The fact that it was exchanged with a property which may or may not be used as his house, and that he had never sold any immovable property prior to this, is an argument for a capital disposal. However, the badges of trade, and especially the short period of ownership, will result in a trading transaction. N2 The repairs would not have been deductible given that the law allows only a statutory deduction of 20% of the gross rental income. 22

10 (ii) Special defence contribution (SDC) for 2013 On rental income: Rental income from house in the UK Less 25% (4.750) SDC at 3% 428 Less unrelieved UK tax: (352) SDC payable on UK rental income 76 Rental income from preserved building (350 x 12) Rental income from apartment in Indonesia Less 25% (4.050) SDC at 3% 365 Total SDC payable 441 (iii) Capital gains tax for 2013 House in UK (N1) exempt 0 Farmhouse (N2) Income from disposal: Car at market value Cash Less cost of acquisition and capital expenditure x (118,04/41,01) (80.593) x (118,04/117,52) (15.066) (95.659) Less life-time exemption (N3) (17.086) Gain chargeable to capital gains tax Capital gains tax at 20% Notes: N1 The house in the UK was purchased over ten years ago and was clearly used as an investment given that it produced rental income. Given the long period of ownership and the intention of using it for generating investment income, this is clearly a capital gains tax disposal. Cyprus capital gains tax only taxes immovable property situated in Cyprus, so the income received from the sale of the UK property is exempt in Cyprus. N2 The farmhouse was inherited property and as such will be treated as a capital gains tax disposal, despite the capital repairs incurred to make the property more marketable. N3 Gregory s main occupation is not in agriculture and as such he would not qualify for the life-time exemption on agricultural land, despite the property being a farmhouse. 23

11 Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) December 2014 Marking Scheme 1 Lambos Grain Trading Limited Available Maximum (a) Analysis and explanation of VAT treatment of purchase of grain from France, including the value on which the reverse charge is applied, validation of VAT registration number and treatment of input VAT 3 Analysis and explanation of VAT treatment of purchase of grain from Russia, including the value on which VAT will be paid on importation (b) (i) Calculation of tax paid under initial proposal 1,5 Calculation of tax paid under recommended proposal 2 Explanation of exemption for high rate employees 2 Recommendation to gift difference between spouses 1 6,5 6 (ii) Declaration that Evgenia not entitled to 90-day rule exemption 0,5 Explanation of the 90-day rule 1,5 2 2 (iii) Explanation of treatment of pension under normal rules 0,5 Explanation of special mode of taxation 1,5 Recommendation of tax under special mode of taxation 0,5 Reference to credit for Ildorian tax suffered 0,5 3 3 (iv) Domestic transportation of goods, place of supply Cyprus 1 Location of invoice recipient not relevant (v) Explanation of issue relating to transfer pricing, including related parties and arm s length principle 2,5 Explanation of issue relating to group relief, including definition of a tax group 2,5 5 5 (vi) Statement that reorganisation schemes are specific with prerequisites 0,5 Explanation of merger scheme and why it is not applicable 2 Explanation of transfer of assets scheme and why it is not applicable 2 Explanation of final tax consequences of Proposal Number 2 1,5 6 5 (vii) Tax effect in Ildoria neutral as between a branch or subsidiary 0,5 Profits of overseas branch exempt, so only consideration is deemed distribution rules, thus subsidiary preferable 2 Explanation of legal issue arising from use of branch 1 Recommendation for use of subsidiary 0,5 4 3 Format and presentation of memorandum, including use of appendix 2 Effective communication

12 2 Gruli Systems Ltd Available Maximum (a) Correct explanation of management and control 2 2 (b) Definition of a permanent establishment (PE) 1 Six examples of PE (0,5 mark each, maximum 2 marks) (c) Question 1 NewCo 1 must be tax resident in Boxoria 1 Explanation of tax if MIL receives dividend income 1 Explanation of tax if MIL receives interest income including calculation 1,5 Conclusion for MIL to prefer equity funding 0,5 Explanation that if Gruli owns 50% of NewCo 1 directly, it will not be able to deduct interest from Cyprus bank 1 Explanation that if Gruli owns 50% of NewCo 1 directly, it will be subject to WHT on dividends with calculation 2 Recommendation to use intermediary Boxorian 100% company, with explanation of structure and benefits and calculation of tax saving 3 Explanation of taxation of dividends in Boxoria, including identification of tax saving 1,5 Explanation of taxation of dividend income in Cyprus under corporation tax and SDC, with reasons 2 Explanation of Cyprus tax on interest if loan provided directly to NewCo 1, with calculations 2 Explanation of Cyprus tax on interest if loan provided indirectly to NewCo 1, with calculation 2,5 Conclusion for Gruli to prefer equity finance 0,5 18,5 16 Question 2 Identify that 2% interest rate requires Boxorian tax resident lender 0,5 Explanation that debt financing would increase the overall tax payable in the structure, with calculation 1,5 2 2 Question 3 Explanation of existence of permanent establishment 1 Explanation that attributable income of PE will be taxed in Boxoria, regardless of NewCo 2 s tax residence

13 3 Ntinos and Pavlina Available Maximum (a) Definition of settlor and beneficiary for CIT 1 Explanation that Ntinos cannot settle shares into a CIT with reason (b) Explanation that trust is transparent for tax purposes 0,5 Explanation that beneficiaries liable and can claim exemptions and deductions 1 Explanation of how assessment is raised 0,5 2 2 (c) Explanation of why losses can be carried forward 3 Explanation of how losses can be used, including 5-year restriction (d) Transfer exempt as a gift to daughters 1 1 (e) Explanation that Alexia will be subject to 10% withholding tax 1,5 Explanation of how tax will be paid 1,5 3 3 (f) Explanation of what income comprises 1 Explanation of the allowable expenses including head office premiums and adjustments 3,5 Explanation of off-set of losses 0,5 Explanation of minimum tax payable (g) Explanation that the benefit is taxable income and how it is calculated 1,5 Explanation of how the benefit is taxed, including calculation 1 Calculation of tax payable 0,

14 4 Eleni and Paris Available Maximum (a) (i) Correct calculation of taxable income 1 1 (ii) Explanation of obligation to submit a tax return 2 2 (iii) Date by which the return has to be submitted 1 1 (b) (i) Date by which the return has to be submitted 1 1 (ii) Date by which the objection should be filed 1 1 (c) Explanation of how partnership income is taxed 1 Calculation of gross income, net of VAT 0,5 Calculation of taxable income for each partner 0,5 2 2 (d) Discussion of effective tax rate of Eleni 1 Explanation of effective tax rate on dividends if company is used 1,5 Conclusion that a company is not effective for Eleni 0,5 Explanation of effective tax rate of Paris 1 Conclusion that a company is effective for Paris 0,5 Recommendation for Paris to use a company for his share in the partnership 1 5,5 5 (e) Income received is income from intellectual property (IP) 0,5 Explanation of income tax treatment of IP rights income 3 Explanation of place of supply for VAT 1,5 Explanation of VAT treatment for USA universities 0,5 Explanation of VAT treatment for UK universities 2 7,

15 5 Gregory Available Maximum (a) Correct list of badges of trade (0,5 marks each) 5 5 (b) (i) Explanation of sale of plot of land being trading 2 Calculation of profit from sale of plot of land, including land transfer fees 1,5 Mention that preserved building rental income exempt 0,5 Correct statutory deduction of 20% of rental income 0,5 Correct capital allowances calculation including mention that UK house is over 33 years old 1,5 Calculation of tax on chargeable income 0,5 Calculation of double tax relief on UK income 1,5 Calculation of double tax relief on Indonesian income 1 Mention that repairs not deductible expense with reason 0,5 9,5 9 (ii) Calculation of UK rental income SDC with double tax relief 1,5 Calculation of SDC on remaining rental income 1 2,5 2 (iii) Explanation that UK house is capital disposal 0,5 Explanation that UK house is exempt from Cyprus CGT 0,5 Explanation that farmhouse is capital disposal 0,5 Correct sales price for farmhouse 0,5 Deduction of capital expenditure with inflation adjustment 0,5 Correct life-time exemption with explanation 1 Calculation of CGT 0,