European Union: Accession States Tax Guide

Transcription

1 European Union: Accession States Tax Guide B ULGARIA CYPRUS CZECH REPUBLIC ESTONIA HUNGARY LATVIA LITHUANIA MALTA POLAND ROMANIA SLOVAK REPUBLIC SLOVENIA A Lex Mundi Multi-Jurisdictional Survey prepared by the Lex Mundi International Tax Practice Group Updated April West Loop South, Suite 1000 Houston, Texas USA Tel:

2 About Lex Mundi Lex Mundi is the world s leading association of independent law firms. Lex Mundi facilitates the exchange of information regarding the local and global practice and development of law and improves the ability of its members to serve their respective clients. Lex Mundi has member law firms in 100 countries. Lex Mundi firms have adopted uniform standards of client service and are comprehensively and periodically reviewed to ensure continued adherence to Lex Mundi s standards of excellence. The worldwide coverage of Lex Mundi's membership provides Lex Mundi the unique ability to conduct and facilitate surveys of local law and procedure on a global scale. Lex Mundi member firms cooperated with the World Bank, Harvard University and Yale University on two comprehensive comparative studies one covering litigation and judiciary efficiency and the other covering corporate governance and the rights of minority shareholders. A complete list of our multi-jurisdictional surveys can be found on our website at 2

3 About this Survey On May 1 st 2004, the fifth enlargement in the history of the European Union was effected, comprising the largest number of countries ever admitted at one time (i.e. Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic and Slovenia). On January 1 st 2007, two new countries joined the EU, namely Romania and Bulgaria. This enlargement, which has inspired far-reaching legal, political and economic reforms in the twelve new member states, presents challenges and numerous opportunities in the area of taxation. On the occasion of the recent enlargement, Lex Mundi has prepared and marketed internally a short, up dated practical guide, providing essential information on the tax systems in force of each new EU member state. The EU Accession States Tax Guide was initiated by Lex Mundi s International Tax Practice Group and was coordinated by Yerassimos C. Yannopoulos and Maria Vrachatis both members of Zepos & Yannopoulos (the Lex Mundi member firm in Greece). The aim of the relevant publication is to: (i) disseminate among Lex Mundi member firms key information on the tax systems covered and (ii) constitute a valuable tool for both members and clients in assessing the tax environment in each new member state in the pursuit of business activities and opportunities. For the convenience of its users, the guide has been divided in country chapters including the tax systems in force. Each chapter has been further divided in seven sections ranging from General Information to Enforcement & Litigation procedure. Finally, the user may find an appendix outlining the basic income tax rates in each country as well as a list of the DTC agreements concluded so far. 3

4 Author s Guide The EU Accession States Tax Guide was completed thanks to the valuable contributions fr om every member firm in the respective jurisdictions. Therefore, all the credit for this publication should go to the following colleagues who took the time to complete the relevant questionnaire and to contribute the national chapters. Please feel free to contact the firms/colleagues below, if you need any clarification and/or additional information. BULGARIA CYPRUS CZECH REPUBLIC ESTONIA HUNGARY LATVIA LITHUANIA Svetlin Adrianov PENKOV, MARKOV & PARTNERS Tel: Fax: lega@bg400.bg Chryso Pitsilli Dekatris DR. K. CHRYSOSTOMIDES & CO. Tel: Fax: cdekatris@chrysostomides.com.cy Petr Nemec PROCHÁZKA RANDL KUBR Tel : Fax : Petr.Nemec@prk.cz Rolan Jankelevitsh LEPIK & LUHAAAR Tel : Fax: rolan.jankelevitsh@lawin.ee Peter P. Nagy NAGY ES TROCSANYI Tel : Fax : nagy.peter@nt.hu Zinta Jansons KLAVINS & SLAIDINS Tel : Fax : zinta.jansons@lawin.lv Gintaras Balcius LIDEIKA, PETRAUSKAS, VALIUNAS ir PARTNERIAI Tel : Fax : gintaras.balcius@lawin.lt 4

5 MALTA POLAND ROMANIA SLOVAK REPUBLIC SLOVENIA Stephen Attard GANADO & ASSOCIATES ADVOCATES Tel : Fax : sattard@jmganado.com Michal Bernat WARDYNSKI & PARTNERS Tel : Fax : michal.bernat@wardynski.com.pl Ana-Maria E. Miron NESTOR NESTOR DICULESCU KINGSTON PETERSEN Tel: Fax : Ana-Maria.Miron@nnkp.ro Tomas Maretta Jana Borska CECHOVA & PARTNERS Tel : Fax : tomas.maretta@cec hova.sk jana.borska@cechova.sk Natasa Vidovic VIDOVIC & PARTNERS Tel : Fax : vp@vidovic-op.si 5

6 Table of Contents BULGARIA... 7 CYPRUS CZECH REPUBLIC ESTONIA HUNGARY LATVIA LITHUANIA MALTA POLAND ROMANIA SLOVAK REPUBLIC SLOVENIA

7 Lex Mundi European Union: Accession States Tax Guide BULGARIA Penkov, Markov & Partners A. General information According to the International Monetary Fund s May 2006 assessment, Bulgaria has registered fast growth of investments and drop of unemployment which is due to strict fiscal policy. According to the assessment, the financial growth is expected to continue and reach 6 % a year. The main goals of the fiscal policy are: 1) maintaining macro-economic stability; 2) maintaining and stimulation of economic growth; and 3) improvement of the living standard by means of decreasing the taxation pressure and social security. These goals are the basic principles in the Program for European Integration, Economic Growth and Social Responsibility, adopted by the Government. The State s profits pursuant to the State Budget Act are mostly from taxes, i. e. taxes are the most important source of income for the state budget. As far as the proportion between direct and indirect taxes is concerned, profits from indirect taxes are bigger than profits from direct taxes. B. Corporate income taxation 1. Which are the taxable entities? The follow ing entities are taxable under Bulgarian law: 1. Resident legal persons; 2. Non-resident legal persons which carry out economic activity in the Republic of Bulgaria through a permanent establishment or which receive income from a source inside the Republic of Bulgaria; 3. Sole traders: regarding taxes withheld at the source and in the cases specified in the Income Taxes on Natural Persons Act; 4. Natural persons who are merchants within the meaning of the Commerce Act: in the cases specified in the Income Taxes on Natural Persons Act; 5. Employers and commissioning entities under contracts for management and control: regarding the tax on the expenses on fringe benefits provided for in the Corporate Income Tax Act (CITA). 6. Unincorporated associations and the contribution payment centres established under the Social Insurance Code are treated as legal persons and are taxable for purposes of CITA; 7

8 7. Any non-resident organizationally and economically distinct formation (trust, fund and other similar formations), which independently carries out economic activity or performs and manages investments, where the owner of the income cannot be identified, is a taxable person for income from sources inside the Republic of Bulgaria. 2. How is the taxable income determined? The tax financial result shall be determined by means of adjusting the accounting financial result for: 1. Permanent tax differences - accounting income or expenses, which are not recognized for tax purposes; 2. Temporary tax differences they arise where any income or expenses are recognized for tax purposes in a year other than the year of accounting for the said income or expense; and 3. Other amounts provided for in the Corporate Income Tax Act. 3. What are the applicable tax rates? The corporate tax rate is 10 %. 4. Are capital gains taxed separately? The new Corporate Income Tax Act, effective as of , introduces separate taxation of capital gains. 5. May losses be carried back or forward and to what extent? Taxable persons have the right to carry forward the tax loss formed according to the procedure established by CITA. Where a taxable person has elected to carry forward the tax loss, the said loss shall be mandatorily carried forward successively until its depletion during the next five years. The taxable person exercise its right to election by means of deduction of the tax loss during the first year after incurrence of a tax loss, during which the person has formed a positive tax financial result, before deduction of the tax loss. Where the taxable person has not formed a positive tax financial result before deduction of the tax loss until the date of tax control, the person is presumed to have exercised the right to election in respect of carrying forward of a tax loss. Any tax loss, formed during the current year in a country with which the Republic of Bulgaria has signed a convention for the avoidance of double taxation and the method of avoidance of double taxation with respect to profits is exemption with progression, shall not be deducted from the tax profits from a source inside Bulgaria or other States during the current of succeeding years. The tax loss referred to shall be deducted successively solely from the tax profits from the source outside Bulgaria from which the said loss has been incurred during the next successive five years. Upon termination of the activity of a permanent establishment in a Member State of the European Community or of the European Economic Area, any tax losses from a permanent establishment, which have not been carried forward and have not been recovered shall be 8

9 carried forward according to the standard procedure established by CITA until the five-year period since the incurrence of the losses has elapsed. Where a taxable person has formed a tax loss and the loss or a part of it has its source outside Bulgaria in respect to which source the credit method for double taxation avoidance is applied, the loss which is not deducted during the current year shall be deducted during the next five successive years solely from the tax profits from the source outside Bulgaria from which the said loss has been incurred. Where the tax loss for the year has not been formed from a single source (foreign State or Bulgaria), such loss shall be allocated among the countries from which the loss has originated. 6. Are there any withholding taxes and at which rates? The withholding taxes pursuant to CITA are: a) Withholding Tax on Income from Dividend and Shares in Liquidation Surplus the tax rate is 7%; and b) Tax Withheld on Income of Non-Resident Persons the tax rate is 10%. 7. Are there any preferential group taxation rules in force? Group taxation is not permitted. Tax anti-avoidance rules cover transfer pricing and related persons. 8. Which are the anti-avoidance rules currently in force? Where related parties enter into commercial and financial relationships under terms which affect the amount of the tax financial result and which differ from the terms between unrelated parties, the tax financial result shall be determined and taxed under the terms which would have arisen in respect of unrelated parties. Where one or more transactions, between unrelated parties, has been concluded under terms the fulfilment of which leads to tax evasion, the tax financial result shall be determined ignoring the said transactions, their terms or legal form and taking into consideration the tax financial result that would be obtained upon the effecting of a customary transaction of the relevant type at market prices and intended to achieve the same economic result, but which does not lead to tax evasion. The following shall also be treated as tax evasion: 1. Any substantial excess of the quantities of raw materials used as production inputs and other production costs over the customary quantities and costs for the activity carried out by the person, where any such excess does not result from circumstances beyond the person s control; 2. Any contracts for loan for use or other gratuitous provision for use of tangible and intangible benefits; 3. Any borrowing or lending at interest diverging from the market interest rate applicable at the time of conclusion of the transaction, including in cases of interest- debts for own account; free loans or other temporary gratuitous financial assistance, as well as debt write-offs or repayment of non-business and 9

10 4. Payment of any remunerations or compensations for any services, which have not been actually performed. Where a transaction is concealed by another, fictitious transaction, the tax liability shall be assessed under the terms of the concealed transaction. 9. Which are the main administrative requirements to comply with the local tax authorities? Taxable persons, which owe corporate tax shall submit an annual tax return in a standard form regarding the tax financial result and the annual corporate tax due. The annual tax return shall be submitted on or before March 31 of the following year at the National Revenue Agency territorial directorate with jurisdiction over the place of registration of the taxable person. Any taxable person shall remit the corporate tax for the relevant year on or before March 31 of the following year after deduction of the tax prepayments remitted for the relevant year. 10. With which countries have double taxation conventions already been concluded? Country Interest withholding Royalties withholding Dividends withholding tax tax tax rate rate rate Albania 10% 10% 5-15% Algeria 10 % 10 % 10 % Armenia 10% 10% 5-10 % Austria Belarus 10 % 10 % 10 % Belgium 10% 5% 10% Canada 10 % 10 % 10 %;15 % China 10 % 7 %; 10 % 10 % Croatia 5% - 5% Cyprus 7 % 10 % 5%; 10% Czech Republic 10 % 10 % 10 % Denmark - - 5%; 15% Egypt 12.5% 12.5% 10% Finland - 5 % 10 % France - 5 % 5 %; 15 % Georgia 10 % 10 % 10 % Germany - 5 % 15 % Greece 10 % 10 % 40 %; 10 % Indian Republic 15% 15%; 20% 15% Indonesia 10% 10% 15% Iran 5 % 5 % 7,5 % Ireland 5 % 10 % 5 %; 10 % Israil 5 %; 10 % 7,5-12,5 % 7,5-12,5 %; 10% 10

11 Country Interest withholding Royalties withholding Dividends withholding tax tax tax rate rate rate Italy - 5% 10% Japan 10 % 10 % 10 %; 15 % Kazakhtan 10% 10% 10% Korea 10 % 5 % 5 %; 10 % Kuwait 5 % 10 % 0 %; 5 % Latvia 5% 5%; 7% 5%; 10% Lebanon 7 % 5 % 5 % Lithuania 10% 10% 0-10 % Luxemburg 10 % 5 % 5 %; 15 % Macedonia 10 % 10 % 5 %; 15 % Moldova 10% 10% 5-15 % Mongolia 10 % 10 % 10 % Morocco 10% 10 % 7 %; 10 % Nederland - 5 % 5 %; 15 % Norway % People s Republic of Korea 10 % 10 % 10 % Poland 10% 5% 10% Portugal 10% 10% % Republic of Hungary 10 % 10 % 10 % Republic of Malta - 10% 30% Republic of Slovenia 5 % 5 %; 10 % 5 %; 10 % Republic of Turkey 10 % 10 % 10 %; 15 % Republic of Uzbekistan 10 % 10 % 10 % Romania 15 % 15 % 10 %; 15 % Russian Federation 15 % 15 % 15 % Singapore 5% 5% 5% Slovak Republic 10 % 10 % 10 % South Africa 5 % 5 %; 10 % 5 %; 15 % Spain % Sweden - 5% 10% Switzerland 10 % 5 % 5 %; 15 % Syrian Arab Republic 10% 18% 10% Thailand % 5-15 % 10% Ukraine 10 % 10 % 5%; 15% United Kingdom of Great Britain and Northern Ireland % USA 5 % 5 % 5 %; 7 %; 10 % Vietnam 10% 15% 15% Yugoslavia 10% 10% 5%; 15% Zimbabwe 10% 10% 10%; 20% 11

12 The tax rates pointed out above are the maximum rates, provided by the conventions. 11. Are there any special laws providing tax incentives to certain tax entities? Tax incentives are provided in the Corporate Income Tax Act and in some special laws. Such incentives are: 1) corporate tax retention (the right of any taxable person not to remit to the executive budget the amounts of corporation tax, which subsist in the patrimony of the taxable person and are spent for purposes prescribed by law); 2) any collective investment scheme, which has been admitted to public offering in the Republic of Bulgaria, and any licensed investment company of the closed-end type under the Public Offering of Securities Act, shall be exempt from corporate tax; 3) Special Purpose Investment Companies under the Special Purpose Investment Companies Act are exempt from corporate tax.; 4) tax incentives for hiring of unemployed persons and incentives for enterprises hiring people with disabilities; 5) incentives for agricultural producers: agricultural producers are allowed to retain 60 per cent of the corporate tax; 6) tax relief for carrying out manufacturing activities in municipalities with unemployment rate above the national average etc. C. Individuals 1. Which are the taxable persons? Taxable persons under the Income Taxes on Natural Persons Act (ITNPA) are any resident and non-resident natural persons and any resident and non-resident persons, who are obligat ed to withhold and remit taxes under this Act. Resident natural person," regardless of nationality, is any person who: 1. Has a permanent address in Bulgaria, or 2. Is present within the territory of Bulgaria for a period exceeding 183 days in any twelve-month period, or 3. Is sent abroad by the Bulgarian State, by bodies and/or organizations thereof, by Bulgarian enterprises, and the members of the family of any such person, or 4. Whose center of vital interests is situated in Bulgaria? Any person, who has a permanent address in Bulgaria, but whose center of vital interests is not situated in Bulgaria, shall not be a resident natural person. "Non-resident natural person" shall be any person who is not a resident person within the meaning of this Act. 2. How is the taxable income specified? The types of taxable income of individuals depending on the source, are: 1. Income from employment relationships; 2. Income from economic activity in a sole-trader capacity; 3. Income from other economic activity; 4. Income from rent or from other gainful use of rights or property; 5. Income from transfer of rights or property; 12

13 6. Income from sources referred to in Article 36 herein, as well as income where final taxes are levied under this Act. Any income derived from sources acquired by a taxable person during the tax year shall be taxable, with the exception of the income which is non-taxable by virtue of law. The ITNPA provides for some non-taxable income as well. The taxable income and the taxable amount are determined for each source of income separately. The aggregate annual taxable amount shall be the sum total of the annual taxable amounts determined for each type of income depending on the income source, minus the tax relief provided for in this Act. The following tax relief is provided under the ITNPA: tax relief for persons with reduced working capacity, tax relief for personal voluntary social and commercial insurance contributions, tax relief for personal contributions for contributory service upon retirement, tax relief for children, tax relief for donations. 3. What are the applicable tax rates? Taxes are determined according to the following table (applicable to income from e mployment relationships): Monthly Taxable Amount Lower limit Upper limit Tax 0 BGN 200 Nil BGN 200 BGN % in excess over BGN 200 BGN 250 BGN 600 BGN % in excess over BGN 250 Above BGN 600 BGN % in excess over BGN 600 The tax amount on the aggregate annual taxable amount shall be determined according to the following table: Annual Taxable Amount Lower limit Upper limit Tax 0 BGN 2,400 Nil BGN 2,400 BGN 3,000 20% in excess over BGN 2,400 BGN 3,000 BGN 7,200 BGN % in excess over BGN 3,000 Above BGN 7,200 BGN 1, % in excess over BGN 7, Are the capital gains taxed separately? Capital gains are not taxed separately. 5. May losses be carried forward or back? The Individuals may not carry back and forward losses. Sole traders only may carry losses forward through the procedure under B 5 herein. 13

14 D. Capital The main taxes on capital are: Real estate tax - the rate is set at 1.5 per mille of the assessed value of the corporeal immovables; Inheritance tax - Inheritance tax is levied on the estate of any decedent Bulgarian citizen located in Bulgaria or abroad when devolved by legal or testamentary succession, as well as on the estate located within Bulgaria where so devolved by any decedent foreign citizen. Inheritance tax is assessed separately in respect to each legal or testamentary heir as follows: 1. Applicable to siblings and the children of siblings: 0.7 per cent per share in excess of BGN 250,000; 2. Applicable to persons other than those referred to in Item 1: 5 per cent per portion in excess of BGN 250,000. Gift tax and tax on gainful acquisition of property donations of property are taxed at a rate of 0.7 per cent: on donations between siblings and the children of siblings and 5 per cent: on donations between any other persons. Where property is acquired for gainful purposes, the tax shall be at the rate of 2 per cent of the assessed value of the transferred property. E. Indirect taxes The indirect taxes are excise duties and VAT. F. Other duties Apart from municipal fees, the Local Taxes and Fees Act provides for transport vehicle tax. G. 1. Enforcement Litigation procedure All tax laws contain administrative penalty provisions, which provide fines mostly for violations of the respective law. Violations are considered to be the failure to submit tax returns before the required deadlines; declaration of circumstances leading to reduction of or exemption from fee, however non-payment the tax due is not such a violation. The consequences of non-payment are calculation of interest and enforcement of the duty. 2. There are two degrees of deciding tax disputes in the Bulgarian courts. The average time required for the final resolution and completion of the litigation procedure in a tax dispute is one year. 14

15 Lex Mundi European Union: Accession States Tax Guide CYPRUS Dr. K. Chrysostomides & Co. General Information Cyprus gained independence in 1960, whereupon the underdeveloped, predominately agricultural economy of the early 1960s was rapidly transformed into a modern economy, offering dynamic services with advanced physical and social infrastructure. Today, the services sector is considered the backbone of the Cyprus economy, accounting for approximately 76.7% of the GDP in 2005, while tourism accounts for approximately 20% of GDP. The average annual rate of growth during the period 2001 to 2005 has been in the range of 3.2% and the rate of unemployment approximately 4.28%. In terms of per capita income, Cyprus is classified by the World Bank among the high income countries ( C9.834 USD in 2005). On 1 st May 2004, Cyprus acceded to the European Union. Harmonization with the EU acquis communataire was carefully planned and so far, Cyprus has successfully faced the challenge of integration without any insurmountable difficulties. According to a recent assessment by the U.K. based Centre for European Reform (Lisbon Score Card VI) Cyprus performance against the Lisbon Criteria in 2005 compared relatively well to other new member states (ranking third in a total of 10 states). In May 2005, the Cyprus pound, which is the legal tender in Cyprus, joined the European Exchange Rate Mechanism II (E.R.M. II), a prerequisite for joining the Euro zone which is planned for January Cyprus has already applied for membership and its economic performance will now be judged against the Maastricht criteria. As stated in a recent Report Published by Moody s Investors Services We are reasonably confident of Cyprus ability to meet the criteria, given its low inflation (average of 2% in 2005) stable exchange rate (which has remained within 2.25% of the central parity rate to the euro since entering the EMRII) and its declining fiscal deficit and public debt burden. (Moody s Investors Service, Cyprus, p.2, May 2006) In its fiscal policy, Cyprus has complied with the recommendations of the EU Council of Ministers for Economic and Financial Affairs (ECOFIN) in eliminating excess deficit while at the same time working towards the mid-term budgetary objective of balanced public finance until the year

16 The table portrays the trend of the state s revenue from the taxes levied in aggregate as well as the proportion between direct and indirect taxes for the period (in millions of Cyprus Pounds) Tax Revenue Direct Taxes 550,31 540,01 531,80 619,94 776,86 Indirect Taxes 675,10 766,28 990, , ,75 Total Tax Revenue 1225, , , , ,61 The structural changes in the taxation system which were effected by the tax reforms introduced in 2003 have broadened the tax base while reducing, the marginal tax rates. As a result, the tax burden on individuals and legal persons has been considerably reduced, thus placing Cyprus among the lowest tax jurisdictions in Europe. A. Corporate income taxation 1. Taxable entities Companies that are resident in Cyprus are subject to corporate income tax. Under the Income Tax Law No.118(I) of 2002 ( the Income Tax Law ) the term company means a company incorporated under the Cyprus Companies Law, Cap 113 (i.e. private, public or overseas company, either limited by shares or by guarantee) any body with or without legal personality, public corporate bodies, co-operative companies, fraternity or society of persons, with or without legal personality, as well as any comparable company incorporated or registered outside the Republic. A company is a resident of Cyprus when its management and control is exercised in the Republic. The term company excludes partnerships which are treated as transparent, i.e. their partners are liable to tax. Trusts are taxable in a similar way, i.e. the beneficiaries are taxed through the trustees. Income Tax Law Companies that are resident in Cyprus are taxed on their worldwide income while nonresident companies are taxed on their Cyprus source income, subject to certain exemptions. Resident companies are exempt from tax in respect of business income deriving from a permanent establishment held abroad subject to Controlled Foreign Corporation (CFC.) rules. (See paragraph 8 below). Non-resident companies are taxed exclusively in respect of business income realized through a permanent establishment situated in Cyprus, subject to certain exemptions. The term permanent establishment, as defined in Section 2 (1) (a) of the Income Tax Law, is identical to the definition given to this term in the O.E.C.D. Double Taxation Model Convention. 16

17 Non resident persons having a permanent establishment in the Republic may elect, if it is to their benefit, to be taxed in accordance with the rules applicable to resident persons for any fiscal year. Entities taxed under special regimes International Trusts The income of an international trust established under the 1992 International Trusts Law is exempt from tax both in the hands of the trustees as well as the beneficiaries. Insurance Companies Insurance Companies are also subject to the same corporate income tax rate but benefit from certain exemptions applicable in the life insurance business sector. Shipping The profits of or dividends from a company incorporated in Cyprus which owns ships registered under the Cyprus flag and are engaged in international traffic are exempt from taxation. The exemption extends to the emoluments of the crews of Cyprus flagged ships. Ship management companies, have the option to be taxed either at 4,25% under section 19 of the Income Tax Law or pay tonnage tax at 25% of the rates used to calculate the tonnage tax imposed on ships under their management. 2. The tax base Taxable income is defined in s. 2 of the Income Tax Law, as the aggregate remaining amount of income of any person from the sources specified in section 5, following deduction of such amounts as are permitted by or under this Law. In order to arrive at the taxable income, income from all sources is added up and all expenses and charges incurred wholly and exclusively for the generation of income, as well as wear and tear allowances, where applicable, are deducted. Tax exempt income (a) (b) (c) profits from the disposal of securities (such as shares, stocks, bonds, debentures, etc. of companies incorporated in Cyprus or abroad and options thereon). dividends. up to 50 per cent of the interest income of companies, with the exception of interest income generated from or closely connected to the ordinary activities of the taxable entity. Tax deductible expenses All expenses and outgoings wholly and exclusively incurred for the generation of income are recognized as tax deductible, including: 17

18 (a) (b) (c) (d) (e) Interest incurred for the acquisition of fixed assets used in the business. Expenditure for repairs of premises, plant and machinery. Bad debts, including provisions for bad debt provisions. Expenditure on scientific research and/or patents and patent rights. Donations to charitable institutions. Valuation of inventories Inventory is generally valued at the lower of cost or net realizable value. Cost must be determined under the first-in first-out method (FIFO). The last-in first-out (LIFO) method is not acceptable. Depreciation rules No investment allowances are granted. Instead, a reasonable amount is allowed as a deduction, for the exhaustion and wear and tear of fixed assets arising from their use in the business or employment. The total amount of such allowable deduction cannot exceed the capital expenditure incurred for the acquisition of the asset. The wear and tear allowances are calculated on the straight line, on the basis of the useful economic life of each asset. 3. Applicable income tax rates The taxable income of a company is taxed at the rate of 10%, while the taxable income of public utility corporate bodies is taxed at the rate of 25%. 4. Capital gains tax Companies (and individuals) are subject to capital gains tax under the Capital Gains Tax Law No. 52/80 ( the Capital Gains Tax Law ) at the rate of 20%, on gains arising solely from the disposal of: immovable property situated in Cyprus shares in a company which owns immovable property situated in Cyprus (excluding shares listed in any recognized stock exchange) 5. Treatment of losses Tax losses incurred in any one year which are off set against other income may be carried forward and set off against future profits for an indefinite period of time. This provision applies for all unutilized tax losses generated as from year There are no restrictions on the set off of losses generated from different activities. Losses of an individual trader or a partnership business converted into a limited liability company may be set off against future profits of the company. Losses incurred abroad, whether from a permanent establishment or not, can be set off against the Cyprus profits of a business whether incorporated or unincorporated. However, future profits of the permanent establishment are liable to tax, to the extent of the losses allowed. 18

19 Restrictions A loss generated by a company cannot be carried forward in the following cases: (a) (b) (c) if within any three year period there is a change in the ownership of the shares of a company and a substantial change in the nature of its business. if at any time since the scale of the company s activities has diminished or has become negligible and before any substantial reactivation of the business there is a change in the ownership of the company s shares; up to the amount of any donation or contribution or loss, if a company is engaged in ship management services. 6. Withholding taxes Under the Income Tax Law Subject to specific provisions in the relevant tax treaties between Cyprus and the country of residence of the person concerned, the resident who makes a payment to a non tax resident is obliged to withhold and pay over to the revenue authorities tax in the following cases: (a) (b) Although Cyprus does not impose any withholding tax on royalty payments made to non-cypriot resident recipients, nonetheless, the exemption applies only for royalties paid as consideration for the use of a right/asset outside Cyprus. When the royalties concern rights/assets within Cyprus and unless the recipient is an associated company in another EU Member State, a 10% withholding tax is applied. There is a 5 per cent withholding tax on film rentals, 10 per cent withholding tax on professional income and 10 per cent withholding tax on remuneration of entertainers and sportsmen. Under Special Defence Contribution Under the Special Defence Contribution Law No.117(I) of 2002, ( SDC ) the following apply: Dividend income The dividend income of a resident company is exempt from SDC where such income is received from a non-resident company. The exemption is subject to the following conditions: (a) (b) The Cypriot Company s holding in the paying company is at least 1% of the share capital, irrespective of the holding period in the foreign subsidiary. Controlled Foreign Corporation (CFC.) rules are complied with (see the response under paragraph 8 below). Interest income Cypriot holding companies are liable to a 10% per cent SDC on interest income deriving from any source, whether in Cyprus or abroad. However, SDC does not apply to interest earned by a company in the ordinary course of its business or to interest closely related to the ordinary carrying on of the business, both of which are subject to income tax. The 50% tax 19

20 exemption on interest is not applicable in this case (see the response under paragraph 2 above). Rentals The gross income from rental income reduced by 25% is subject to SDC at the rate of 3%. This contribution is not a deductible expense for income tax purposes. 7. Taxation of Groups Group Relief Trading losses generated in the course of a year may be surrendered by a group company to another company which is member of the same group, provided both companies are resident in the Republic. Trading losses of the surrendering company may be set off against the total income of the claimant company. For the purpose of group relief, two companies are deemed to be members of the same group, if one is the subsidiary of the other (by at least 75%) or if they are both subsidiaries of a third company (by at least 75%). Company reorganizations: For the purposes of the Income Tax Law, the Capital Gains Tax Law and the Stamp (Amendment) Law, No.121(I) of 2002 reorganization means either a merger, division, transfer of assets or exchange of shares. The E.U. Merger Directive 90/434/E.E.C. has been transposed in Cyprus tax legislation so that any profits or gains made by reason of mergers, divisions, transfer and exchange of shares concerning companies resident in different EU member states or third countries or of non resident companies or companies established in other EU member states or third countries, are exempt from tax. Assets taken over are depreciated as if no change in ownership has taken place. Losses are also transferred to the new company. The exchange of shares as well as the transfer of the registered office of a European Company will not give rise to any taxation. 8. Anti-avoidance rules The general principle governing transfer pricing rules in Cyprus is the arm s length principle. The Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/EEC) has been transposed into the Income Tax Law. The relevant provisions stipulate that the arm s length principles should apply in certain transactions, including transactions between associated enterprises. Cyprus has no controlled foreign corporation legislation of the type introduced in some other countries. As a result, the undistributed profits of foreign subsidiaries are not assessed at the parent company level. The general principle behind the Cypriot CFC rules is that antiavoidance measures should be used only to maintain the equity and neutrality of national tax laws in the international environment. Therefore, the Cypriot CFC rules only concern income that is genuinely passive and do not extend to active income. Their aim is to prevent non-resident companies over which domestic tax payers have a controlling or substantial influence, from converting tainted income into exempt dividend income receivable by a 20

21 Cypriot-resident company. Thus CFC provisions will only be triggered if more than 50 per cent of the non-resident company s activities result directly or indirectly in investment income and the foreign tax burden on the income of the non-resident company paying the dividend is substantially lower than the tax burden on the company which is tax-resident in Cyprus (substantially lower means lower than 5 per cent). If one of the conditions is not met, the dividend remains tax exempt. Investment income is defined in section 2 of the Income Tax law as being income not deriving from business, employment or pension. Cypriot tax legislation does not provide for thin capitalization rules i.e minimum debt/equity ratio requirement. 9. Administrative requirements of local tax authority The Cyprus system is a combination of the revenue-assessed and self-assessment systems. Companies fall entirely under the self-assessment system. Self-employed individuals fall under the self-assessment system only as far as provisional tax is concerned and for employees a P.A.Y.E system is in operation. Ultimately, self-employed individuals and employees are revenue assessed. It is the duty of each individual / legal entity to deliver to the Director of Inland Revenue a return of income, following deduction of tax exempt, tax deductible expenses and credits granted under the taxation laws in force. Tax returns should be filed, not later than the 30 th of April of the year following the year of assessment in the case of individuals. Companies and self-employed persons pay temporary tax on estimated incomes during the year in three equal installments by submitting a temporary tax return with the first payment due on August 1 st, in the case of persons (selfemployed and companies) submitting accounts with the return not later than the 31 st December of the year following the year of assessment. 10. Double Taxation Treaties Currently, 33 treaties are in force, covering 42 states including most European countries, the USA, Canada, China, India, South Africa, Singapore and four Arab countries (Egypt, Syria, Kuwait, Lebanon). 11. Special Incentives There are no incentive laws providing preferential tax treatment of any type of business activities. The government has, however, taken several measures with a view to enhancing the island s competitiveness and introduced a framework of certain incentives which aim, inter alia, to the attraction of capital intensive foreign investment and the development of new high-tech industries. 21

22 B. Individuals 1. Taxable persons Under the Income Tax Law, individuals who are residents in Cyprus are subject to tax on their worldwide income whether remitted to Cyprus or not. Individuals who are non-cyprus tax residents are subject to tax only on their Cyprus-sourced income. An individual is a tax resident of Cyprus if in the year of assessment (calendar year), stays in the Republic of Cyprus for a period or periods exceeding in aggregate 183 days. 2. Taxable Income As regards the definition of taxable income please refer to our comments in paragraph 2 in Section B above. In addition to the allowances and tax exemptions granted to companies (in so far as they apply to individuals) the most important exemptions and allowances applicable to individuals are the following: Tax Exemptions (a) (b) (c) certain pensions, investment income, such as interest and dividends, income of charities, cooperatives as regards transactions with members, approved provident and other funds, etc. Allowances (a) (b) (c) contributions to the social insurance fund, contributions to any provident or pension fund, life insurance premiums subject to certain restrictions. Dividend income The dividend income of resident individuals is subject to SDC at the rate of 15%, which is withheld at source. Dividends paid to non-resident persons will be fully tax exempted. Interest income Interest income earned by resident persons is subject to SDC at the rate of 10%, which is withheld at source. Interest income earned by non-resident persons is fully tax exempted. 3. Applicable tax rates The Income tax rates for 2005 and 2006 are: Taxable Income in Cy %Rate Tax in Cy Cumulative taxable income in Cy Cumulative tax incy Over Over

23 4. Capital gains tax Individuals are subject to capital gains tax under the Capital Gains Tax Law No. 52/80 ( the Capital Gains Tax Law ) at the rate of 20%, on gains arising solely from the disposal of: immovable property situated in Cyprus shares in a company which owns immovable property situated in Cyprus (excluding shares listed in any recognized stock exchange) 5. Treatment of losses Loses that cannot be wholly set off against an individual s taxable income in the year of tax assessment, are set off against taxable profits arising from other sources during the same year. Furthermore, any remaining amount may be carried forward and be set off against such person s taxable income of future years. C. Capital Immovable property Tax Immovable property is subject to tax on the market value of the property as at 1 st January It is an annual tax calculated at the following rates: Value of Property C Rate % Up to 100,000 NIL 100, , , , Over 500, No inheritance tax, lottery taxation or gift (inter vivos) tax is due in Cyprus. D. Indirect taxes 1. Stamp duty Stamp duty is payable on certain transactions, including any documents which relate to property situated in Cyprus or any action to be performed or realized in Cyprus, irrespective of the place of execution. The rates are: 0.15% for contracts of a consideration of up to CYP100,000 (about US$222,568). 0.2% for any amount over CYP100, Value added tax (VAT) VAT is charged on the supply of goods or the provision of services in Cyprus at the following rates: Low rate: 5% (e.g. applicable in the case of supply of food in the course of catering; 23

24 Standard rate: 15% Zero rate: (e.g. applicable in the case of supply of food other than in the course of catering) Some supplies are exempt from tax, (e.g. insurance and financial services). 3. Customs & Excise Goods imported into Cyprus from overseas are subject to customs duty in accordance with the Common Customs Tariff (CCT). Excise taxes are imposed on a limited number of categories of goods, mainly cigarettes, petrol and motor vehicle, alcohol etc. 4. Transfer fees for immovable property These are paid on transfers of immovable property and are calculated on the market value of the property as estimated by the Land Registry department. They range from 3% to 8% depending on the value of the property. 5. Capital duty Capital contribution is subject to registration fees calculated on the basis of the authorized share capital (nominal only) and any further increases at the rate of C 60 (payable once upon incorporation) plus 0.6% on the authorized share capital. There are no fees payable on share premium. E. Other duties 1. Professional tax Companies operating from premises within municipal boundaries are subject to an annual professional tax, ranging from Cy 450 (about US$1,002) to Cy 3,000 (about US$6,677), depending on various factors such as their turnover, share capital, number of employees. 2. Stock exchange transaction fees A special fee is imposed in relation to transactions that take place in the Cyprus Stock Exchange or are announced to the Cyprus Stock Exchange, at the rate of 0.15% for both individuals and entities. The fee is suffered by the seller or the person who announces the transaction. Some transactions are exempt from these fees, for example share issue and share redemption by the issuer, transactions in non-convertible corporate bonds. F. Enforcement-Litigation procedure Non compliance with the deadlines for the payment of tax results in penalties and interest depending on the deadline not complied with. 24

25 It is an offence under the law to make an inaccurate statement or return in respect of income, and furnish invalid information. Such offence is punishable on conviction of the offender by a fine not exceeding Cy or by both a fine and imprisonment. It is also an offence under the law to fail or neglect to give any notice or to file any returns. Such offence is punishable on conviction of the offender by a fine not exceeding Cy 10,00 for each day of refusal, failure or neglect or by imprisonment not exceeding twelve months. A person who is proved to have fraudulently omitted or delayed to pay the tax under the Assessment and Collection of Taxes Law becomes liable on conviction, in the case of a company, to a monetary fine not exceeding Cy 1,000. In the case of an individual, conviction may be for a monetary fine not exceeding Cy 500 or to imprisonment not exceeding six months or to both a monetary fine and imprisonment. Taxpayers who disagree with an assessment, have the right to file an objection in writing, setting out the reasons of disagreement, while paying at the same time any amount of tax not in dispute (tax according to the tax return). On receiving the final determination, a person may either file an hierarchical recourse to the Tax Tribunal within 45 days, or apply to the Supreme Court for a revision of the decision of the director within 75 days. The burden of proof that the assessment is excessive falls on the tax payer. Slovak Republic Sweden nil nil Syria nil nil Thailand /10/15 5/10/15 UK 15 nil 6 nil nil USA 5 nil 7 nil nil Yugoslavia Tax Tribunal This is an independent body, which examines and decides on issues and disputes between taxpayers and the Department of Inland Revenue with regard to income tax, SDC, immovable property tax and capital gains tax. The Tax Tribunal must take a decision on a case under examination within one year at the latest from the date that the hierarchical recourse was filed. Supreme Court The Supreme Court examines applications (otherwise known as recourses) by taxpayers on decisions taken by an administrative organ, such as the Commissioner of Income Tax or the Director of Inland Revenue or the Tax Tribunal. Appeals on the first instance judgments may be made to the Supreme Court within 42 days, either from the date of notification of the decision of the Commissioner of Income Tax or from the date of notification of the decision of the Tax Tribunal. 25

26 APPENDIX INCOME TAX RATES FOR 2005 & 2006 FOR INDIVIDUALS Taxable Income C Rate % Tax C Cumulative Taxable Income C Over Cumulative Tax C INCOME TAX RATES FOR 2005 & 2006 FOR CORPORATIONS Companies Public corporate bodies 10% 25% Appendix Continued Below 26

27 Country Slovak Republic Dividends Royalties Interest Rcvd. in Cyprus Paid from Cyprus Rcvd. in Cyprus Paid from Cyprus Rcvd. in Cyprus Austria nil nil nil nil Belgium nil nil Bulgaria nil nil nil nil nil nil Canada China CIS nil nil nil nil nil nil Czech Rep Denmark nil nil Egypt France nil nil Germany nil nil Greece nil nil Hungary 5 1 nil nil nil India Ireland nil nil nil nil 10 nil nil Italy 15 nil nil nil Kuwait Malta Mauritius nil nil nil nil nil nil Norway nil nil 5 nil nil nil nil Poland Romania Russia 5/10 5/10 nil nil nil nil Sweden nil nil Syria nil nil Thailand /10/15 5/10/15 UK 15 nil 6 nil nil USA 5 nil 7 nil nil Yugoslavia Paid from Cyprus 27

28 1 15% if received by a company holding directly less than 25% of the capital 2 15% if received by a company holding directly less than 10% of the capital 3 10% if received by a company holding at least 25% of the capital of the paying company. However, if German corporation tax on distributed profits is lower than that on undistributed profits and the difference between the two rates is 15% or more, the withholding tax is increased from 10% to 27%. In all other cases it is 15%. 4 Withholding tax shall not exceed the tax chargeable on the profits out of which the dividends are paid. 5 5% if received by a company controlling less than 50% of the voting rights. 6 If received by a company controlling less than 10% of the voting rights, thus entitled to refund of excess ACT deducted in the UK (if it controls more than 10% of the voting rights, it is not entitled to the refund). 7 15% if received by a company controlling less than 10% of the voting rights. 8 Nil on literary, dramatic, musical or artistic work. 9 Nil for literary, artistic or scientific work, film, and TV royalties. 10 5% on film and TV royalties. 11 Nil if paid to a Government or for export guarantee. 12 Nil if paid to the Government of the other state. 13 Nil if paid to the Government of the other state, in respect of bank loans, in connection with the sale on credit of any industrial, commercial or scientific equipment or any merchandise. 14 Nil if paid to a Government, banks or financial institutions. 15 Nil if royalties are on literary, artistic or scientific work including films, TV films and radio broadcasting % on copyright of literary, artistic or scientific work including cinematography films and films or tapes for TV or radio broadcasting. 28