The reduced VAT rate of 5% remains unchanged while the super reduced VAT rate is increased from 8% to 9%.

Transcription

1 Cyprus Companies Published on Friday, 2 nd May 2014 The cabinet decided on April 23, 2014 to form a new unified tax authority which will replace the existing two separate authorities, the income tax and the VAT authorities Starting January 13, 2014 the new standard VAT rate in Cyprus is increased from previous 18% to 19%. The reduced VAT rate of 5% remains unchanged while the super reduced VAT rate is increased from 8% to 9%. 24 March 2014 Last submission date for the Income Tax Return for Companies (I.R.4A) for the tax year January 2014 Requirement for submission of Form I.R.614A Payment of defence contribution withheld on rents 7 January 2014 With effect from 1 January 2013 the corporate tax rate has been increased from 10% to 12%. Transfer and carry forward of tax losses by credit institutions with effect from 25 March 2013, in the event of a transfer of operations, assets, rights or obligations from one credit institution to another under the Credit Institutions Resolution Law, any accumulated losses of the transferor at the date of the transfer are transferred to the acquirer and may be used by it for up to fifteen years from the end of the year in which the transfer took place.

2 Increase in special contribution for defence on interest The rate of special contribution for defence, commonly referred to as SDC tax, on interest has been increased from 15% to 30%. The increase will take effect from the date of publication of the law in the official gazette, which will no doubt take place shortly. SDC tax is payable only by tax residents of Cyprus; non-resident individuals and companies are completely exempt. Interest on corporate financing or loan arrangements is subject to income tax rather than SDC tax. Annual levy on bank deposits with effect from 1 January 2013 the levy payable by banks on customer deposits has been increased from 0.11% to 0.15%. No levy is payable on inter-bank deposits. The levy is not deductible for the purpose of calculating taxable profits. It will, however, reduce the amount of profits subject to deemed dividend distribution. Limited effect the changes do not detract from Cyprus s attractiveness as a holding company jurisdiction. Even after the increase, Cyprus s corporate tax rate is one of the lowest in the EU and the increase should not materially affect most holding companies. Furthermore, the other benefits of the Cyprus holding company regime such as the tax free flow of dividends through Cyprus and the beneficial exit opportunities offered by Cyprus s favorable national tax legislation and wide network of double tax agreements remain intact. A. INTRODUCTION The House of Representatives of Cyprus has voted in December 2010 several amendments to the current tax legislation for the prevention of tax evasion and tax avoidance. These amendments include also some fines and additional penalties for late payment of tax and non-compliance with the tax legislation. The most significant changes in the legislation that may affect the International investor doing business through Cyprus are summarized below. B. THE INCOME TAX LAW Notional interest on debit balance of shareholders

3 Up to now, loans given by a Cyprus Company to its shareholders were subject to a notional interest of 9% per annum which notional interest is subject to Special Defence Contribution Tax at the rate of 10%. As from 1 st of January 2011, this notional interest on shareholders' debit balances is imposed only when the shareholder is an individual. In cases where the shareholder is a corporation, the 9% notional interest does not apply, but the provisions of Article 33 of the Income Tax Law, which requires loans to related parties to be granted at an interest rate based on the prevailing market conditions, applies. In case the market interest rate is not followed, the commissioner of Income Tax has the right to impute such rate. Tax allowable Expenditure In order for an expense incurred for business purposes to be considered as a tax allowable expense it must be supported by invoices and relevant receipts or other supporting documentation as required by relevant Regulations. Administrative Penalties Previously, there was a penalty of approximately 52 for the late submission of the annual tax returns of a company. With the current amendments, the penalty of 52 is abolished and from now on, in cases where there is a late submission of tax returns or late provision of information as requested by the law, a penalty of 100, applies. Further, in cases where the Commissioner of Income Tax sends a notification demanding the submission of the tax returns or provision of information and the tax payer fails to comply within 60 days, then the penalty is increased to 200. Also there is 5% additional penalty on tax payable when the taxpayer fails to settle taxes due on the dates as set by the law. Date of commencement The above mentioned amendments became applicable from 1 st of January 2011 except from the administrative penalties which became applicable six months after its publication in the official gazette of the Republic.

4 C. THE SPECIAL DEFENSE CONTRIBUTION TAX (SDCT) C.1 Deemed Dividend Distribution Deemed dividend distribution applies only to a company that has a Cyprus tax resident shareholder (either a physical or a legal person). Furthermore, in case the shareholder of the Cyprus Company is a tax resident person acting as a nominee shareholder, holding shares on behalf of foreign persons, these provisions do not apply. If the provisions of deemed dividend distribution apply, then the deemed dividend is today subject to 20% SDCT. Particular Cases i. Voluntary Dissolution or Liquidation A company which is under voluntary dissolution or liquidation is obliged to pay SDCT, within one month from the date of the relevant resolution, on any deemed dividend distribution on profits of the specific year and on the two preceding tax years. ii. Reduction of capital In case of a capital reduction, any amounts paid to the shareholder in excess of the share capital which was actually been paid by the shareholders will be treated as deemed dividend distribution and will be taxed accordingly. iii. Transfer of assets When a company transfers an asset to a shareholder without any consideration or part consideration then the difference between the fair value of the asset and the consideration if any will be deemed to be dividend distributed to the shareholder and taxed accordingly. However the above provision will not apply when the particular asset was acquired by the company through a donation from the shareholder.

5 C.2 Withholding tax on rents Following the 2010 amendments, the lessee of a property has a withholding obligation under which any person paying rents on property situated in Cyprus is obliged to withhold Defense tax and submit such tax to the tax authorities. The SDCT rate is 3% on the 75% of gross rent amount and is paid in two six monthly installments in June and December. C.3 Interest and Dividend income received from abroad Any interest or dividend income from sources outside the Republic which is subject to SDCT is payable in two six-monthly installments in 30 June and 31 December of each year. In order for an interest income to be subject to SDCT it must be regarded as passive income note incurred from the company's business activities. In order for a dividend income to be subject to SDCT it must be received from a company in a jurisdiction where the income was taxed at a rate lower than 5% and the company paying the dividend to be engaged either directly or indirectly by more than 50% in activities which result in investment income. For more information on the taxation of interest and dividend income please revert to our publication Brief outline on Cyprus Taxation on Interest, Dividends and Profit from Sale of Titles available on our website Administrative Penalties In cases where there is a late submission of tax returns or a late provision of information as requested by the law, a penalty of 100, applies. Furthermore, in cases where the Commissioner of Income Tax sends a notification demanding the submission of the tax returns or provision of information and the tax payer fails to comply within 60 days, then the penalty is increased to 200. Also there is 5% additional tax on tax payable when the taxpayer fails to settle taxes due on the dates as set by the law.

6 D. ASSESSMENT AND COLLECTION LAW Registration with Tax Authorities A company has the obligation within a time limit of 60 days from the date of its incorporation to register itself with the Tax Authorities and obtain a Tax Identification Number. The same provision applies to foreign companies who become tax residents of Cyprus who must get registered with the Tax Authorities within 60 days time limit from becoming a tax resident. In practice, previously, the registration of the company with the Income tax office took place at the time of the first submission of the company's tax returns or at the time where the company requested its first Tax Residency Certificate. Those companies that were registered before the new amendments of the Law were supposed to proceed with registration with the Tax Authorities not later than the 30 th June, Books and records to be kept For businesses who are obliged to keep accounting books, the books should be updated no later than four months from the month the transaction was made. The issuance of the invoices must be made within thirty days from the day the transaction was made, unless an exception was granted by the commissioner of Income Tax. Issuance of assessment by the Commissioner The Commissioner of Income Tax may decide to issue an assessment based on the available information if a taxable person does not submit a return within the specified deadline or in case where the company does not maintained proper books and records.

7 Banking Secrecy Under the new amendments, the Commissioner of the Inland Revenue is able to lift bank confidentiality for tax residents. In order to do so, he must obtain the written consent from the Attorney-General. The Commissioner must provide adequate evidence to the Attorney General in order to justify his request and for such an approval to be granted. He must also give notice to the person under investigation before the examination. In order for the Attorney General to give its consent for the Bank to give the information certain conditions identified in the law must be satisfied. Administrative Penalties In cases where there is a late submission o tax returns or provision of information as requested by the law, a penalty of 100, applies. Furthermore, in cases where the Commissioner of Income Tax sends a notification demanding the submission of the tax returns or provision of information and the tax payer fails to comply within 60 days, then the penalty is increased to 200. Also there is 5% additional tax on tax payable when the taxpayer fails to settle taxes due on the dates as set by the law.