Professional Level Options Module, Paper P6 (CYP) 1 Capoda Ltd

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2 Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) June 2013 Answers 1 Capoda Ltd (a) To: Laurence, MD Capoda Ltd From: Nicos, Tax Advisor Date: 16 January 2012 Re: Presentation to H Bank board of directors MEMORANDUM (i) (ii) As requested, detailed below are the tax benefits that could be highlighted in your presentation to the board of directors of H Bank relating to the Laurcuvee Ltd ( Laurcuvee ) project. (1) Incorporation of Laurcuvee Capoda Ltd ( Capoda ) will be incorporating a 100% Cyprus subsidiary, Laurcuvee, which will be Cyprus tax resident. Laurcuvee is expected to be loss making in Following a recent amendment in the tax law, Capoda will be able to claim group loss relief for these losses in 2012, despite Laurcuvee not being a member of the tax group for the entire tax year. Both companies meet the remaining conditions for group loss relief being Cyprus tax resident and, for Capoda, holding more than 75% of Laurcuvee s share capital. (2) Share capital Capoda will borrow funds from H Bank Plc ( H Bank ) and use these funds to incorporate Laurcuvee and subscribe for the share capital of the subsidiary. Once again, following a recent amendment in the tax legislation, Capoda will be able to deduct the interest payable on the loan from H Bank, despite the funds being used to invest in shares. This is only possible because the subsidiary is 100% owned by Capoda. However, if Laurcuvee will have assets that will not be used in the business, the interest payable by Capoda relating to the loan from H Bank will be restricted based on the cost of those non-business assets. (3) Intellectual property rights With regards to the development of intellectual property rights, there have been significant amendments in tax legislation. 1. From 1 January 2012, any capital expense to develop intellectual property is tax deductible. 2. From the amounts that will be capitalised, there is a tax deductible amortisation allowance equal to 20% per annum, with a full year s charge in the year of development. Given that the estimated amount to be capitalised will be , this equates to a tax deduction of per year for the years 2012 to Laurcuvee will be allowed to deduct, for tax purposes, a deemed expense equal to 80% of the profit derived from the royalties sold. The remaining 20% of the profit (i.e. after deducting any direct expenses) will form part of the taxable income of the company and be taxed at the rate of 10% (assuming there is a taxable profit). Employment of Paul As detailed in the Appendix to this memorandum, the total tax payable by Paul for the tax year 2013 will be , and for each of the tax years 2014 and 2015 will be per year. The net income he will receive for the tax year 2013 will be , and for each of the tax years 2014 and 2015 will be

3 APPENDIX Paul s tax payable and net income Tax years 2013 to and 2015 Annual gross income Social insurance (maximum) x 6,8% (3.625) (3.625) Less 50% of gross emoluments due to income being greater than 100k ( x 50%) (75.000) (75.000) Less exemption for non-residency before employment max 8.550* (8.550) Taxable income Tax payable: First ( ) x 35%/( ) x 35% Tax payable Net income *Tutorial note: In practice, the Cyprus Income Tax Office does not allow a taxable person to claim both the 50% exemption and the non-residency exemption, as in this scenario. However, the legislation provides for both and clearly they are not mutually exclusive. The answer shown above follows the strict legal position. (b) Tax Consultants & Co Ltd Nicosia 16 January 2012 By Hand The Board of Directors Capoda Ltd Nicosia Dear Sirs Following on from our recent meeting with Mrs Laurence, we set out below our advice on the issues raised during the meeting. (i) Structure of the Russian business We understand that you will be expanding into the Russian market by establishing new operations there. The question arises whether initially these operations should take the form of a subsidiary company or of a branch of Capoda Ltd ( Capoda ). Tax position If a subsidiary company is formed and it generates losses, then such losses will not be available to Capoda for group loss relief given that the Russian company will be tax resident in Russia. These losses are likely to be carried forward and relieved against the first available future profits, although we would need to verify this under Russian tax law. Given that the business may be terminated in five years if profits are not made, there is the chance of such losses remaining unrelieved. It is for this reason that, from a tax point of view, we would recommend you undertake the Russian business through a branch. In this way, any losses made by the branch can be relieved against profits in Capoda, the Cyprus parent company, including those for the initial period when losses are expected in the Russian business. This is subject to the recapture rule which states that, when the branch becomes profitable, profits up to the amount of the losses previously allowed are to be included in the taxable income of the parent, Capoda. The branch will be a permanent establishment in Russia, so its profits will be taxed in Russia at the Russian corporation tax of 20%, and double tax relief will apply on the foreign tax suffered, thus no further tax will be payable by Capoda in Cyprus. In general, any profits made by the Russian branch belonging to Capoda will specifically be exempt from Cyprus corporation tax, subject, always, to the recapture rule. Legal position It should, however, be noted that as a branch is considered to be a legal extension of the parent company, any legal responsibilities which may arise from the Russian business can potentially affect Capoda also. This is not the case for a subsidiary which is considered to be a separate legal entity, so with a Russian subsidiary Capoda s only liability, as its parent company, will be the share capital invested. (ii) Proposed structure for the expansion of Capoda s activities outside Cyprus We attach a proposed structure for the investments you wish to undertake outside Cyprus (Appendix I). 16

4 Russia Given that the Russian business may be closed down at the end of five years, even if it were to be incorporated as a subsidiary of Capoda, it would not be appropriate for the Russian company to hold shares in subsidiary companies itself. Withholdings taxes We note that you particularly wish to minimise the withholding taxes payable under the proposed structure. Also, that dividends and interest income are expected to arise as follows: interest income to Hommage Bank Plc from the Russian subsidiary company; dividends from Inspiration Ltd ( Inspiration ), tax resident in the Netherlands; dividends from Audette Ltd ( Audette ), tax resident in Moldova; interest income to Hommage Bank Plc from Audette. Dividends Dividends paid from the Netherlands to Cyprus will be free of withholding tax given the EU Parent Subsidiary Directive. If Inspiration is a direct subsidiary of Capoda, dividends can be paid to the Cyprus parent without the imposition of any withholding taxes. Dividends paid from Moldova to Cyprus are subject to a 5% withholding tax in the case of a shareholding of 25% or more. However, there is no withholding tax on dividends paid between Moldova and the Netherlands, provided ownership is 50% or more and the investment in the Moldovan company exceeds US$ Given that you propose to invest more than US$500,000, we recommend that Audette becomes a 100% subsidiary of Inspiration. In this case, any dividends paid by Audette to Inspiration will be free of withholding taxes. These dividends will not be subject to any tax in the Netherlands and any dividends declared by Inspiration to Capoda will not be subject to any Dutch withholding tax. Also, the dividend income received by Capoda will not be subject to taxation in Cyprus, given that it is derived indirectly from trading activities. Interest income Loan to the Russian subsidiary There is no withholding tax on interest income under the provisions of the double tax treaty between Russia and Cyprus. Therefore, any interest income from a loan made directly from Hommage Bank Ltd ( H Bank ) to the Russian company will be free of withholding taxes. The only caveat would be to ensure that the interest rate is at market level and does not trigger any thin capitalisation rules which may apply in Russia. Loan to Audette Interest income from the loan to Audette would suffer a 5% withholding tax on the gross interest amount, if it were paid directly to H Bank in Cyprus by Audette in Moldova, or via a company in the Netherlands, as Moldova will apply a 5% withholding tax under the provisions of either the double tax treaty between Moldova and Cyprus or that between Moldova and the Netherlands. A 5% withholding tax on a loan of with a 15% annual interest rate would result in tax deducted at source of This tax withheld can potentially be offset against the tax payable in Cyprus on the interest income through double tax relief, but only to the extent that tax is due in Cyprus. If, as you stated, the tax paid in Cyprus would only be 1% of the maximum interest income of , which is , then additional tax of per annum (75,000 15,000) would be payable as a result of the application of the 5% withholding tax. To avoid the additional annual tax payment, we would suggest that the loan to Audette is structured through the Russian company. The Russian company could take out a loan from H Bank in Cyprus, and give a back-to-back loan to Audette in Moldova. Under the Moldova Russia tax treaty, the interest payable by Audette to the Russian company would be free of withholding taxes, as would be the interest payable by the Russian company to H Bank under the Russia Cyprus tax treaty. If a 0,5% interest margin is acceptable to the Russian tax authorities, then the interest charged by H Bank in Cyprus to the Russian company would be at 14,5% per annum, and the interest charged by the Russian company to Audette in Moldova would be the required 15%. At these interest rates, the tax payable in Russia on the net loan interest would be (see Appendix II). This would result in a tax saving of per annum for five years ( (as stated above) ). Given that it is a five-year loan and that the operations in Russia are expected to exist for at least five years, a problem would arise if the operations in Russia are terminated in less than five years, or if you decide to grant an extension of the loan to Audette at that time. We remain at your disposal for any further explanations or clarifications you may require. Yours faithfully, Nicos Tax Advisor 17

5 APPENDIX I Proposed Structure for the Expansion of the Activities of Capoda Ltd Hommage Bank 45% Loan Capoda Ltd Cyprus tax resident 100% 100% Russian Company Russian tax resident Inspiration Ltd Dutch tax resident Loan 100% Audette Ltd Moldovan tax resident APPENDIX II Tax in Russia on back-to-back loan Taxable income in Russia Back-to-back loan interest 0,5% x Tax payable at 20% Voudoui Ltd (Voudoui) (a) Value added tax (VAT) treatment of sales For any sales which take place in Cyprus, the goods are sold from Voudoui s warehouse. The place of supply is where the goods are located; given no transportation, this is in Cyprus. As such, 17% VAT must be applied to these sales on the invoices. For sales to the European Union ( EU ), provided Voudoui obtains and validates the VAT registration number of the customer in their country, then no Cyprus VAT will be imposed. The place of supply will be that of the Member State which issued the VAT number, and the customer will account for VAT in their country using the reverse-charge method. If Voudoui is unable to validate the VAT registration number of the customer, then the place of supply will follow the general rule, which is where the goods are located when transport begins, i.e. in Cyprus, and Cyprus VAT of 17% must be imposed on the supply. For sales taking place to the Middle East, the goods will be exported from Cyprus and the place of supply will be where the goods are located when transport begins, i.e. in Cyprus. However, the export of goods is a zero rated supply and as such the VAT will be nil. 18

6 (b) (c) (d) (e) Disposal of machines The sale will not be subject to capital gains tax. However, a balancing addition arises, calculated as follows: Initial cost of two machines Capital allowances claimed (10% p.a. fully written down) ( ) Written down value Nil Sales price for both machines (2 x ) Balancing addition The balancing addition of will be included in Voudoui s taxable income. New machines The two new machines will attract capital allowances at the rate of 20% (rather than 10%) due to new legislation allowing for increased capital allowances for all machinery purchased in the years 2012 to The depreciation charge for the new machines, whatever this will be, will reduce the accounting profits, thus reducing any deemed distribution. In addition, the cost of acquiring the two new machines can be deducted from the accounting profit for the purposes of determining any deemed distribution. Capital gains tax on the exchange of land Sales proceeds ( (market value) cash) Aug Less indexed cost: x (118,41/91,47) June 2002 (64.726) Less land transfer fees (1.500) Rollover relief (60.274) Chargeable gain Capital gains tax payable at 20% Readjusted value of new land for any future disposal Proposed restructuring Anredas Ltd ( Anredas ) owns a large piece of land in Limassol, and Anitos Ltd ( Anitos ) owns a manufacturing plant in Paphos and a refinery in Larnaka. As such, any disposal of shares in these companies is likely to trigger a capital gains tax ( CGT ) liability for the shareholder, and potentially a balancing statement requirement resulting in both corporation tax and special defence contribution ( SDC ) implications. Although we are not given any information in the question regarding the size of this potential CGT liability, the most tax efficient solution is to avoid this by using a company reorganisation scheme or schemes. Benefits The benefits of using a company reorganisation scheme are that the following tax exemptions apply: No corporation tax arises, including no requirement to prepare balancing statements. No SDC implications arise. No CGT arises from the transfer of chargeable assets. No stamp duty is imposed. No land transfer fees are applicable. No mortgage fees apply, if there are mortgages. In this case, it would appear that it would be necessary to use two schemes consecutively. It does not matter in which order the two reorganisation schemes are effected. Scheme 1 transfer of assets The two distinct branches of activity in Anitos, namely the refining and sale of crude oil on the one hand and the manufacturing and sale of plastic products on the other, can be separated using a transfer of assets scheme. The commercial reasoning is justified, given that the bank requires the crude oil business to be placed into a separate company. Under this scheme and without being dissolved, Anitos will transfer all the assets relating to the crude oil refining business, including the refinery in Larnaka, to the new company (in Diagram 2) in exchange for the transfer of shares representing the entire share capital of New Company. 19

7 Following this transfer, the structure would change from Diagram A to Diagram B, as shown below: Mr Tryfonas Mr Tryfonas 100% 100% Voudoui Ltd V Anredas Ltd Voudoui Ltd V Anredas Ltd 50% 50% V Anitos Ltd crude oil business plastics business V 50% 50% V V Anitos Ltd plastics business 100% V New Company crude oil business Diagram A: crude oil business and Diagram 1: plastics business in Anitos Ltd Diagram B: crude oil business transferred to new company Diagram 1: plastics business remains in Anitos Ltd Scheme 2 exchange of shares The second reorganisation scheme requires an exchange of shares whereby Voudoui Ltd (Voudoui) transfers its shares in Anitos to Anredas, in exchange for the allotment of shares in Anredas to Voudoui. Specifically, under this scheme, Anredas would issue new shares, such that the holding of its existing shareholder, Mr Tryfonas, would be diluted from his current 100% shareholding to a 75% shareholding in Anredas. At the same time, Mr Tryfonas s effective ownership of Anitos will increase from 50% to 75%. Given that Anredas and Anitos have similar values, Mr Tryfonas would retain the same equity values (100% + 50% = 75% + 75%). The new shares in Anredas (25%) would be allotted to Voudoui, which in turn would transfer its 50% shareholding in Anitos to Anredas. As such, Anredas would own 100% of Anitos. Once again the commercial reasoning is justified, given that the resulting structure will make a floatation of Anredas more attractive. The completion of this scheme would result in Diagram 2 of the final structure as requested by Nakis, and as depicted on the piece of paper handed to Mel in the meeting. Tutorial note: If Mr Tryfonas simply transfers 25% of his shareholding in Anredas to Voudoui, this would trigger capital gains tax for him given that Anredas owns immovable property in Cyprus. As such, this option is not advisable. 3 Daniel (a) Type of trust Daniel is describing a fixed trust. This is a trust where the rights of the beneficiaries are defined. In this case, any income will be distributed to the two sons equally upon receipt. (b) (i) Werlek Consulting Ltd ( Werlek ) If the Ildorian tax legislation is the same as that of Cyprus, then the tax residency of Werlek will depend on where the management and control of the company is exercised. Management and control is not defined in the legislation. However, in simple terms, it is taken to mean: where the majority of the directors reside; where the board meetings of the company are held; and where the general policy of the company is formulated. The co-existence of all three criteria is essential. As such, if Daniel leaves Ildoria, never to return, and takes up residency in Cyprus, this will effectively transfer the management and control of Werlek to Cyprus and Werlek will become a Cyprus tax-resident company. As a result, Werlek will benefit from the lower Cyprus corporation tax rate of 10% compared to the Ildorian rate of 15%. Daniel will not have to incorporate a Cyprus company for the purpose of the consultancy agreement with Ambrian Ltd. 20

8 (ii) (iii) House in Kent As per the UK capital gains tax legislation, the gain from the sale of the property is taxable in the country of residency of the owner. Given that the owner, Daniel, will be a Cyprus tax resident, then, from a UK tax perspective, the gain is taxable in Cyprus and there are no UK tax implications. With regard to the Cyprus tax implications, the Cyprus capital gains tax regime only taxes properties that are physically situated in Cyprus. As such, the property in Kent will be outside the scope of Cyprus capital gains tax. Thus the sale of the house by Daniel in Kent will not have any tax implications in either the UK or Cyprus. Cyprus trust Any income derived by a Cyprus trust is attributed, for Cyprus income tax purposes, to the beneficiaries. However, the assessment is raised in the names of the trustees in a representative capacity. The beneficiary is entitled to any exemptions or deductions provided for the specific types of income. If Daniel settles the Werlek shares and the Kent property into a Cyprus trust, with both his sons as beneficiaries, the income will be taxed as follows: (1) Dividend income The dividends from Werlek attributable to Kee, a Cyprus tax resident, will be taxed under the special defence contribution ( SDC ) at the rate of 20% for the years 2012 and From 1 January 2014, the rate will become 17%. SDC on the dividends attributable to Kee must be withheld at source by Werlek, and paid through self assessment by the end of the month following the month of withholding. Dividends are specifically exempt from Cyprus income tax. The dividends attributable to Bryan will be outside the scope of Cyprus taxation given that Bryan will not be a Cyprus tax resident, thus SDC will not apply to him. However, if Ildoria has the same taxation system as Cyprus, Bryan will be in receipt of foreign dividends and will be required to pay Ildorian SDC at the applicable rate through self assessment. The self assessment should be paid on or before 30 June for any dividends received in the first six months of the year, and on or before 31 December for any dividends received in the last six months of the year. (2) Rental income The rental income from the house in Kent will be taxed in the same manner for both Kee in Cyprus and Bryan in Ildoria. For income tax purposes, the income will form part of their taxable income. The total gross rental income is per year, which will be attributed to each son, from which they are allowed to deduct a statutory allowance of 20% of the income. There is no loan interest to deduct, and the house is over 33 years old so no capital allowances apply. The rental income will also be subject to Cyprus/Ildorian SDC. Assuming they have no other taxable income, the income tax and SDC payable by each son will be as follows: Income tax Gross rental income ( /2) Less 20% statutory allowance (5.600) Taxable income Tax payable at 0% at 20% 580 Total tax payable before double tax relief 580 Less tax paid in the UK: x 20% = restricted (580) Tax payable nil Unrelieved foreign tax = SDC Gross rental income ( /2) Less 25% (7.000) SDC liability at 3% 630 Less unrelieved foreign tax of restricted (630) SDC payable Nil 21

9 (iv) Ildorian state pension Under the normal rules, Daniel s state pension from Ildoria will be taxable under the progressive income tax rates. As the pension is , even if Daniel has no other income, the highest rate of income tax on the pension will be at 30% and the tax payable However, Daniel may opt to be taxed under the special mode of taxation for pensions based on services rendered abroad. Under this option, the Ildorian state pension income in excess of will be taxed at a flat rate of 5%, resulting in tax payable of (( ) x 5%). Clearly it would be more tax efficient for Daniel to opt for this alternative method. 4 Nastyka Ltd (a) (b) (c) (d) (e) Value added tax (VAT) on services supplied by Ina The service supplied is received by Nastyka Ltd ( Nastyka ) for the purposes of its business, so it is a business-to-business (B2B) supply. The place of supply follows the general B2B rule, which is where the recipient of the service is located, i.e. Nastyka in Cyprus. This is regardless of the fact that Ina is in Cyprus, as her presence does not create a base that requires her to register for VAT. Nastyka will apply the reverse charge on the invoice from Ina at the standard VAT rate, and will examine whether the input VAT can be reclaimed. Given that Nastyka s business is the sale of children s toys, input VAT on the application of the reverse charge should be reclaimable. Tax payable by Ina Ina is coming to Cyprus as a self-employed engineer who is not a tax resident of Cyprus. Her gross emoluments from advisory services will thus be subject to withholding tax at a rate of 10%. This will result in tax of x 10/90 = Nastyka is liable to pay to the Inland Revenue, being the tax deduction at source from the emoluments of Ina, in addition to the the company is to pay to Ina. The tax should be paid by the end of the month following the month of payment and should be accompanied by a statement explaining how the tax arose and how it was calculated. Distance sales Sales made directly to private customers who do not apply VAT to their EU acquisitions and are established in another EU member state are considered to be distance sales. The place of supply of such sales is where the goods are located when the transportation begins. In this case, this will be Cyprus, and Nastyka must charge these consumers Cyprus VAT. An issue arises if Nastyka exceeds the registration limit of another EU country for distance sales made to that country. This would require Nastyka to register in that member state and charge VAT at the local rate. Nastyka should keep a record of the sales made in each EU member state and check regularly that the registration threshold for distance sales in each of those countries has not been exceeded. George s trip to India George will be away in India for 122 days during Given that he has not left Cyprus for over two years, this means that he will still have been in Cyprus for more than 183 days during 2012, so he will continue to be a Cyprus tax resident. However, given that George will be out of Cyprus for more than 90 days working for the foreign branch of Nastyka, a Cyprus employer, he will be allowed the 90-day rule exemption. This means that the remuneration attributable to the services rendered by George to the Indian branch will be exempt from tax in Cyprus. This will cover both the salary he receives in Cyprus and the salary he receives in India for the entire four-month period September to December Purchase of furniture George has purchased furniture for his house using funds from Nastyka Ltd. The options that he is considering have the following consequences: 1. Option 1, to show the furniture in the books of Nastyka as belonging to the company and claim VAT and capital allowances, is highly unethical. Input VAT cannot be claimed for items that are for private use and capital allowances cannot be claimed for items that are not being used in the business. If an inspection from the VAT authorities or the Department of Inland Revenue discovered the furniture in the books of Nastyka, all the tax claimed would be assessed, and interest and penalties added. Furthermore, doubt would be cast over the integrity of the books and records of Nastyka which would lead to a more in-depth inspection of the transactions of the company, increasing its administrative compliance costs. George should reject this option entirely. 2. Option 2, whereby George s current account will be debited with the amount of , is the correct accounting treatment. 22

10 However, a debit balance in the books of the company by a director/shareholder creates a benefit which is considered to be taxable income. The value of the benefit is equal to 9% per annum of the debit balance, calculated monthly. In this case, George s benefit is thus equal to 375 per month ( x 9%/12). Given that George is a higher rate taxpayer, he will be taxed at 35% on this amount. Over the six-month period 1 August 2012 to 31 January 2013, the tax on the benefit will be 788 (375 x 35% x 6). This additional tax should be deducted from George s emoluments each month by Nastyka, and paid through the PAYE system. It would be better for George not to wait six months until February 2013 in order to clear the balance. Given that Nastyka always has a surplus of cash, a dividend could be declared straight away. To receive a net amount of as dividend (to clear the debit balance), Nastyka would have to declare a gross dividend of ( x 100/80). The dividend of would attract special defence contribution of 20%, i.e , which would have been payable in February 2013 in any case. By bringing the payment forward, George will save the tax of 788 which he would have had to pay had the debit balance remained in place. 5 Electra Ltd ( Electra ) (a) Proposed disposals (1) Apartment Electra will sell the apartment in Nicosia which it had acquired two weeks before. The short time-frame between the date of acquisition and the date of disposal is a very strong indicator of a trading transaction. It is irrelevant when the kitchens were delivered. However, Electra is selling the apartment due to its cash flow problems and thus would be able to state that the motive for the sale was not trade. In addition, Electra has carried out no supplementary work, has taken no loan for the acquisition and, since Electra manufactures and sells kitchens, has no knowledge to justify a trading transaction. The very short time period will be the determinant factor in deciding that this transaction is a trading transaction. The taxable income will be the difference between the sales price of and the acquisition price of , so will be included in Electra s taxable income and subject to corporation tax at 10%, unless the company has losses from its other activities to offset this income. (2) Warehouse The financing of the purchase of the warehouse with a loan (method of financing), as well as the improvements made to the warehouse (supplementary work) are factors that point towards a trading transaction. If the sale of the apartment is deemed to be a trading transaction, this will make Electra a trader in land which is a very strong factor in determining that future sales will be deemed to be trading. On the other hand, the fact that the warehouse is held for two years (length of ownership), is being sold to alleviate the cash flow problem of the company (circumstances responsible for the sale and what happens with the sale proceeds) and that the warehouse is shown in Electra s records as a fixed asset (subject matter of the transaction) are factors that point towards a capital transaction. The length of ownership of two years is the strongest factor for the transaction to be considered of a capital nature but the knowledge of the owner (if Electra becomes a trader in land from the sale of the apartment) is a very strong factor for the transaction to be considered a trading one too. Therefore, a trading transaction will be the most likely outcome. (3) Cars The sale of cars is outside the scope of capital gains tax. The sale of the car will also not be subject to corporation tax as it constitutes the sale of a capital item and thus is not trading income. (b) Retention of social insurance contributions until January 2015 If the social insurance contribution (SIC) amounts are not paid on time, there will be two consequences for Electra Ltd: (1) The salaries to which the SICs relate will not be tax deductible in the 2012 tax year. If the SIC amounts are paid within two years from the due date of payment, then the salaries will be tax deductible in the tax year the payment is made, otherwise the tax deduction will be lost. The November SIC contributions are due on 31 December 2012 and the December 2012 contributions on 31 January If they are both paid in January 2015, then the November 2012 salaries will not be tax deductible whereas the December 2012 salaries will be a tax deductible expense for Electra in the 2015 tax year. (2) Upon payment in 2015, there will be a surcharge equal to 15% of the delayed payment amount. 23

11 (c) Voluntary deregistration for value added tax (VAT) (i) Electra can apply for voluntary deregistration from VAT if the expected turnover from trading for the following 12-month period is less than the deregistration threshold of , net of VAT. The 12-month period can be measured at any time. Electra will have to satisfy the VAT Commissioner of the accuracy of the expected turnover. Deregistration is effective from the date of the application unless Electra and the VAT Commissioner mutually agree a later date. (ii) On the final VAT return, in addition to the output VAT on sales and the input VAT on purchases, a VAT charge will be made for any business assets held on the deregistration date. For this purpose, business assets are made up of any unsold trading stock and capital assets for which input VAT was claimed when they were purchased. A de minimis limit of 341,72 is applied to any output tax that arises so that, if the total output VAT on business assets is below this amount, then no output VAT is payable. 24

12 Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) June 2013 Marking Scheme 1 Capoda Ltd Available Maximum (a) (i) (1) Explanation of the tax deductibility of losses through group relief with reasons 2 (2) Tax deductibility of interest on the loan relating to shares with correct explanation 2 (3) Expenses are tax deductible 1 Explanation of amortisation allowance 2 Explanation of deemed expense of 80% on profits (ii) Calculation of social insurance on maximum 1 Calculation of exemption for high salary employee 1,5 Calculation of exemption of 20% up to Calculation of tax payable 0,5 Calculation of net income Format and presentation of memorandum 2 2 (b) (i) Explanation of position if a subsidiary is used 2 Explanation of position if a branch is used, including recapture of losses and double tax relief 4 Potential legal disadvantages of a branch (ii) Explanation of keeping the Russian subsidiary separate due to possible exit strategy in five years 1 Explanation of withholding tax on dividends from Inspiration 1 Explanation of withholding tax on dividends from Moldova and recommendation to use Inspiration as intermediary holding company 4 Explanation of withholding tax on interest on direct loan to Russian subsidiary 1 Explanation of withholding tax on interest on the loan to Audette either through Cyprus or the Netherlands 2 Calculation of the tax cost 1,5 Recommendation to structure loan to Moldovan company through Russian subsidiary with calculation of tax benefit 3 Identification of potential issue in five years if Russian subsidiary is closed and the loan to Moldovan company is through Russian company 1 14,5 12 Format and presentation of letter

13 2 Nakis Available Maximum (a) Explanation of the VAT treatment of sales to Cyprus customers 1 Explanation of the VAT treatment of sales to EU customers 3 Explanation of the VAT treatment of sales to Middle East (b) Explanation and correct calculation of balancing statement 2 2 (c) Explanation of rate of capital allowances 1 Explanation of depreciation charge on accounting profits 1 Explanation of cost of acquisition on accounting profits (d) Calculation of taxable gain before rollover relief 1 Calculation of rollover relief 1 Calculation of tax payable 0,5 Calculation of readjusted value for future disposal 0,5 3 3 (e) CGT and other tax implications if no reorganisation scheme used 2 Benefits of using a reorganisation scheme (6 x 0,5) 3 Explanation of transfer of assets scheme 3 Explanation of exchange of shares scheme Daniel (a) Explanation of a fixed trust 1 1 (b) (i) Explanation of management and control 2 Application to Werleck 1 Do not require a new Cyprus company 0,5 3,5 3 (ii) Explanation of no capital gains tax with justification 3 3 (iii) Explanation of how Cyprus trust is taxed 2 Explanation of taxation of dividend income for Kee 2 Explanation of taxation of dividend income for Bryan 2 Explanation of taxation of rental income 2 Calculation of income tax and SDC on rental income (iv) Explanation of taxation under the normal rules 1 Explanation of the special mode of taxation 1,5 Conclusion that should opt for the special mode 0,

14 4 Nastyka Ltd Available Maximum (a) Explanation of B2B transaction and place of supply 1,5 Explanation of reverse charge and claim of input VAT 1,5 Explanation of no registration requirement for Ina 0,5 3,5 3 (b) Explanation of 10% withholding tax with calculation of tax 1,5 Explanation of Nastyka s obligation to pay with date and method 1,5 3 3 (c) Explanation of distance sales 1 Explanation of the place of supply 1 Explanation of potential obligation to register in another member state 1,5 3,5 3 (d) Explanation that George is still a Cyprus tax resident 1 Explanation of the 90-day rule and exemption (e) Proposal to recognise the furniture in the books of Nastyka is unethical, with reasons 1,5 Explanation of further repercussion from such course of action 2 Statement that option should be rejected 0,5 Statement that Option 2 is the correct treatment 0,5 Explanation of benefit arising from a debit balance, including a calculation of the tax for the six-month period and method of payment 3 Recommendation to pay an earlier dividend, including calculations of gross dividend and SDC consequences 2 9,

15 5 Electra Ltd Available Maximum (a) (1) Apartment Analysis of badges of trade (0,5 mark each, maximum of 2,5) 2,5 Conclusion of trading 0,5 Calculation of taxable income 1 (2) Warehouse Analysis of badges of trade (0,5 mark each, maximum of 3) 3 Discussion of the length of ownership criteria v the sale of the apartment 1,5 Conclusion 0,5 (3) Cars Sale is outside the scope of CGT 0,5 Explanation that transaction is also not subject to corporation tax 0, (b) Salaries not tax deductible until year of payment and only if paid within two years 2 Explanation of due date of SICs on November and December salaries 1 Explanation of tax deductibility of November and December salaries 1 Explanation of surcharge of 15% on payment (c) (i) Explanation of deregistration criteria 2 Date of deregistration (ii) Explanation of need to include a VAT charge on business assets in final return 2 Reference to the de minimus limit 0,5 2,

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