No transactions Corporation tax payable (Schedule A) 3,000 6,250 9,250 SDC payable (Schedule D) ,781 5,894 10,633

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) June 218 Answers 1 (a) MEMORANDUM Alfa Farm Ltd Tax implications of the sale of the existing used tractor and purchase of a new larger one To: Tax partner From: Tax assistant Date: 1 January 218 Overall summary Comparison of corporation tax and special defence contribution (SDC) payable for the four years 218 to 221 The table below summarises the tax implications of the proposed transactions. Detailed computations are presented in the schedules at the back of this memorandum Total No transactions Corporation tax payable (Schedule A) 3, 6,25 9,25 SDC payable (Schedule D) ,781 5,894 1,633 SDC on interest income Total ,6 12,368 2,783 Transactions made Corporation tax payable (Schedule B) 625 2,375 3, SDC payable (Schedule E) 1,324 3,481 5,697 1,52 Total 1,949 3,481 8,72 13,52 Overall saving 1,334 (793) (3,525) (4,296) (7,281) (i) Corporation tax implications Schedules A and B contain detailed computations showing how the tax liability of Alfa Farm Ltd (Alfa) will change in 218 and the subsequent three years on the basis of the client s projections provided. It should be noted that the existing used tractor will be sold for 35, which is more than its original purchase cost. As a result, all the capital allowances claimed will need to be added back in 218 as a balancing addition. The profit of 5, over and above the original cost of 3, will be tax exempt. The overall effect is to increase the corporation tax payable in 218 by 625. However, the increased capital allowances on the new tractor in the next three years will result in a reduction in corporation tax. Therefore, as can be seen from the summary above, there will be a reduction in the corporation tax payable over the four-year period of 6,25 ( 9,25 3,). Loss relief for the losses of 218 and 219 carried forward would be claimed under both alternatives, as can be seen from the detailed computations. The interest of 75 lost as a result of using the fixed deposit account does not affect the corporation tax liability as it is exempt from corporation tax. (ii) SDC implications For SDC purposes, companies are deemed to have distributed 7% of their accounting profits after corporation tax at the end of the two years from the end of the year to which the profits relate. This deemed dividend distribution (DDD) is reduced by any actual dividends paid before the lapse of the two-year period. If, as in the case of Alfa, actual dividends are not paid, the SDC due on the deemed dividends is payable by the company as if dividends equivalent to the DDD have been paid. This SDC paid will be taken into account when future dividends are paid from the relevant year s after tax profits. Both shareholders of Alfa (Andreas and Anna) are tax resident and domiciled in Cyprus, so the full 17% rate of SDC will have to be paid on 7% of the company s after tax accounting profits. The DDD amount depends only on the relevant year s results and is not affected by any future or previous year s accounting losses. It could be affected by future shareholder changes, where the new shareholders are not tax resident and domiciled in Cyprus for SDC purposes. There is no indication that either Andreas or Anna intends to sell their shares, so this possibility has been ignored for the purposes of the calculations. Schedules D and E contain detailed calculations of the SDC payable on the DDD if the transactions are not made and if they are made respectively. As shown in the overall summary at the beginning of this memorandum, the overall effect on the SDC payable on the DDD is a saving of only 131 ( 1,633 1,52). As the DDD is based on after tax accounting profits, these have been re-computed in Schedule E to reflect the changes in depreciation, the accounting profit on the sale of the existing used tractor, and the reduction in interest income. 15

3 The loss of interest due to the fixed deposit account being used to purchase the new tractor will result in an additional SDC saving of 9 over the four-year period. Conclusion As shown in the overall summary at the beginning of this memorandum, carrying out the transactions will result in an overall saving of corporation tax and SDC in three of the four years, and a net tax saving over the entire four-year period of 7,281. Schedules Schedule A Projected corporation tax payable by Alfa Farm Ltd assuming no transactions Taxable profit before loss relief 3, 5, Less loss from 218 carried forward (5,) Less loss from 219 carried forward (1,) Taxable profit 24, 5, Corporation tax at 12 5% 3, 6,25 Schedule B Projected corporation tax payable by Alfa Farm Ltd assuming transactions made Taxable profit/(loss) (5,) (1,) 3, 5, Capital allowances on existing used tractor no longer available ( 3, x 25%) 7,5 Balancing addition on sale of existing tractor (from Schedule C) 22,5 Capital allowances on new tractor ( 8, x 25%) (2,) (2,) (2,) (2,) Taxable profit before loss relief 5, (21,) 1, 3, Less loss relief from 219 carried forward (1,) (11,) Taxable profit 5, 19, Corporation tax at 12 5% 625 2,375 Schedule C Balancing statement on disposal of existing tractor 218 Sale proceeds 35, Less: 215 Cost 3, Capital allowances at 25%: Year ended 31 December 215 (7,5) Year ended 31 December 216 (7,5) Year ended 31 December 217 (7,5) Tax written down value at 31 December 217 (7,5) Balancing addition 27,5 Restricted to capital allowances claimed 22,5 Schedule D Projected SDC payable by Alfa Farm Ltd assuming no transactions Accounting profit before tax 3,5 5, 35, 56, Less corporation tax (from Schedule A) (3,) (6,25) SDC on interest income ( 75 x 3%) (225) (225) (225) (225) Accounting profit after tax for deemed distribution calculation purposes 3,275 4,775 31,775 49,525 Minimum required at 7% 2,293 3,343 22,243 34,668 SDC at 17% ,781 5,894 16

4 Schedule E Projected SDC payable by Alfa Farm Ltd assuming transactions made Accounting profit before tax 3,5 5, 35, 56, Add: Depreciation on existing used tractor 3, 3, 3, 3, Accounting profit on sale of existing used tractor (from Schedule F) 14, Less: Depreciation on new tractor ( 8,/1 years) (8,) (8,) (8,) (8,) Interest on deposit account used for purchase of new tractor (75) (75) (75) (75) Adjusted accounting profit before tax 11,75 (75) 29,25 5,25 Less corporation tax payable (from Schedule B) (625) (2,375) Accounting profit after tax for deemed distribution calculation purposes 11,125 (75) 29,25 47,875 Minimum required at 7% 7,788 2,475 33,513 SDC at 17% 1,324 3,481 5,697 Schedule F Accounting profit on disposal of existing tractor 218 Sale proceeds 35, Less: 215 Cost 3, Depreciation at 1% Year ended 31 December 215 (3,) Year ended 31 December 216 (3,) Year ended 31 December 217 (3,) Book written down value at 31 December 217 (21,) Profit on disposal 14, (b) Tax implications of purchasing the new tractor directly from a supplier in France Corporation tax Capital allowances can be claimed on the total cost of the tractor regardless of the supplier. Therefore, provided the purchase cost, including transport costs to the farm, is the same there will be no corporation tax implications. SDC There are also no SDC implications if the purchase cost is the same, because the depreciation deductible when determining the accounting profits for DDD purposes will also be the same, and the purchase of an asset has no direct SDC consequences. Value added tax (VAT) As Alfa is registered for VAT in Cyprus and both Cyprus and France are members of the EU, the purchase will be an intra community business to business (B2B) transaction, because Alfa will buy the tractor for use in its business. Provided Alfa notifies the French supplier of its Cyprus VAT registration number and the supplier verifies this on the online system available for such purposes, the French supplier will not charge VAT on the sale and Alfa will account for VAT in Cyprus using the reverse charge method. Purchasing from the French supplier is therefore likely to give Alfa a short-term cash flow advantage compared to purchasing from a local supplier. As the local supplier will charge Cyprus VAT at 19% on the sale price, Alfa will suffer an immediate cash outflow of 95,2 ( 8, + VAT at 19%) and must then recover the VAT paid of 15,2 by deducting it from the VAT due in the relevant quarter. 2 John and Mary (a) Taxation on income from employment in Cyprus John and Mary s tax residency status will depend on the number of days they are physically in Cyprus. As they will only move to Cyprus in September 218, they will not be in Cyprus for more than 183 days in 218, and so will not be considered Cyprus tax residents for that year. Accordingly, they will only be taxed in Cyprus on any Cyprus source income. From 219 onwards, they will be spending more than 183 days in a calendar year in Cyprus and therefore will be considered Cyprus tax residents and will be taxed in Cyprus on their worldwide income. However, as in both cases their salaries will be considered as Cyprus source income, they will taxable on their salaries in both 218 and

5 It is not relevant that Mary is not a Cyprus national, nor is it relevant that, despite their departure from Farland, John and/or Mary may also be considered as tax residents of Farland in 218 and/or 219. John John will earn an annual salary of 11,, therefore, he will be entitled to the executive first employment exemption of 5% of his salary, because: His salary is more than 1, per year. He was resident outside Cyprus in 217, the year before the commencement of his employment in Cyprus. He was not resident in Cyprus for three of the five years before the year of commencement of his employment. The exemption will be allowable even though John has previously worked in Cyprus, i.e. John s employment at the cafeteria before he moved to Farland will not affect his entitlement to the exemption. The exemption will apply in 218 even though John s actual income in that year will be less than 1,, as his annualised income (monthly income x 12) will exceed 1,. The exemption is available for ten years, provided the individual s salary is above the minimum 1, level in each of those years. Therefore, John should be able to claim the exemption in both 218 and 219. After the 5% deduction, John s remaining income will be taxable on the basis of the normal rules. Mary Mary will not be entitled to the 5% first employment exemption because her salary will be less than 1, per year. However, as she was not tax resident in Cyprus in 217, the year before the commencement of her employment, she will be entitled to the basic first employment exemption of the lower of 2% of her salary or 8,55 per tax year. As Mary s salary will be 9,, the maximum amount of 8,55 will apply. This exemption is first given in the tax year following the year the employment commences. Therefore, Mary will only benefit from this exemption in 219 and not in 218. Again, after deducting the exemption, Mary s remaining income will be taxable on the basis of the normal rules. Tutorial notes: 1. The basic (2%) first employment exemption is to be abolished after 22, but the question only asked for the position in the two years 218 and The Tax Department circular 217/4 issued on 24 July 217 offers detailed guidance on the interpretation of the legislation as it applies to first employment exemptions articles 8(21) and 8(23). (b) (i) Taxation of income from assets Cyprus income tax is only payable on income from John and Mary s assets in Farland in the years when they are Cyprus tax residents. Therefore, their liability will start in 219. To be liable for special defence contribution (SDC), in addition to being a Cyprus tax resident in accordance with the 183 day rule, an individual also has to be domiciled in Cyprus. John will be considered as domiciled in Cyprus because: Cyprus is his domicile of origin as in accordance with Cyprus legislation, John acquired the domicile of his father at the time of his birth. There is no evidence that he acquired a domicile of choice outside Cyprus and, as he will be returning permanently to Cyprus with his wife to live and work, he will not be maintaining a domicile of choice in Farland even if he did acquire one during his stay there. He was only away from Cyprus for a period of 14 or 15 years, which is less than the required consecutive period of absence of 2 years or more. Accordingly, John will be both tax resident and domiciled in Cyprus from 219 onwards and so liable to SDC as well as income tax from 219 onwards. However, as Cyprus is not Mary s domicile of origin (her father does not have Cyprus as his domicile of origin), she will only be considered as domiciled in Cyprus once she has been a tax resident of Cyprus for 17 out of the 2 years before the commencement of the current tax year. She will therefore only become domiciled in Cyprus for SDC purposes in 17 years time; during this 17-year period she will not be liable to SDC. Rental income from Farland house For income tax purposes, John and Mary will each be taxed on their 5% share of the rental income from 219 onwards. A deduction of 2% of the gross rental income is allowed for physical persons in Cyprus, plus capital allowances on the cost of construction of the house (excluding the cost of the land) over a period of 33 years since the house s first use, and any interest paid on a loan made specifically for the acquisition of the house. Even though there is no double tax treaty between Cyprus and Farland, Cyprus will give unilateral relief for the tax suffered at source on the rental income in Farland. The amount of the credit must not exceed the amount of Cyprus tax which is ascertained on the basis that the income is computed in accordance with the provisions of the Cyprus tax law and the charge to tax is at a rate ascertained by dividing the tax chargeable on the total income of the person entitled to the income by the amount of their total income. The foreign total income is inclusive of any foreign tax suffered. 18

6 John will also be liable to SDC on his share of the rental income from 219 onwards. SDC is payable at the rate of 3% on his share of the gross rental income as reduced by 25%. John will have to pay this SDC on a self-assessment basis every six months, by filing a return on 3 June and 31 December every year and paying the SDC due. If the Farland tax suffered at source has not been fully offset against John s Cyprus income tax liability, then unilateral relief also permits the excess to reduce his SDC liability on the rental income. Interest on Farland bank deposit Interest earned by physical persons is specifically exempt from income tax in Cyprus but is subject to SDC at the rate of 3%. Therefore, John will be liable to SDC on his share of the interest from 219 onwards. He will again have to declare and pay the relevant SDC on a six-monthly basis, in the same return with the Farland rental income. Dividend from Akinita Ltd shares The dividend John receives from Akinita Ltd is Cyprus source income which is exempt from income tax but subject to SDC. However, in this case Akinita Ltd is responsible for deducting the SDC due at 17% at source. (ii) Potential tax savings from transferring assets between John and Mary Bank deposit and shares in Akinita Ltd The Farland bank deposit interest and the dividends from Akinita Ltd in Cyprus are exempt from income tax but taxable under SDC. If these assets are transferred wholly into Mary s name, there will be a saving of the whole of the potential SDC liability because Mary will not be liable to SDC for 17 years. House in Farland The position regarding the rental income from the house in Farland is less obvious, as this is subject to relatively high rates of income tax in the hands of both John and Mary, as well as SDC in John s case. As a result of the first employment exemption, John s salary of 11, will be reduced by 5% in each of the ten years from 217 to 226. This will bring his after exemption employment income below 6, and thus his rate of tax on any non-employment income down to 3%. In contrast, because the first employment exemption available to Mary will only be 8,55, her after exemption employment income will be 81,45 so she will pay tax at the highest rate of 35% on any rental income. Insufficient information has been provided to determine whether the income tax saving which might be achieved from transferring the house into John s name would be sufficient to offset the increased amount of SDC payable, but the following are the factors which will need to be considered: The amount of any further deductions available against John s employment income for social insurance, provident fund contributions, professional subscriptions, etc, and thus the extent of the 3% tax band available in respect of the rental income. The amount of the annual taxable rental income net of all allowable deductions (2%, capital allowances and any loan interest) relative to the size of John s available 3% tax band (as above). Whether the rental income net of all allowable deductions may result in a loss. As such a loss would be deductible against other taxable income of the taxpayer in the same year, if a loss is likely to arise, it would be beneficial to transfer 1% ownership of the house to Mary (not John) as she would be able to save income tax at 35% from offsetting the loss against her employment income, and save 1% of the SDC which would otherwise be payable by John on 75% of the gross rental income. The rate of tax paid at source on the rental income in Farland and thus the amount of unilateral relief available in Cyprus. The higher the Farland tax rate relative to the average rate of Cyprus tax on the gross income on which unilateral relief is granted, the more limited the benefit of transferring 1% ownership of the house to either Mary or John. Taxation of asset transfers in Cyprus There will be no Cyprus tax consequences as a result of any transfers of assets between John and Mary, irrespective of whether they are tax residents of Cyprus at the time, as there is a specific exemption from capital gains tax in the case of a transfer between first degree relatives (e.g. a husband and wife). 3 Toulla (a) Advantages and disadvantages of delaying value added tax (VAT) registration Advantages Toulla will not have to charge VAT on her sales. As she will be selling mainly to end consumers all over the world, this will make her prices lower. The benefit is marginal, however, as she will not be able to recover input VAT on her purchases and so the effective VAT saving for her customers will only relate to her profit margin. She will spend less time checking when to charge VAT for EU and non-eu customers and in preparing and filing quarterly VAT returns, so may incur lower administration costs. She will not need to deregister if her business does not grow as expected and/or she decides to close down. 19

7 Disadvantages She will not be able to recover VAT on her purchases. Specifically, in the case of the large initial order from the Indian supplier, Toulla will not be able to get a refund of the VAT paid on the import if (as is likely) it exceeds the total output VAT on her sales for that quarter. There is, therefore, a cash flow disadvantage. She will not be able to give the Greek supplier a VAT registration number, in which case the Greek supplier will have to charge Greek VAT on his invoice. Whereas, if Toulla were to register for VAT, this being a business to business (B2B) transaction within the EU, the supplier would not have to charge VAT and Toulla would have to declare output VAT and recover input VAT under the reverse charge mechanism. As a result of not being able to recover input VAT, the cost of her sales will be higher. However, not all the input VAT on her previous purchases will be lost when she registers, Toulla will be able to claim input VAT on any unsold stock, purchases of fixed assets made in the three years before registration, and purchases of services made in the six months before registration. As her business will not have a VAT registration number, it will look smaller and potentially less prestigious to business contacts. If her business goes well, once she does register, Toulla will have either to change her prices to include VAT or to absorb the additional cost herself. An increase in prices is unlikely to be popular with her customers. Registering now will avoid a late registration penalty should she make a mistake in the timing of when she needs compulsorily to register for VAT. (b) (i) Sale direct from India to Belgium Although the goods will be supplied by Toulla, a Cyprus VAT registered trader, they will travel directly from India (where Toulla s supplier is located) to Belgium (where Toulla s customer is located) so will never come to Cyprus. As at the time of the transfer of ownership of the goods they will not be in Cyprus, the transaction is outside the scope of Cyprus VAT. Accordingly, Toulla should not charge VAT on the sale irrespective of whether the Belgian trader is registered for VAT or not. Tutorial note: VAT will be paid on the goods at the place of first importation into the EU which in this case is Belgium. The Belgian trader will have to pay Belgian VAT on the import. (ii) Provision of exempt services The provision of medical services is an exempt supply, whereas the sale of biomedical natural cosmetics is standard rated. Therefore, Toulla s business will become partially exempt for VAT purposes and may not be able to recover all the input VAT on its expenses. The standard method of calculating recoverable input tax in the case of a partially exempt business is as follows: Input tax on goods and services used wholly for the purpose of making taxable supplies is wholly available for credit. Input tax on goods and services used wholly for making exempt supplies is wholly disallowed. Input tax which is not directly attributable, e.g. related to indirect costs and overheads, is available for credit on the basis of apportionment, using the fraction: Total taxable supplies/total supplies. In computing the apportionment fraction, the following supplies are ignored: Supplies of capital goods. Incidental supplies in connection with the leasing or letting and granting of a licence to occupy immovable property, and financial transactions. Supplies not subject to output tax under s.2(7), e.g. second hand works of art, except when purchased for resale. Self-supplies. If the input tax wholly or partly attributed to exempt supplies is below the de minimis limit, then credit for such tax is still allowed in full. This tax is known as exempt input tax. The limit is an amount not exceeding 171 per month on average and which does not exceed 5% of all the input tax for the period concerned. This calculation also has to be made on an annual basis, so that an annual adjustment can be made for any over or under declaration made. (c) VAT deregistration If Toulla ceases to trade completely, VAT deregistration is compulsory. She will need to notify the tax department within 6 days of cessation. If she continues to trade but only at low levels of turnover, Toulla can deregister voluntarily when the value of her anticipated taxable turnover for the ensuing 12-month period does not exceed the deregistration threshold of 13,669 (net of VAT and excluding supplies of capital assets). The 12-month period can be measured at any time and the onus will be on Toulla to satisfy the tax department that she qualifies for voluntary deregistration. She will be deregistered from the date of the application or another mutually agreed later date. 2

8 Voluntary deregistration will not be approved if: she intends to cease making taxable supplies at a future date falling within a 12-month period. In such a case deregistration will only apply from the date of cessation of making taxable supplies; or she intends to suspend trading for 3 days or more within a period of 12 months. At the date of deregistration, there is a deemed supply of the business assets (trading stock and capital assets) on which input VAT was recovered at the time of their purchase. Toulla will be required to pay VAT at the relevant rate on the market value of her stock and any such assets at the date of deregistration. This output VAT will only be payable if the amount due exceeds the de minimis limit of Farmaka Ltd (a) Pistis Trust The term trust refers to the legal relationship which is created, in life or on death, by one person, the settlor, when property (movable and/or immovable) is put under the control of a trustee of the trust for the benefit of another person, the beneficiary, or for a prescribed purpose, in such a way that the real benefit from the property does not belong to the settlor or trustee but to the beneficiary. One person can act in any two of the three capacities (settlor, trustee and beneficiary). In the case of the Pistis Trust, as Tatiana is both the settlor and the beneficiary, she cannot also be a trustee. A Cyprus International Trust is a trust in respect of which: the settlor was not a Cyprus resident in the year preceding the year of creating the trust, although they may become tax resident subsequently; and the beneficiary, except in the case of a charity, was not Cyprus tax resident in the year preceding the year of creating the trust, although again, they may become tax resident subsequently. Tutorial note: Since 22 March 212 it is no longer a requirement that the trust property cannot include immovable property in Cyprus or that the life of the trust is limited to 1 years from the date of creation. The income of a trust is taxed as if it were the income of the beneficiary entitled to benefit from it, after taking into account any exemptions or deductions provided for in respect of that specific type of income. However, even though the beneficiaries are the persons liable for any income tax due, the assessment is raised in the name of the trustees in their representative capacity, as for any other representative or agent. Tatiana is the sole beneficiary of the Pistis Trust. Therefore, any income received by the trust will be taxed as if it were Tatiana s income. Dividends received by physical persons are exempt from income tax in Cyprus and no special defence contribution (SDC) is payable in the case of persons who are not Cyprus tax resident. As Tatiana is not Cyprus tax resident, any dividend received from Farmaka Ltd will not be subject to either income tax or SDC. (b) Farmaka Ltd tax residency When applied to a company, the term tax resident in Cyprus means a company whose management and control is exercised in Cyprus. There is no definition of management and control but in practice this can be taken to be: where the majority of the company s directors reside; and where the directors board meetings are held; and where the general policy of the company is formulated. The co-existence of all three criteria is essential. Although essential, sometimes the place where the meetings of the directors are held may not be conclusive. It is the place where the real management and control of a company is exercised that is important and this may, in fact, be exercised by one person; where this is the case his/her place of residency will be the company s place of residence. There are no clear cut rules each case must be decided on its own facts. The following factors are not material deciding factors: where the company s central office is located; where the company s annual general meetings are held; or the company s country of incorporation. Given the specific arrangements described in respect of the management of Farmaka Ltd, there is reason to believe that Tatiana exercises management and control over the company. Specifically, Marios, the only director, is a lawyer who does not understand about the business of the company and Tatiana is in regular contact with him and guides him; Tatiana attends all important meetings; Tatiana is a joint-signatory with Marios on all transactions on the bank account of the company. As Tatiana is not a Cyprus tax resident, Farmaka Ltd is also likely to be considered as not tax resident in Cyprus. 21

9 (c) (i) Farmaka Ltd Taxable profit in 218 Income from patent royalties 2, Less: Amortisation of cost ( 5, x 2%) (1,) Profit 1, Less: Deemed expense allowed by legislation (8%) (8,) Taxable profit 2, (ii) Farmaka Ltd Corporation tax payable in 22 Income from patent sale 2,, Less: Cost of patent (5,) Add back: Amortisation for 215 and 219 ( 1, x 5) 5, 2,, Less: Deemed expense allowed by legislation (8%) (1,6,) Taxable profit 4, Corporation tax at 12 5% 5, (iii) Tax implications of sale of Farmaka Ltd shares The sale of 1% of the Farmaka Ltd shares to the consortium by the Pistis Trust will have no Cyprus tax implications because: any profit made on the sale of shares is specifically exempt from income tax and corporation tax; and as Farmaka Ltd does not own any immovable property in Cyprus, any profit on the sale of the shares will also be exempt from capital gains tax. Therefore, to sell the shares from the Pistis Trust instead of selling the patent from Farmaka Ltd will result in a tax saving of 5, (as calculated in (ii) above). 5 Bota Ltd (a) Capital gains tax on disposal of warehouse in July 217 Sale proceeds 66, Less: Cost per working (no indexation as deflation see also tutorial note) (441,226) Capital gain 218,774 Capital gains tax at 2% 43,755 Workings: Capital gain on exchange of smaller warehouse Sales proceeds in April , Less: Cost 36, Indexation from February 21 to April 212 (( 36, x /213 4) 36,) 26,226 (386,226 ) Capital gain on exchange all rolled over (value of exchanged property higher) 13,774 22

10 Adjusted cost of large warehouse: Market value of smaller warehouse at time of exchange 49, Additional payment 55, Less roll-over relief (from above) (13,774) Adjusted cost for future disposals 441,226 Tutorial note: The retail price index reached a maximum in 214 and has been following a downward trend since there is deflation and not inflation of prices. As a result, the inflation adjustment results in a lower cost rather than a higher cost as would normally be expected. The legislation provides in article 6(b) that what is allowable is any cost made wholly and exclusively for the purposes of realising the gain adjusted for inflation not deflation. As the legislation does not provide for a retail price index adjustment but for an inflation adjustment to cost, no retail price adjustment should be made to cost. (b) Sale of flat in Notaxland and total corporation tax payable for 217 Capital gains tax is only payable on any gains made on immovable property situated in Cyprus. As the flat is not situated in Cyprus, no capital gains tax will be payable on the profit made on the sale. However, the flat was bought for a price significantly below its market value with the intention of a sale at a quick profit. Therefore, the profit on sale will be viewed as a trading profit and so taxable under corporation tax. The fact that Bota Ltd has not made any previous sales of immovable property is irrelevant. As the flat has not been used, it cannot be considered as a permanent establishment of Bota Ltd in Notaxland. Bota Ltd Corporation tax computation for 217 Profit from the sale of the flat ( 2, 1,) 1, Other administration expenses all allowable (1,) Capital allowances added back on sale of large warehouse 15, Taxable profit before loss relief 15, Losses carried forward (65,) Taxable profits 4, Corporation tax payable at 12 5% 5, (c) (i) Special defence contribution (SDC) on liquidation In the case of the liquidation of a company, the total of the profits for the last five years before liquidation which have not been distributed or have not been deemed to have been distributed are deemed to be distributed on the liquidation and the shareholders are deemed to receive such dividends. SDC will be payable on all amounts deemed as distributed to shareholders who are Cyprus tax resident and Cyprus tax domiciled individuals. The following are also to be taken into consideration in deciding the amount of SDC (if any) which will finally be paid: Where a resolution for its voluntary dissolution or liquidation is approved by a company, such company has an obligation to file the declaration of the deemed dividend in respect of the profits of that year and the two preceding years and to pay the SDC due thereon within one month from the date of such resolution. The Commissioner of Taxation is also empowered to raise an assessment on the company for the collection of the SDC. The provisions of the law in respect of deemed dividend distributions are not applicable in respect of the accounting profits arising during the period of liquidation or dissolution, when the company s assets are not sufficient for the full settlement of the company s creditors and no amount can be distributed or paid to its shareholders. If, on liquidation or dissolution, a company distributes to its shareholders assets whose market value after reduction by any capital gains tax payable exceeds the cost of the asset to the company, any such excess will be deemed to be a deemed dividend. Where profits are made during the period of liquidation or dissolution of a company, the deemed dividend distribution cannot exceed the net asset value distributed or which could be distributed to the shareholders. 23

11 (ii) SDC payable on the liquidation of Bota Ltd Year SDC due 212 Accounting loss 213 Accounting profit before tax 125, Less corporation tax paid (11,5) After tax accounting profit 113,5 Less dividend paid in 215 out of 213 profits (>7% of 113,5) (8,) Undistributed after tax profits 33,5 SDC at 17% 5, Accounting loss 215 Accounting loss 216 Accounting loss 217 Accounting profit on sale of warehouse ( 66, 5,) 16, Profit on sale of flat ( 2, 1,) 1, Administration expenses (1,) Profit before tax 25, Less capital gains tax (from part (a)) (43,755) Less corporation tax (from part (b)) (5,) After tax accounting profits 21,245 SDC at 17% 34,212 Estimated SDC on liquidation 39,97 Tutorial note: The 8, dividend paid in 215 out of the 213 after tax accounting profits is greater than the 7% minimum deemed distribution requirement for that year, therefore no SDC on deemed dividends was paid or has to be paid in respect of

12 Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) June 218 Marking Scheme Available Maximum 1 (a) (i) Corporation tax Narrative explanations Balancing adjustment, restricted to CAs claimed 1 Profit over cost not taxable 1 Interest not taxable under corporation tax 1 CAs claimed on new tractor reduce taxable profit/corporation tax payable 1 Computations No transactions: Start from taxable profit 5 Loss relief 218 and 219 in 22 1 Application of correct corporation tax rate 5 Transactions made: Start from taxable profit/loss 5 Add back 218 CAs on existing used tractor 1 Add back balancing addition on sale (including computation) 2 Deduct CAs on new tractor from Loss relief 219 carried forward to 22 and Application of correct corporation tax rate 5 Transfer of relevant figures to overall summary 1 Reference to overall corporation tax effect in narrative (ii) Special defence contribution (SDC) Narrative explanations DDD provisions in legislation 1 5 No effect from future results unless change in shareholders 1 Need to re-compute accounting profits 5 SDC saving on interest lost 1 Computations No transactions: Start with accounting profits 5 Deduct corporation tax 5 Deduct SDC on interest 1 Apply correct percentage and rate for SDC to DDD 1 Transactions made: Start with accounting profits 5 Add existing tractor depreciation (all years) 1 Add profit on sale of existing tractor (including computation) 1 5 Deduct depreciation on new tractor (all years) 1 Deduct interest lost 5 Deduct corporation tax 5 Apply correct percentage and rate for SDC of DDD 1 Transfer of relevant figures to overall summary 1 Reference to overall DDD/SDC effect in narrative 5 Narrative conclusion Format and presentation of the memorandum 1 Clarity and effectiveness of communication 2 Logical flow of calculations

13 Available Maximum (b) Corporation tax implications no effect on capital allowances 1 SDC implications: no effect on accounting profit/ddd charge 1 no direct effect re purchase 5 VAT implications: B2B intra-community transaction 1 French supplier no VAT, Alfa VAT registration checked 1 VAT in Cyprus under reverse charge method 5 Minor cash flow advantage, with explanation (a) Both John and Mary are tax resident in 219 but not in 218, based on the 183-day rule 1 Salaries are Cyprus source income so taxable in both years 5 Irrelevant if considered tax resident in Farland at the same time 5 Irrelevant that Mary is not a Cyprus national 5 John eligible for executive first employment exemption 1,. Level, not resident in 217, not resident in three out of five years 2 Allowed even though worked in Cyprus before 5 First allowed in 218 on basis of annualised salary 1 Also eligible in 219 provided salary > 1, 5 Mary only eligible for basic first employment exemption not tax resident in Cyprus in 217, lower of 2% or 8, Commences in 219 only, year after commencement of employment 1 Other than exemptions normal rules apply for both John and Mary (b) (i) Income tax only if resident 5 SDC only if resident and domiciled 5 John has Cyprus domicile from 219, domicile of origin from father, will not maintain domicile of choice, not more than 2 years non-resident 2 Mary not Cyprus domicile of origin, so not Cyprus domiciled until resident for 17 years 1 Farland house rent income tax, 2% deduction, capital allowances for 33 years, interest deduction 1 5 Unilateral relief for Farland tax, with explanation 1 5 Farland house rent SDC, John only, 3% of 75%, self-assessment every six months 1 5 Unilateral relief for any excess Farland tax 5 Interest exempt from income tax, but SDC for John 3% rate, self-assessment (like rent) 1 5 Akinita Ltd dividend exempt from income tax, but SDC at 17%, deducted at source (ii) Transfer of Farland deposit account and Akinita Ltd shares to Mary to save SDC for 17 years 1 Rental income need to consider income tax as well as SDC effect 5 Comparison of marginal tax rate on rental income for John (3%) and Mary (35%) based on after exemption employment income levels 2 Factors to be considered size of John s 3% band, amount of taxable rental income, effect if a rental loss, effect of Farland tax rate/unilateral relief 4 No Cyprus tax consequences, capital gains tax exemption for first degree relative transfers

14 Available Maximum 3 (a) Advantages: No VAT on sales, benefit as sales made to final customers, but only on profit margin 1 5 Less admin costs, no checking on EU/non-EU customers 1 No deregistration if business does not grow 5 Disadvantages: No recovering of input VAT, no refund on large import from India 1 No VAT registration number for Greek supplier therefore will suffer Greek VAT on purchases 1 Cost of sales will be higher due to unrecovered VAT 5 Can recover VAT once registered on unsold stock, assets within three years, services within six months 1 5 Does not look large/prestigious to business contacts 5 Likely to need to increase prices once registers 5 Risk of penalty for late registration (b) (i) Outside scope of Cyprus VAT, goods not in Cyprus at time of transfer of ownership 1 Should not charge Cyprus VAT irrespective of VAT status of customer in Belgium (ii) Partially exempt may not recover all of input VAT 5 Explanation of standard method for calculating recoverable input VAT 2 Supplies ignored for fraction purposes ( 5 each) 2 De minimis limit, 171 per month on average, 5% of input tax for period 1 5 Annual adjustment (c) If ceases business deregistration is compulsory, notify within 6 days 1 5 Voluntary deregistration if turnover reduced to below 13,669 threshold, net of VAT, excluding capital assets, any 12-month period 2 Date of application or other mutually agreed date 5 No approval if cessation within 12 months 5 No approval if suspend trade for more than 3 days 5 Deemed supply of assets and stock on which input VAT claimed at market value at date of deregistration 1 5 De minimis of

15 Available Maximum 4 (a) Legal relationship, in life or on death, settlor, trustee, beneficiary 2 5 Person can only be two out of the three parties Tatiana cannot also be trustee 1 Cyprus International Trust residence requirements for settlor and beneficiaries, year preceding the year of creation 2 Income is taxed as if it were the income of the beneficiary on the basis of his or her tax status 1 Returns and assessments made in the name of trustee 1 Dividends received by physical persons exempt, no SDC as Tatiana not Cyprus resident (b) Tax resident if management and control exercised in Cyprus 1 Three criteria ( 5 each) + co-existence essential ( 5) 2 Real management and control important issue 1 Question of fact based on circumstances of each case 5 Location of central office, AGM and place of registration not material deciding factors ( 5 each) 1 5 Reasons indicating Tatiana exercises management and control ( 5 each) 1 5 Conclusion: not tax resident because Tatiana not tax resident (c) (i) Amortisation of 2% on cost 1 8% deemed expenses (ii) Deduct cost but add back amortisation for two years 2 8% deemed expense 5 Corporation tax at 12 5% rate (iii) Sale of shares exempt from income tax and corporation tax 1 No immovable property in Cyprus so also exempt from capital gains tax 1 Tax saving effect identified

16 Available Maximum 5 (a) Gain on exchange in 212: Correct sales proceeds 1 Correct cost/indexation rates 1 Roll-over relief on gain given in full 1 Adjusted base cost: Market value at date of exchange + additional payment rollover relief 1 5 Capital gains tax on sale in July 217: Sales proceeds 5 Correct adjusted cost/indexation rates 1 Capital gains tax at 2% (b) No CGT property not in Cyprus 1 Trading profit subject to corporation tax purchased with intention of a quick sale/profit 1 5 Irrelevant no previous sales of immovable property 5 Not a PE because not used 5 Corporation tax computation profit on sale, admin expenses, capital allowances on warehouse added back, losses deducted, CT at 12 5% rate (c) (i) Profits of last five years, not distributed or deemed distributed 1 5 Filing requirements for voluntary liquidation 1 Other factors affecting amount payable ( 5 each) (ii) 212 accounting loss After tax accounting profit 5 Dividend paid in No further DDD charge (dividend >7%) 5 SDC at 17% 5 214/215/216 accounting losses After tax accounting profit (5 x 5) 2 5 SDC at 17% on full amount