Technical Report. Granting Credit relating to foreign tax paid on Income Derived outside the Republic. Seize the advantage of our expertise.

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1 Seize the advantage of our expertise Technical Report This publication should be used as a source of general information only. It is not intended to give a definitive statement of the law. For the specific applications of the law, professional advice should be sought. Our directors would be glad to address any questions you may have. Granting Credit relating to foreign tax paid on Income Derived outside the Republic Contents Introduction 2 Page Section A: Legal framework 2 Section B: Practical application 2 Section C: Evidence to be in the possession of the auditors and be available to be submitted for the support of the foreign tax credit claimed when requested 4 Our services 6 Andreas Athinodorou Chief Executive Officer andreas.athinodorou@aspentrust.com Marina Zevedeou Chief Operations Officer marina.zevedeou@aspentrust.com Tel. No.: Fax No.: Website: In association with the Cyprus tax advisors Members of: Seize the Aspen advantage

2 Circular 2011/ 14, Granting credit relating to foreign tax paid on income derived outside the Republic Sections 35 and 36 of Income Tax Law Introduction The following is a summary of the Inland Revenue Circular 2011/ 14, The summary of the circular is divided mainly into three parts. The first part of the circular sets out the legal framework under section 35 (credit in respect of foreign tax under a bilateral tax treaty) and section 36 (unilateral tax credit relief). The second part covers the practical application, including assessment procedures where foreign tax credit is claimed and points of interest. The third part sets out the documents required to be held by the auditors and be furnished to support the claims for double tax credit relief. Section A: Legal framework Credit in cases of double tax treaty In the first paragraph of the circular, a summary is made of the provisions of sections 35, including the crediting of tax paid in a treaty country against the tax payable in the Republic in respect of the foreign source income, the meaning of the foreign tax calculation and maximum of foreign tax credit given amount of foreign tax not allowed as a deduction from the income subject to tax in the Republic underlying tax tax sparing credits taxpayer s right to choose not to be granted a credit for foreign tax claim for foreign tax must be made within 6 years from the end of the tax year in which credit relates to extension of time in certain circumstances. Grant of credit in respect of foreign tax under unilateral provisions Under section 36, a credit is granted in respect of foreign tax not exceeding the Cyprus tax on the income in question the calculation of the tax credit follows to a practical extent the procedure established for calculating the credit in the events where there is a double tax treaty underlying tax in case of dividends. Special Defence Contribution Foreign tax credits is given under section 3(9) of the Special Defence Contribution Law. Section B: Practical application Procedure for issuing assessments where credit is claimed on foreign tax The Inland Revenue Department (IRD) will issue assessments and will grant the tax credit on foreign tax for assessments relating to tax years 2012 onwards, only when the company has fully complied with this circular and has delivered the necessary evidence as these are described in first and second paragraphs of section C (certificate from the foreign tax authority and alternative evidence where the original tax authority certificate is not possible) and important point 8 of section B of this circular to the Auditors of the company in Cyprus. Reliable evidence that the company has complied with the above obligation will consist of a positive statement of compliance with the circular on the tax Confirmation which is submitted with the income tax return. It is evident therefore that credit will not be granted when the tax confirmation is submitted without confirming the above obligation. Credit will also not be given at the first tax assessment and in the case of an individual s assessment who has not presented reliable evidence, except for the cases when the income tax return has been submitted electronically. For years up to 2010 for which no tax assessments have been issued, the credit will be granted only in cases where it does not relate to income payable on a future date and provided 2

3 that the above mentioned conditions are complied with. For cases included in important point 8 of section B that relate to years up to 2010 the credit will be granted only after presenting reliable evidence. In all cases of claiming foreign tax, auditors should prepare analytical accounts of profit and loss and analytical computation of the resulting tax in the Republic of Cyprus, separating the incomes on which foreign tax was suffered and which is claimed as a credit and expenses relating to such incomes, in accordance with the circulars issued on this matter, and the foreign tax which may be offset under the provisions of this circular. The competent Sections of examination of income tax returns and accounts will demand each year from the IT Section, a statement of taxpayers to whom foreign tax credit was granted and will carry out random checks which will cover statements submitted by various audit firms taking into account the amount of credit claimed and the previous experiences and data. Important points 1. The credit on foreign tax cannot exceed the amount of Cyprus tax imposed and attributable to the same income incurred abroad. Also the amount of credit shall not exceed the total tax payable by the taxpayer at the relevant tax year. 2. Where there are different types of income from abroad, the credit for foreign tax is calculated for each type of income separately. 3. Where the same type of income arises from abroad by different sources or from different countries and which was taxed at different rates, the credit for foreign tax is calculated for each source of income or for each country separately. 4. For the purposes of calculating the foreign tax credit, all expenses directly or indirectly affecting the acquisition of income on which the credit relates, are deducted from it. 5. In the case where the allocation of expenses must be done on a different basis and not proportionately, a separate profit and loss account must essentially be made for calculating profits on which the claimed foreign tax was imposed. 6. In no case shall the foreign tax or the amount of foreign tax that exceeds the corresponding Cypriot tax be deducted from income that is subject to tax in the Republic and to reduce taxable income. 7. An exception is the case where the income subject to tax has increased by deemed income, for example in the case of dividends for which, under the provisions of the law or the treaty, the tax on profits of the company paying the dividend (underlying tax) must be taken into account which increases the amount of income subject to tax, but which again would have no practical effect. 8. In the case of income which is payable in the future (e.g. interest) and which is recognised as revenue annually according to international accounting standards, since the income is subject to withholding tax abroad and will be withheld and paid to the foreign tax authority upon payment of the income, then the annual corresponding tax credit against the Cyprus annual tax due will be given, provided that Paragraph 4. 8 of the income tax return I.R.4 of the year 2011 (and following years) has been completed, or as this may possibly be renumbered in future years and regards the foreign tax paid/ withheld and which was claimed in previous years. The company also undertakes the obligation to ensure confirmation from the foreign tax authorities and deliver this to its auditors in Cyprus, stating the year that the income from such sources arose, the amount type of such income and the tax paid in relation to it during the year. 9. No deduction shall be granted in respect of foreign tax imposed on income that is exempted from tax in Cyprus, for example, the foreign tax paid on income from a permanent establishment abroad, whose profits are exempted under Section 36(3) of the Income Tax Law even if part of it, equal to the amount of losses from a permanent establishment granted in previous years is recaptured (proviso to section 36(3)) or the tax withheld on dividends which are exempted from both income tax and special defence contribution. 10. It is emphasised that in case of rental income from abroad which may be subject to both income tax and special defence contribution, any amount of foreign tax withheld or imposed which can not be 3

4 set off against Cyprus income tax that is imposed on the same income, it can be set off against the liability that arises for special defence contribution on this income. 11. It is emphasised that all allowable expenses, direct, indirect or overheads are allocated to each type or source of income in accordance with the provisions of Circular 2008/14 and the amount of Cyprus tax on the underlying income for the purpose of credit of foreign tax, is calculated on the net income of any type or source, after the deduction of allocated expenses. Section C: Evidence to be in the possession of the auditors and be available to be submitted for the support of the foreign tax credit claimed when requested Presentation of a certificate from the tax authorities of the foreign country In all cases, presentation of a certificate by the tax authorities of the foreign country properly translated in Greek or English, which certifies the tax imposed in that country and the income on which the tax was imposed/ withheld, constitutes the most trustworthy and indisputable proof of payment of the foreign tax, on the basis of which the credit is granted immediately, according to what has been stated in the previous parts of the circular. Alternative particulars when the presentation of the tax certificate is not possible or extremely difficult to obtain In case it is not feasible or extremely difficult to obtain such a certificate, alternative particulars should be submitted which provide reliable documentation of the foreign tax and the income in respect of which the foreign tax was paid, to an extent that satisfies the Department of Inland Revenue. Evidence which can be accepted, either individually if considered satisfactory or in combination with other evidence, include the following: 1. Claim for credit of imposed tax (salary, rent or other income) Notice of assessment by the competent tax authority that shows the type of income that was taxed. Stamped self assessment form where this applies. Proof of payment of foreign tax issued by the competent tax authority provided that satisfactory details as regards to the type of income and the period concerned are given. In case of employees, certificate of emoluments from the employer which analyses the withholding amounts. Because the tax withheld with the employer is not the final tax, the certificate of emoluments should be accompanied by the final tax assessment or by a stamped self assessment form whenever this is the case. An exception may be cases where the tax withheld exceeds significantly the corresponding Cyprus tax and at the discretion of the assessing staff can be accepted. 2. Claim for credit of tax withheld In relation to interest (i) Certificate of interest and tax withheld from the bank or other financial institution. (ii) If the interest is paid by a person who is not banking company, a stamped declaration form from the competent foreign tax authorities for the payment of interest with tax withheld to the person who is a Cyprus tax resident or a certificate of the interest payment and tax withheld along with a receipt of the tax paid. (iii) In cases where interest is collected on behalf of the beneficiary through a representative (trustee, custodian, broker, etc.), who is an independent person from the beneficiary and performs representative s duties in the ordinary course of his business and is governed by legislation comparable to the Cyprus legislation authorising the Provision of Investment Services, certificate from the representative for the payment of the interest, the withholding of the tax, by whom the interest was paid and the amount of deposit/ loan. 4

5 In relation to intellectual property rights (royalties) or rights of use or other income (i) Declaration form of payment of rights or other income with tax withheld to the individual Cyprus resident, stamped by the competent foreign tax authorities. (ii) Certificate of payment of rights or other income and withholding of tax from the payer of the rights/ income, together with the receipt of the payment of the tax. In relation to dividends (i) Declaration form of payment of dividend with withholding tax to the individual Cyprus tax resident, stamped by the competent foreign tax authorities. (ii) Dividend receipt which shows the gross dividend, the tax withheld and the net amount of dividend. In case the dividend is paid by a company listed on a recognised stock exchange the dividend receipt can be considered alone as a satisfactory evidence, but in other cases complementary evidence will be needed unless the amount of the tax does not exceed (iii) In cases where the dividend is collected on behalf of the beneficiary through a representative (trustee, custodian, broker, etc.), who is an independent person from the beneficiary and performs representative s duties in the ordinary course of his business and who is subject to any legislation comparable to the Cyprus legislation authorising the Provision of Investment Services, a certificate from the representative for the payment of the dividend, the withholding of the tax, by whom the dividend was paid, the number of shares held and the year in which it was paid. In all cases of receiving income from interest, royalties, dividends or any other income on which tax is withheld, where both the payment of income and the withholding of tax thereon is made through a bank and on the remittance advice/deposit slip for the benefit of the recipient sufficient data on income and tax withheld are recorded, the remittance advice/deposit slip may be accepted as evidence. 3. Claim for underlying tax credit Audited accounts and tax computations of the company paying the dividend for the year from the profits of which the dividends were paid. In case where the underlying tax relates to another company (subsidiary) and not the one paying the dividend, audited accounts and assessments of the company paying the original dividend from the taxed profits and which was used to issue the final dividend by the foreign company which pays the dividend to the Cyprus tax resident person, shall be furnished. Notice of tax assessment or stamped self-assessment from the tax authorities of the country where the head office of the company paying the original dividend is situated which states the income that was taxed and the tax paid. In case of a company listed on a recognised stock exchange no particulars are required, provided that the IRD will have at its disposal the audited accounts of the company itself with a summary of the incomes and tax for the year based on these accounts. 4. Claim for tax sparing credit This claim is documented only with a certificate from the competent tax authorities of the State where the company paying the dividend is resident. It is emphasised that if the Cyprus tax on dividends is fully covered by the withholding tax, no particulars shall be required for confirming the underlying tax or the tax saved. 5. For all cases 1-4 All certificates or confirmations must be original and be either in the Greek or the English language or have built-in English text or be translated in the Greek or the English language by an official translator such as the Press and Information office or the Embassy of the State on whose language the document is written. 5

6 Note To avoid time consuming procedures in instances where the claimed amount of foreign tax is relatively low and does not exceed the for the type of income or for each separate source of income, documentary evidence that has not been officially translated can been accepted, provided that it is accompanied by auditor s statement that he has examined the evidence and is satisfied that the taxpayer has suffered/paid the foreign tax claimed. The IRD reserves the right to examine in detail all the evidence which the auditor has at his disposal for the purpose of issuing his relevant decision and/or ask for any additional evidence that it considers necessary. In every case, the examining officer makes sure that the income on which foreign tax credit is claimed is included in the tax returns submitted, tat such a withholding is provided in the agreement with the other country and the calculation is correct. With regards to cases that are not covered by the evidence referred to in section C of the circular and for amounts of withholding tax credit up to the , the Head of the District Office decides which particulars can be accepted. For amounts of withholding tax credit that exceeds and up to the competent Chief Officer decides while for larger amounts the case is submitted to the Director with your (the assessing officers) recommendations. Provided that nothing can prevent the hierarchical submission of the case to a higher level even if it falls within the limits mentioned above. This circular applies to all cases which are under review and have not been settled. In no event cases which have been examined and settled and for which no objection is pending will be opened. Note: The above is a free translation based on the circular. Our services Please contact us at info@aspentrust.com information. for any questions you may have regarding the above Our team has the necessary expertise and is in the position to offer an integrated range of professional services and advice on the formation of a structure that is tax efficient and tailored to your specific needs. We excel on the implementation and management of practical tax solutions aimed at meeting your business objectives. What we can do for you: We can source the tax advice and assist in the architecture of the optimal structure for your business needs. Implement the structure in accordance to the advice. Offer the day-to-day administration and back office support in line with the agreed advice. Liaise with third party auditors to ensure financial reporting and tax compliance in line with the tax advice. ooooooooo GH