Answers
Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) December 2015 Answers 1 Tanaz To: Tax partner From: Tax senior Date: 20 July 2014 Re: Recent meeting with Tanaz of Emily Food Products Ltd MEMORANDUM Following my recent meeting with Tanaz of Emily Food Products Ltd (EFP), please find below the information requested with regards to her proposed acquisition of Esmeralda Complex (Esmeralda) which is currently owned by Andriana Development Ltd (ADL), as well as the setting up of the Cyprus subsidiary, Em s Cyprus Food Ltd (EMC), of her company Emily Food Products Ltd (EFP). (a) (b) Purchase of shares v purchase of building If Tanaz purchases the Esmeralda Complex building from ADL, she will need to pay land transfer fees on the purchase price, excluding value added tax (VAT). She will also need to pay VAT on the purchase price. If Tanaz purchases the shares of ADL, no land transfer fees or VAT will be applicable, and so these expenses will be saved. The tax treatment of the various transactions contemplated differs depending on whether Tanaz purchases the shares of ADL or acquires Esmeralda outright in her own name. These differences are explained below: (i) Rental income from ground floor shop Tanaz purchases the building herself If Tanaz purchases the building herself, any rental income arising from the ground floor shop will constitute Cyprus source rental income for Tanaz. In arriving at the taxable income, she will be allowed to deduct the following from the gross rental income: (1) a 20% statutory deduction of the gross rental income; (2) capital allowances equal to 3% of the cost of acquisition (excluding the cost of the land); (3) interest on any loan used to acquire the property, if applicable. Such interest would be pro-rated to the floor occupied by the shop based on a logical method of apportionment, such as the area of the shop as a percentage of the entire building. This net taxable income would be subject to the normal income tax brackets. Given that Tanaz is a non-cyprus tax resident, no special defence contribution (SDC) will be applicable to the rental income. Tanaz purchases the shares of ADL If Tanaz purchases the shares in ADL, the company will be taxed on the rental income, under corporation tax at the rate of 12 5%. The company is not entitled to the 20% statutory deduction but instead can deduct any expenses incurred wholly and exclusively for the production of the rental income. These will include capital allowances and any relevant interest as above. ADL is a Cyprus tax resident company and thus will also be liable to pay SDC on the rental income, of 3% on 75% of the gross rents. At the same time, ADL will need to request a correction from the Tax Department, in order to adjust for the input VAT it had previously claimed relating to any property not subject to resale. Given that the rental income is exempt for VAT purposes, ADL will need to refund the input VAT which relates to the shop to the Tax Department. This again should be based on a logical method of apportionment, such as the area of the shop as a percentage of the entire building. (ii) Use of one of the first floor offices for free by EMC Tanaz purchases the building herself or purchases the shares of ADL As the 100% subsidiary of EFP, EMC is a related company to Tanaz and, as such, any commercial dealings it has either with Tanaz, if she purchases the building in her own name, or with ADL, if that company remains the owner of the building, should be at arm s length. If no actual rental is charged, the Tax Department will treat the owner of the building (Tanaz or ADL) as receiving a deemed rental income equal to the market rate, and this will be taxed on Tanaz/ADL as per (b)(i) above. No SDC applies to the deemed rental income. Given that this is deemed income for Tanaz/ADL for tax purposes, it will not appear as an expense in the books of EMC. It may be better to charge an actual rent so that EMC could also benefit from a tax deduction for the expense. An actual rent will attract SDC for ADL, however. 15
(iii) (iv) If Tanaz purchases the shares of ADL, ADL will need to request a correction from the Tax Department, in order to adjust for the input VAT it had previously claimed relating to the office which will be rented out and not resold (as explained in (b)(i) above). Sale of one of the first floor offices to a third party Tanaz purchases the building herself If Tanaz purchases the building outright in her name, the ensuing sale of the office will be an isolated transaction which may be taxed either under income tax if it is deemed to be a sale in the nature of trade, or if otherwise, under capital gains tax. The badges of trade will be used to decide the nature of the transaction. From the information available, given that the sale is expected to occur within a short time period (within a few weeks from the time of purchase), it is highly likely that the sale will be treated as a trading transaction. As such, the profit (if any) from the sale of the office will constitute taxable income for Tanaz and be taxed using the normal income tax rates. From the sale price, net of VAT, she will be allowed to deduct any expenses incurred wholly and exclusively for the purposes of generating the income. This will include the purchase price and the land transfer fees relating to the office, apportioned from the total cost paid using a logical method, such as a square metre basis. If the sale is considered to be a trading transaction, when Tanaz sells the office, she will need to charge VAT on the sale given that the building is a new property. She will need to register for VAT purposes in Cyprus and charge VAT on the sale of the office. She will be able to deduct, as input VAT, that part of the VAT relating to the purchase of the office, based on a logical apportionment such as a square metre basis. Alternatively, if the sale is considered to be an isolated transaction it will be exempt from VAT. A tax ruling should be sought from the Tax Department to verify this. If this is the case, no VAT will be charged on the sale and no VAT can be reclaimed as input VAT. The VAT treatment does not necessarily depend on the direct tax treatment of the sale. Tanaz purchases the shares of ADL If ADL is purchased, then any taxable profit made on the sale of the office will be subject to corporation tax at 12 5%. In addition, the company will charge VAT on the sale, and have the right to reclaim the input VAT which is attributable to the office sold. Use of the top floor apartment for personal use Tanaz purchases the building herself If Tanaz holds the apartment in her own name, no tax consequences will arise for her from her own use of the apartment. Tanaz purchases the shares of ADL If ADL continues to own the apartment, the use of the apartment by Tanaz, being a director of ADL, will give rise to a benefit in kind (BIK) for Tanaz. This BIK will be equal to the market value of the rent receivable for a similar sized apartment in the same area. If the BIK value exceeds the tax free bracket of 19,500, then ADL must account for Tanaz s tax through the PAYE system. ADL will not be able to claim capital allowances in relation to the apartment, and any interest on a loan to purchase it will also be restricted. For VAT purposes, ADL will have undertaken a self-supply and so it will need to charge VAT to itself as if it had sold the apartment at the market value, and pay the output VAT due. It will be allowed to claim the related input VAT against such a self-supply. (c) (i) EMC will be a Cyprus tax resident company. Therefore the income it will receive from the sub-licensing of the trade name will constitute taxable income and the payment it makes to EFP for the use of the intellectual property will be a tax deductible expense. The difference will be taxable in Cyprus at the corporation tax rate of 12 5%. EMC will not be able to use the special scheme for intellectual property, which provides for a deemed 80% statutory deduction from the income, given that EMC itself will not be the owner of the intellectual property as this will remain in the name of EFP (its parent company). With regards to the royalty payment to EFP, which relates to the use of the franchise within Cyprus, EMC should deduct a 10% withholding tax from the gross amount of the payment, as the royalty is considered Cyprus source income. However, the provisions of the double tax treaty with the United Arab Emirates should be examined, if one exists, to ascertain whether the treaty provides for a reduced rate of withholding, or no withholding at all. With regards to the royalty payment to EFP, which relates to the use of the franchise outside Cyprus, no withholding tax arises as such royalties are not deemed to be income derived from sources within the Republic. (ii) EMC will receive a service from EFP which is the right to sub-lease the trade name. This is a business-to-business (B2B) service, with the place of supply following the basic B2B rule, which is where the recipient of the service is established, i.e. Cyprus. Once the value of the services exceed the registration threshold of 15,600, EMC will be required to register for VAT and apply VAT under the reverse charge method. Given that it will only perform taxable supplies with a right of deduction, EMC will have the right of a full deduction of the input VAT on the application of the reverse charge. 16
2 Joanna (a) (b) (c) (d) (e) (f) The two methods of double tax relief which may be provided for in double tax treaties are: (1) The exemption method: under this method the income is exempt from tax in the source country and only taxed in the country of residence. (2) The credit method: under this method the foreign tax paid in the foreign country on income arising in that country is credited against the source country s tax on the same income. Where no double tax treaty agreement exists, Cyprus, in accordance with its national tax legislation, provides unilaterally for the credit method to apply. Thus where a Cyprus resident person has suffered foreign tax on foreign income which is also taxable in Cyprus, and no double tax treaty exists with that country, double tax relief will be provided in Cyprus by crediting the foreign tax against the Cyprus tax which would arise on that income. International agreements have the force of authority in priority to domestic law. However, where the provisions of the domestic law are more beneficial for the taxpayer, then the domestic law applies. The provisions of the treaty only prevail over the domestic law if they are more favourable for the taxpayer. Under Cyprus domestic law, dividend income is exempt from income tax. In the case of a dividend paid from a Cyprus company to an Ildorian tax resident, the domestic law will prevail, and no withholding tax will be applied. As per the information provided, Mardon Ltd (Mardon) and Danwek Ltd (Danwek) are related companies so any transactions effected between the two companies should be on an arm s length basis. This means that the terms of the loan agreement between Mardon and Danwek should mirror the commercial terms of the open market, including in respect of the rate of interest charged. If the interest rate was too high, and assuming that the interest was tax deductible in Ildoria, this would shift profits from Ildoria, where they would be taxable at 30%, to Cyprus, where they would be taxable at 12 5%. The confirmation from the Ildorian tax advisers is that the Ildorian tax authorities will accept that the 5% per annum interest rate agreed is equivalent to arm s length. Using the structure recommended by the Ildorian tax advisers, Tiger Ltd (Tiger) would invest 6 million in Mardon as share capital and lend Mardon 4 million. The 4 million loan would be further provided to Danwek as a back-to-back loan. From the information provided, Mardon would provide the entire 10 million to Danwek, as a loan at an interest rate of 5% per annum. The minimum acceptable margin which the Cyprus tax authorities will allow on the back-to-back loan is 0 35%. As such, the loan from Tiger to Mardon would need to be at an interest rate of 4 65% per annum. Mardon would have taxable interest income of 500,000 (5% x 10 million). This will be taxable as business income, under corporation tax at the rate of 12 5%, given that lending is the principal activity of Mardon. Tax of 15,000 (3% x 500,000) would be withheld by Danwek and paid to the Ildorian tax authorities. Mardon would have interest payable of 186,000 (4 65% x 4 million), and taxable income of 314,000 ( 500,000 186,000). The Cyprus tax on this 314,000 before double tax relief is applied will amount to 39,250 (12 5% x 314,000). The Ildorian withholding tax of 15,000 would reduce the Cyprus tax to 24,250. Therefore, the total annual tax payable by Mardon in this case would be 39,250, with 24,250 being payable to the Cyprus tax authorities and 15,000 being payable to the Ildorian tax authorities. An alternative structure could be as follows: Tiger (BVI) Mardon (Cyprus) Loan 100% invested in shares NewCo (Cyprus) Loan Danwek (Ildoria) Tiger lends the entire 10 million of funds to Mardon at an interest rate of 4 65%, which then uses the funds to subscribe for 100% of the shares of a newly incorporated Cyprus tax resident company, NewCo. NewCo will then use the funds from its subscription to lend to the Ildorian company, Danwek, at the agreed interest rate of 5%. The Ildorian tax authorities cannot raise the issue of beneficial ownership given that the loan provided by NewCo will be made entirely from funds from the issue of its share capital. 17
Mardon will have interest payable to Tiger but this will be tax deductible because the funds have been used to purchase shares in a 100% subsidiary company. Mardon will have annual tax losses of 465,000 (4 65% x 10 million). While NewCo will have interest income of 500,000 (5% x 10 million) from Danwek, which will be taxable business income. Mardon and NewCo will form a tax group, given that both companies are Cyprus tax resident, with NewCo being 100% owned by Mardon, and incorporated during the year. Therefore, the taxable loss of Mardon can be offset against the taxable income of NewCo through group tax relief, resulting in Cyprus taxable income for NewCo amounting to 35,000 (interest income of 500,000 less group relief of 465,000 from Mardon). The overall tax payable in Ildoria is the withholding tax of 15,000 (3% x 500,000). The Cyprus tax payable by NewCo before double tax relief is 4,375 (12 5% x 35,000), and will be reduced to nil when double tax relief for the withholding tax is applied. The total annual tax payable under this structure is thus only the Ildorian withholding tax of 15,000. This will result in an annual tax saving of 24,250 ( 39,250 15,000) compared to the structure recommended by the Ildorian tax advisers. 3 Germagio Cyprus Public Company Ltd (i) (ii) (iii) (iv) (v) (vi) Maria has acquired the option right to acquire shares as a result of her employment. The granting of the right to acquire shares in the future at a price set at the date of the start of Maria s employment does not give rise to a taxable benefit. In six months time, however, if she exercises the option right, then a taxable benefit will arise which will be equal to the difference between the average market price of the shares at the date on which she exercises her right, and the amount paid by Maria when exercising the option. If Maria sells her options right, the taxable benefit will be equal to the difference between the average market value of the shares at the date when the sale of the right occurs, and the amount which Maria would have been required to pay in order to exercise her right. The benefit is taxed in the year it arises, through the pay-as-you-earn (PAYE) system. No taxable benefit arises with regards to the issue of rights and bonus shares to the employees who also hold shares in the company, given that the same rights and bonus shares are offered to all shareholders. Compensation payments made to employees as a result of redundancy are not taxable unless the employees are contractually entitled to receive them. As such, the two months contractual redundancy payments will form part of the employees taxable emoluments, but the further four months redundancy payments will be exempt from tax. For GCP, the entire six months redundancy payment would normally be tax deductible for corporation tax purposes, but it would be prudent to request a tax ruling from the Tax Department. The recovery of legal costs by Panos following a successful legal action against GCP for unlawful dismissal is exempt from taxation and thus no PAYE should be deducted from this payment. The fact that the ownership of the factory will revert to GCP at the end of the lease agreement will give rise to a taxable benefit for GCP, known as the owner s benefit. GCP will need to submit the rental agreement, on which stamp duty will first need to be applied, to the Commissioner of Taxation, in order for the value of the owner s benefit to be assessed. The value of the owner s benefit cannot exceed the cost of erection of the factory, and will be spread evenly over the lease period. It will constitute additional taxable income for GCP for the purposes of corporation tax, and be taxed at 12 5%. It is not considered to be rental income and thus is not subject to special defence contribution. GCP will be entitled to annual capital allowances on the cost of construction, or on the value of the benefit, if lower. The tenant, Rotso Limited (Rotso), will be allowed to deduct the capital expenditure incurred, but over the period of the lease, i.e. over ten years. At the end of the ten-year lease period, both GCP and Rotso must submit a balancing statement to the tax authorities. If GCP sells the land during the lease period, the balance of the owner s benefit which has not yet been assessed at the date of disposal will be considered to be taxable income. GCP will have the option as to how the unassessed balance of the benefit is taxed, as follows: (1) for it to be taxed entirely in the year of disposal; or (2) for it to be taxed in the year of disposal and the preceding five years (thus six years in total), or in the actual remaining period of the lease, whichever is the lesser number of years. In the event that the assessment is made in the previous five years, the tax assessment of these years will be revised to reflect this. 18
4 Panayiotis (a) (b) (c) (d) (e) (f) An innovative business is a business: which can demonstrate through a detailed study carried out by a special external expert that it may in the near future develop new or substantially improved products, services or processes in relation to highly improved products, services or market operations, and which are at risk of technological or industrial failure; or whose research and development expenditure represents at least 10% of its total operating expenditure, in at least one of the preceding three years before the granting of any aid or, in the case of a business which is in its initial phase and does not yet have any economic history, such expenditure will be the subject of an audit of the current tax year, as certified by an external auditor. Potato Development Cyprus Limited (PDC) will qualify as an innovative business and any expenditure incurred by an innovative business (as of 25 July 2014) on research and development (R&D) is tax deductible. Given that PDC currently has no income, it will carry forward the taxable loss created by the R&D expenditure, and offset it against its first available taxable income, for the subsequent five years. Following the passage of five years, any unutilised tax losses are lost. As PDC is an innovative business, any expenditure incurred by Cyprus Potato Public Company Limited (CPP) for the purchase of shares in the company will be allowed as a deduction from CPP s taxable income. For Cyprus income tax purposes, any income derived by a Cyprus trust is attributed to the beneficiary, being Eleni in the present case. However, the assessment is raised in the names of the trustees in a representative capacity. The interest income will form part of Eleni s taxable income for income tax purposes, but will be fully exempt from tax. The income will be subject to special defence contribution (SDC) at 30%. The income is subject to SDC on an accruals basis, so it is of no consequence that the interest has never been paid but has been capitalised. The UK law firm is providing intermediary services to Panayiotis. Given that Panayiotis is not in the business of selling shares but is only selling his shareholding in PDC, he is acting as a consumer. This means the transaction is a business-to-consumer or B2C intermediary service. The place of supply of such a service is where the underlying transaction takes place. The underlying transaction is the sale of the shares of a Cyprus company to a Cyprus buyer, which would mean that the underlying transaction is taking place in Cyprus, rendering the place of supply of the B2C intermediary service also in Cyprus. However, in Cyprus, intermediation on the sale of shares is a VAT exempt transaction. No VAT should be charged by the UK company on its invoice to Panayiotis. The trust is a transparent entity for tax purposes. Eleni, as the beneficiary of the trust, would be the person identified as the taxpayer. The proposed capitalisation of the loan by the trust involves the issue of share capital by PDC equal to the amount of the loan. The trust would then offset the amount owed by PDC with the new shares. Any accrued interest at the point of capitalisation would be taxable income for the trust, but no further tax consequences would arise on the loan capitalisation. The capitalisation would result in the trust becoming a 99% shareholder of PDC, with Panayiotis retaining his 1%. The subsequent sale of the shares by Panayiotis and the trust would be exempt from income tax. However, given that PDC owns immovable property in Cyprus (being its offices and laboratory), capital gains tax would arise on the disposal of their shares. The capital gain would be equal to the difference between the market value of the property at the date of disposal, less the cost of its acquisition by PDC adjusted for inflation. 99% of the gain would attributed to Eleni (through the trust) and 1% to Panayiotis. If Eleni or Panayiotis have not used their life-time exemptions of 17,086, these would be available. The resulting capital gain would be subject to tax at the rate of 20%. Two or more companies may apply for a VAT group registration where they belong to the same group of companies. A group of companies exists where one company controls the other, or where both are under common control. The companies must also be incorporated in Cyprus, and be legally independent, but closely bound to one another by financial, economic and organisational links. The effects of group registration are that: Goods and services supplied between the group companies are ignored for VAT purposes. The group is treated as a single taxable person for VAT purposes, therefore supplies made to or by the group companies are treated as made to or by the representative member (being the nominated company in the group identified as such for VAT purposes). Only the representative member is registered and it is responsible for submitting VAT returns and paying the VAT on behalf of all the members of the group. All members of the group are jointly and severally liable for the payment of VAT. The de-minimis threshold for deducting non-allowable input VAT applies to the entire VAT group. 19
5 Tryfonas (a) (b) (c) Tryfonas is not eligible for the 50% exemption for the emoluments of high-salaried individuals earning greater than 100,000, or the 20% exemption up to 8,550. By studying at the University of Cyprus he will have been in Cyprus for more than 183 days every tax year and therefore already a Cyprus tax resident person. The expatriate reliefs are only available where the employee was not a Cyprus tax resident person in the year before commencing employment. The agreement is for Tryfonas to receive 100,000 as a net annual salary, i.e. following the payment of social insurance contributions and income taxes. The net salary of 100,000 is equal to the gross salary (not including the benefit in kind), less the total employee social insurance contributions for the year (W1), less the total income tax payable in the year (W2). This is calculated as follows: Let the gross salary = x 100,000 = x 4,243 [(2/3x + 15,000 4,243 60,000)*35% + 10,885] 100,000 = x 4,243 [(2/3x 49,243)*35% + 10,885] 100,000 = x 4,243 [7/30x 17,235 + 10,885] 100,000 = x 4,243 (7/30x 6,350) 100,000 = x 4,243 7/30x + 6,350 100,000 = (x 7/30x) + 2,107 100,000 2,107 = 23/30x 97,893 = 23/30x x = 127,687 Therefore, Tryfonas s gross annual salary will be 127,687. Workings: W1: Total social insurance contributions Tryfonas s gross salary will exceed the maximum annual insurable income of employees for social insurance purposes. His social insurance contributions as an employee will be capped at 4,243 [7 8% x 54,396]. W2: The total income tax payable The total tax payable for the year is calculated as follows: Income tax on the first 60,000 is 10,885. Total income tax payable = [(gross emoluments chargeable to income tax (W3) total social insurances (W1) 60,000)*35% + 10,885] Therefore, total income tax payable = [(2/3x + 15,000 4,243 60,000)*35% + 10,885] W3: Gross emoluments chargeable to income tax The gross chargeable emoluments are made up of the gross taxable salary, plus the benefit in kind (BIK) (W4). Given that Tryfonas will be a Cyprus tax resident employee, and will be rendering services for a total aggregate period in the tax year of more than 90 days to a permanent establishment outside the Republic of an employer resident in the Republic, then he is eligible for an exemption under the 90-day rule equal to one third of his gross salary. The BIK with regards to the car would not be eligible for a deduction based on the 90-day rule given that use of the vehicle is only made in Cyprus. Gross chargeable income = (x 1/3x) + BIK = 2/3x + 15,000 W4: BIK BIK relating to car = 30,000 x 50% (private use) = 15,000. Tutorial note: The special contribution payable by employees is not examinable under the syllabus and thus has been ignored for the purposes of this answer. The payment of Tryfonas s gross salary of 127,687 will attract the following contributions from Everything Diamond Bright Ltd (EDB): employer s social insurance of 7 8% on the maximum insurable income, redundancy fund insurance of 1 2% on the maximum insurable income, human resource development fund of 0 5% on the maximum insurable income, a 2% social cohesion fund contribution with no upper limit. i.e. 5,168 [(7 8% + 1 2% + 0 5%) x 54,396] + 2,554 [2% x 127,687*] = 7,722. * Tutorial note: The tax legislation is ambiguous as to whether social insurance and related contributions apply to BIK. For this reason, full marks were also awarded where candidates included the BIK in the calculation for the social cohesion contribution. EDB is allowed to deduct the gross emoluments, the BIK, and all the employer contributions for corporate income tax purposes. This will result in a total tax deduction of 150,409 [ 127,687 + 15,000 + 7,722] and a tax saving of 18,801 [ 150,409 x 12 5%]. 20
Thus, the total cost to EDB for employing Tryfonas will be: Total gross salary 127,687 Total cost of leased saloon car 30,000 Employer s insurance contributions 7,722 Less tax saving (18,801) Total overall cost 146,608 21
Professional Level Options Module, Paper P6 (CYP) Advanced Taxation (Cyprus) December 2015 Marking Scheme 1 Tanaz Available Maximum (a) Explanation of land transfer fees and VAT obligation if purchase outright compared to purchase of shares 2 2 (b) (i) Tanaz purchases the building herself Rental income is Cyprus source income 1 Explanation of available deductions 1 5 Net taxable income subject to income tax brackets 0 5 No SDC applies 1 Tanaz purchases the company shares Corporate income tax at 12 5% 0 5 Explanation of available deductions 1 SDC applies 0 5 Explanation of input VAT implications 1 5 7 5 7 (ii) Consequences of the related party connection between Tanaz and EMC 0 5 Explanation of imposition of deemed rental income 1 No SDC on deemed rental income 0 5 Recommendation to charge actual rental income so that EMC can benefit from tax deduction 1 Actual rental income attracts SDC 0 5 Input VAT implications if Tanaz purchases shares 0 5 4 3 (iii) Tanaz purchases the building herself Explanation of income tax implications, badges of trade, with conclusion 4 Explanation of VAT position of a trading transaction, including need to register 1 5 Explanation of VAT position of an isolated transaction 1 Identify need to obtain a tax ruling 0 5 VAT treatment not dependent on income tax treatment 0 5 Tanaz purchases the company shares Explanation of corporation tax implications 0 5 Explanation of VAT implications 0 5 8 5 8 (iv) Tanaz purchases the building herself No tax consequences if Tanaz owns building outright 0 5 Tanaz purchases the company shares Explanation of BIK 2 No capital allowances and interest restricted 1 Explanation of self-supply for VAT 1 5 5 4 23
Available Maximum (c) (i) Explanation of method of taxation 1 Explanation why IP scheme cannot be used 1 Explanation of withholding tax for Cyprus source income 1 5 Recommendation to review DTT provisions, if applicable 1 Explanation of withholding tax for royalty income outside of Cyprus 1 5 5 5 (ii) Explanation of place of supply rules 1 Explanation of the need to register 1 Explanation of reverse charge with right to deduct 1 3 2 Format and presentation of the memorandum 2 Effectiveness of communication 2 4 4 35 2 Joanna (a) Exemption method 1 5 Credit method 1 5 3 3 (b) Stating that unilateral relief exists using the credit method 1 Explanation of how the unilateral relief works 1 2 2 (c) Explanation of force of authority of international agreements vis à vis domestic law 1 5 Application in this case 1 5 3 3 (d) Statement that arm s length principal should apply with explanation 2 Explanation of profit shift to lower tax environment if interest was too high 1 Statement that the Ildorian tax authorities agree that 5% is arm s length rate 0 5 3 5 3 (e) Identification of minimum acceptable margin in Cyprus and thus the interest rate required on the loan to Mardon 1 Calculation of interest income and explanation that this would be taxed in Cyprus as business income 1 Calculation of withholding tax 0 5 Calculation of taxable income in Cyprus and of Cyprus tax payable following double tax relief 2 Statement of total tax payable 0 5 5 5 (f) Recommendation and explanation of double-tier Cyprus structure 4 Explanation of existence of tax group with reasons 2 Explanation of the tax treatment of the interest income and expense within the new structure, including group relief 2 Calculation of Cyprus tax and total tax payable 1 5 9 5 9 25 24
3 Germagio Cyprus Public Company Ltd Available Maximum (i) Granting of right creates no taxable benefit 0 5 Explanation of tax treatment if option is exercised 1 Explanation of tax treatment if option is sold 1 Benefit is taxed in the year it arises, through PAYE 1 3 5 3 (ii) Explanation that no tax liability arises as a result of the rights and bonus shares issue, with reason 2 2 (iii) Explanation of how redundancy payment is taxed for employees 2 Explanation of how redundancy payment is taxed for GCP 1 3 3 (iv) Explanation of tax treatment of recovery of legal costs 1 1 (v) Explanation of existence and value of owner s benefit 1 Requirement to submit rental agreement duly stamped 1 Explanation of the tax treatment of the owner s benefit including capital allowances for GCP and tax deduction for Rotso 4 Requirement for GCP and Rotso to submit a balancing statement at end of lease period 0 5 6 5 6 (vi) Unassessed balance of owner s benefit is taxable 1 Explanation of how the unassessed benefit may be taxed 4 5 5 20 25
4 Panayiotis Available Maximum (a) Definition of an innovative business 3 Identify PDC as an innovative business 0 5 R&D expenditure is tax deductible 0 5 Explanation of treatment of losses carried forward 1 5 5 5 5 (b) Explanation that expenses incurred during acquisition are tax deductible 1 1 (c) Explanation of the administration of tax for a trust 1 Interest exempt for income tax 0 5 Interest is taxable under SDC on an accrual basis 1 5 3 3 (d) Explanation of type of service (B2C intermediary) 1 Explanation of place of supply 1 5 Explanation of exemption 1 3 5 3 (e) Explanation that trust transparent for tax purposes 0 5 Explanation of the tax consequences on loan capitalisation 1 Sale exempt from income tax but chargeable to capital gains tax, with reason 1 5 Explanation of capital gains tax payable, including use of life-time exemptions 2 5 5 (f) Explanation of which persons can apply for VAT group registration 1 5 Effects of group registration (0 5 mark each max 4 items/2 marks) 3 3 5 3 20 5 Tryfonas (a) Explanation as to why Tryfonas is not eligible, with reason 2 2 (b) Basis of calculation of gross salary and arithmetical solution of formula 3 Explanation and calculation of social insurance contributions 1 5 Explanation and calculation of total income tax payable 3 Explanation and basis of calculation of gross chargeable emoluments, including explanation of the 90-day rule 4 Calculation of benefit in kind on car 0 5 12 12 (c) Explanation and calculation of social insurance contributions payable by EDB 2 5 Explanation and calculation of tax deductible amounts and tax savings 2 Calculation of total cost of employing Tryfonas, including total cost of car lease (and not just BIK element) 1 5 6 6 20 26