Answers
Fundamentals Level Skills Module, Paper F6 (CYP) Taxation (Cyprus) Alexis and Maria Pambos June 203 Answers and Marking Scheme Marks Capital/(net worth) statement for the period January 2007 to 3 December 202 January 3 December 2007 202 Assets Bank deposit account with local bank (note ) 50.000 200.000 Bank deposit account with foreign bank (note 2) 200.000 00.000 Trade debtors (note4) 50.000 75.000 Immovable property (note 3) (working 3) 50.000 870.000 + W3 Investments (note 5) (50,000 shares at each) 0 50.000 Motor vehicles (note 3) 50.000 50.000 Total assets 600.000.345.000 Liabilities Loan account (note 3) (20.000/3) (70.000) Net assets 600.000.275.000 Less net assets at January 2007 (600.000) Capital increase for the period 675.000 Add: Loss on sale of motor car (note 4) 30.000 Social insurance and cohesion fund contributions (note 9) (40.000 + 4.000) 44.000 Income taxes (note 9) 00.000 Capital gains tax (note 3) 20.000 Defence tax on interest (note ) (workings, 2) (2.000 +.500 + 5.000 +.000) 9.500 2 Provisional tax paid for the year 202 (note 8) 5.000 Defence tax on rents (note 8)((36.000 x 2 years x 75%) x 3%).620 2 Income tax on rents for the year 20 (note 8) (working 4).900 W4 Transfer fees of main residence (note 7) 40.000 Renovations cost of main residence (note 7) 00.000 Immovable property tax of main residence (2008 to 20) (note 7)(,000 for 4 years) 4.000 Broker and stock exchange fees (note 5).000 Repayment of joint loan (note 3) (80.000 x 2/3) 20.000 2 Living expenses (note 9) 240.000 Total assets and expenses.392.020 Deduct: Donation from Alexis s father (note 7) (Immovable property tax for 200 and 20) (2.000) Business income (note 9) (600.000) Rental income (note 8) (24 x 3,000 per month) (72.000) Interest income from local banks (note ) (working ) (30.000) W Interest income from foreign banks (note 2) (working 2) (39.000) W2 Sale of plot no 5 (note 3) (200.000) Total undeclared income for the period 449.020 Working (note ) For the period January 2007 to 30 August 20 (8.000 x 00/90) 20.000 For the period 3 August 20 to 3 December 202 (8.500 x 00/85) 0.000 30.000
Marks Working 2 (note 2) For the period January 2007 to 3 August 20 (30.000 + 5.000) 35.000 For the period September to 3 December 202 (3.000 +.000) 4.000 39.000 Working 3 (immovable property) /3 share in plot no 4 (note 3) (50.000/3) 70.000 Main residence (note 7) 500.000 Shop (note 8) 250.000 Disposal of plot no 5 (50.000) 870.000 Working 4 (personal income tax paid by Maria for 20) Rental income 2 months at 3.000 per month 36.000 20% allowance on rental income (7.200) Taxable income 28.800 Income tax liability 0 9.500 at 0% 0 9.50 28.000 at 20%.700 28.00 28.800 at 25% 200 Tax payable.900 30 2
2 Pambourinio Ltd Marks Corporation tax computation for the year ended 3 December 20 Net profit (per question).044.000 Add: Legal fees to collect business trade debtors (note 4) 0 Legal fees in defending the title to a fixed asset (note 4) 0 Legal and other fees in connection with the acquisition of fixed asset (note 4) 7.000 Fees in connection with obtaining a bank loan to finance the purchase of an investment (note 4) 8.000 Valuation fees on the property to be used as a security for the bank loan (note 4) 2.000 Mortgage expenses for a bank loan (note 4) 0.000 Loss on revaluation of shares 30.000 Bonus paid to employees (note 5) (fully allowable expense) (tutorial note) 0 Provisional corporation tax paid (note 2) 40.000 Depreciation (note ) 2.000 Balancing addition (note 3) (working) 6.500 W Loss on sale of saloon car 20.000 35.500 Less: Unrealised exchange gain 20.000 Profit from the revaluation of fixed assets 40.000 Profit from a permanent establishment abroad 50.000 Gain on the sale of a building which was considered to be a fixed asset 00.000 Gain from the sale of land which was considered to be a business asset 0 Gross interest on bank deposits (taxed under SDC) (7.000 x 00/85) 20.000 Profit for sale of motor van (note 3) 5.000 Capital allowances: Office premises (note ) (3% x (300.000 50.000)) 7.500 Application software acquired January 2008 capital allowances fully used by 3 December 200 (note ) 0 Capital allowances on computer hardware acquired January 2007 (note ) (40.000 x 20%) 8.000 Capital allowances on laptop acquired January 2009 (note ) (5.000 x 20% x 75%) 750 5 (25.250) Taxable income 928.250 Corporation tax at 0% 92.825 Provisional tax (40,000 + 20,000) (60.000) 32.825 Additional tax 0% (75% of 92.825 is greater than 60.000) 3.283 Corporation tax payable 36.08 Tutorial note: From 202 onwards the amount of the bonus not declared for social insurance purposes will not be a tax allowable expense. Due date: August 202 Working Motor van Calculation of sale proceeds Cost 0.000 Depreciation per question (6.000) Accounting net book value 4.000 Profit on sale 5.000 Sale proceeds 9.000 3
Marks Balancing statement Cost 0.000 Capital allowances per question (7.500) Tax written down value 2.500 Sale proceeds (as calculated above) 9.000 Balancing addition 6.500 25 3 Airoza Limited (a) Capital gains tax on sale of office premises on June 202 Sale proceeds June 202 2.000.000 Less: Cost of acquisition October 2000 500.000 Indexation allowance September 2000 to May 202 (500.000 x 20,49/87,88) 500.000 85.537 Renovation cost January 2005 300.000 Indexation allowance December 2004 to May 202 (300.000 x 20,49/00,5) 300.000 60.929 Interest 80.000 Legal fees 30.000 Transfer fees 25.000 Indexed cost (.8.466) Capital gain 88.534 Capital gain s tax at 20% 63.707 No indexation on interest, legal fees or transfer fees. 8 (b) Balancing statement on sale of office premises on June 202 Cost of building (500.000 x 4/5) 400.000 Renovation cost 300.000 Total cost 700.000 Less: Wear and tear (50.000 + 63.000) (23.000) Net book value at the date of sale 487.000 Market value of the building at the date of sale.500.000 5 Profit on sale of building.03.000 Balancing addition restricted to allowances claimed 23.000 5 (c) Capital gains tax payable on sale of shares by Karlitos Limited on June 202 Valuation as at June 202 2.500.000 5 Less: Indexed cost (as in part (a)) (.8.466) Profit from sale of shares.38.534 Capital gains tax at 20% 263.707 3 4
(d) Marks In the case of the sale of an asset, the gain is realised in the company, and thus results in a potential double charge to tax because of the need to pay a dividend in order for the shareholders to extract the gain from the company. An individual shareholder who is a Cyprus tax resident pays special contribution for the defence (SDC) at the rate of 20% on any dividends received. SDC is not levied on dividends received by companies. 5 Further, if the gain is not actually distributed as a dividend, the company will be liable to pay SDC on a deemed dividend if the overall level of distributions is less than 70% of after tax accounting profits. No double charge to tax can arise on a sale of shares because the gain is realised in the hands of the shareholders, not the company. 4 20 4 (a) Voluntary registration for value added tax (VAT) (i) Actual and intending traders A trader who makes taxable supplies (an actual trader) but whose taxable turnover is less than the compulsory registration threshold may register voluntarily for VAT, in which case the VAT Commissioner will register the trader from the date of the application for voluntary registration, or from a mutually agreed earlier date. 2 A trader who carries on a business and intends to make taxable supplies in the future (an intending trader), who is not liable to register under the future registration provisions because his/her turnover does not exceed the registration threshold, is eligible for voluntary registration in the same way as an actual trader. 2 4 (ii) Traders making supplies outside Cyprus A trader making supplies outside Cyprus who is not liable to be VAT registered may register voluntarily, provided he/she satisfies the Commissioner that he/she: () makes supplies outside Cyprus which would be taxable supplies if made within Cyprus; or (2) is carrying on a business and intends to make such supplies in the course or furtherance of that business; and (3) (in either case) is a person who has a business establishment in Cyprus or whose usual place of residence is in Cyprus and does not make and does not intend to make taxable supplies. 5 For this purpose, a person carrying on a business through a branch or agency in Cyprus is treated as having a business establishment in Cyprus, and usual place of residence in relation to a body corporate is the place where it is legally constituted. 2 5 (b) (i) Trader A should not register for VAT voluntarily because, if he does so, he will have to charge VAT on his sales. As Trader A s customers are individuals who cannot recover the VAT charged, he will possibly suffer a fall in sales because of this increase in prices or have to absorb all or part of the VAT cost himself. 2 (ii) (iii) Trader B should voluntarily register for VAT because doing so will enable him to recover the input VAT suffered on his purchases. As 50% of Trader B s sales are zero rated, this should result in refund of some of the VAT suffered, which is currently a cost to his business. 2 Trader C should voluntarily register for VAT because by doing so, he will be able to reclaim the VAT on the equipment purchased earlier than he might otherwise have done and so improve his short-term cash flow position. 2 6 5 5
Marks 5 (a) XYZ Partnership trading goodwill Andreas: The 50,000 payment made by Andreas for his share of the partnership s trading goodwill must be carried forward. It cannot be deducted as a trading expense, either in the year of payment or in any future year, but can only be deducted from any amount received by Andreas from a future sale of trading goodwill in the XYZ Partnership, i.e. from the same business. 2 Peter: All of Peter s 25,000 (50,000/2) share of the payment for goodwill made by Andreas will be chargeable to income tax in the year 202, as costs incurred in respect of internally generated goodwill are not deductible. 5 Paul: The 2,000 Paul paid Peter for his share of the partnership s trading goodwill in 2003 can be deducted in full from his share of the payment for goodwill made by Andreas, so only 3,000 (25,000 2,000) will be chargeable to income tax in the year 202..5 5 (b) (i) Trading loss incurred by a partnership A partnership loss is allocated between the partners in the same manner as profits would have been shared. Relief for their share of the loss is then given to each of the partners on an individual basis according to their personal circumstances/income: against any other income of the same year; and carried forward and offset against income of future years, indefinitely. 3 (ii) Pre-trading expenditure Provided the expenditure would have been allowed as a deductible expense if trading had already started, pre-trading expenditure of a revenue nature is deemed to have been incurred on the first day of trading. 2 0 6