Amendments to Cyprus Tax Laws

INTRODUCTION

The Cyprus Parliament has voted on the 14th of December 2010 certain amendments to the next Cyprus tax laws:

• Income Tax Law
• Special Defense Contribution Law
• The Assessments and Collection of Taxes Law
• Capital Gains Tax Law
• Immovable Property Tax Law
• Value Added Tax Law

These shall be put in effect 6 months after the publication of such laws within the Official Gazette of the Republic.

INCOME TAX LAW

(a) Disallowed expenditure:

Any expenditure not supported by invoice or corresponding receipts or other supporting information won’t be treated as deductible expenses for income tax purposes.

(b) Tax withheld on payments to non-Cyprus residents:

Tax withheld on payments to non-Cyprus residents needs to be paid to the Income Tax authorities by the tip of the next month. If the tax just isn’t paid inside the deadline, a further tax of 5% shall be imposed on the tax withheld along with the interest imposed (today at 5%). Such payments have to be paid in respect to the next:

1. Copyrights to be used inside Cyprus at 10%;
2. Rights for cinematographic movies at 5%;
3. Income of a physical person in respect to skilled services, fees of artists and athletes at 10%.

(c) Notional interest on receivables from shareholders or directors:

Notional interest, in response to section 39 of Income Tax Law, will only be imposed on debit balances or loans to shareholders or directors at the speed of 9%. If the shareholder is an organization, then market rate of interest will apply as per related party transactions.

SPECIAL DEFENSE CONTRIBUTION LAW

(a) Deemed dividend distribution:

Within the case of non-payment of dividends by an organization inside two years from the tip of the financial yr, the provisions of deemed dividend distribution apply where 70% of profits, after tax is deducted, is deemed to be distributed to the shareholders of the corporate as dividends and special defense contribution is payable at the speed of 15%.

Within the case where an organization disposes an asset to its shareholder (physical person not legal) for a consideration which is below the market value of the asset disposed, it would be deemed that the corporate has distributed dividend to its shareholder equal to the difference between the market value of the asset and the quantity of the consideration. In such a case, special defense contribution can be payable at the speed of 15%.

It needs to be noted that the provisions of the law for deemed dividend distribution won’t apply where the shareholders are usually not tax residents in Cyprus.

(b) Definition of “Taxation”:

The definition of “Taxation” has been amended for the aim of calculating an organization’ profit that’s subject to special defense contribution to incorporate the next:

• Special defense contribution
• Capital gains tax
• Any tax paid abroad which has not been credited against the income tax and or special defense tax payable for the relevant yr

(c) Capital Reduction:

Where the capital of the corporate is reduced, any amounts paid to the shareholders of the corporate in excess of the quantity of the share capital that was actually paid by the shareholder shall be treated as deemed dividend taxable at 15%.

(d) Voluntary Liquidation:

Within the case of an organization under voluntary liquidation, a deemed dividend declaration will have to be submitted (inside one month from the date of the resolution for liquidation) to the relevant authorities in respect to profits of the precise yr and the 2 preceding years.

ASSESSMENT AND COLLECTION OF TAXES LAW

(a) Registration with the Income Tax office:

Corporations have an obligation to register with the Inland Revenue Department and procure a tax identification code inside 60 days from the date of its incorporation with the Registrar of Corporations in Cyprus.

(b) Banking Secrecy

The Commissioner of Income Tax has the proper to request from a bank to supply information within the bank’s possession for a period of seven years from the date of such request. Such power can only be used provided that there’s a written approval by the Attorney General of the Republic. As such, specific requirements have to be fulfilled by the Commissioner prior to receiving such approval.

(c) Submission of Tax Returns, Tax Assessments and Objections:

1. Provisions have been introduced for the submission of electronic tax returns where these have been prepared by knowledgeable auditor. The deadline for submission within the case of electronically submitted returns is prolonged by three months.
2. Where an individual (individual or company) omits to submit a tax return inside the cut-off date set out within the Law and if the Commissioner decides that such an individual has an obligation to pay taxes, then the Commissioner can proceed with the issuance of tax assessment for that person based on the data available.
3. Any objection submitted against a tax assessment referred to above should provide for the explanations that the assessment is inaccurate, the explanations that he considers that no obligation to pay the said tax arises and supply supporting documentation. Such objection needs to be effected inside one month from such assessment.
4. The Commissioner has the proper to request information from any civil servant to supply details in relation to any person for tax purposes.
5. Corporations which have an obligation to maintain books and records for each tax yr are obliged to update them inside 4 months from the date of the transactions. Further, firms are required to issue invoices inside 30 days from the date of the transaction unless a written approval has been obtained by the Commissioner.

CAPITAL GAINS TAX & IMMOVABLE PROPERTY TAX

Administrative penalties equal to EUR 100 or EUR 200 shall be imposed for late submission of declarations or supporting documentation requested by the Commissioner of Income Tax. Within the case of late payment of capital gains or immovable property tax due, a further tax of 5% shall be imposed on the unpaid tax.

VALUE ADDED TAX

The zero tax rate applicable to foodstuff, pharmaceutical products and vaccines has been increased to five%. Such amendments are in effect as from 10-01-2011.