Cyprus: Cyprus Budget Summary December 2010

The Cyprus Parliament has approved the budget for 2011, which includes measures aimed at reducing the government deficit to 4 per cent of gross domestic product, in the context of a requirement under the EU excessive deficit procedure to bring it below the Eurozone limit of 3 per cent of gross domestic product by 2012.

The budget includes changes to the Income Tax Law, the Special Contribution for Defence Law, the Assessment and Collection of Taxes Law, the Capital Gains Tax Law and the Immovable Property Tax Law. These are summarised below.

Following publication of the amending laws in the Official Gazette on 31 December 2010 the amendments will take effect from the beginning of the 2011 tax year apart from those relating to penalties, which will become effective on 30 June 2011 and will then apply to all assessments subsequently issued by the Inland Revenue regardless of the tax year to which they relate.

THE INCOME TAX LAW

Deductibility of expenses

The general principle that all expenses "wholly and exclusively incurred" in the production of income are allowed as deductions from the taxable income remains unchanged, but for the 2011 and subsequent tax years such expenses must be properly evidenced by invoices, receipts or other documentation set out in the Regulations issued under the Assessment and Collection of Taxes Law in order to be deductible.

Loans to shareholders

If a company controlled by not more than five persons provides a loan or any other financial facility to a director or shareholder (or to a close relative of a director or shareholder) the company may be assessed to Special Contribution for Defence ("SDC tax") at 10 per cent on deemed interest income on the loan calculated at the rate of 9 per cent per annum. Hitherto this treatment applied irrespective of whether the recipient of the loan was an individual or a company.

With effect from 1 January 2011 the existing arrangements will continue to apply to loans or other financial facilities provided to individuals, but loans or other financial facilities provided to corporate shareholders will be dealt with on an arm's length basis and assessed at a commercial interest rate.

Penalty for late payment of withholding tax

Payments to non-residents of Cyprus in respect of royalties, film rights, and other Cyprus-source income are subject to withholding tax of 10 per cent. The payer is required to deduct the tax at source and pay it to the Inland Revenue no later than the end of the month following the month in which the payment was made. Following the changes to the law a penalty of 5 per cent of the tax due will be payable in the event of late payment. This amendment will take effect on 30 June 2011 and will then apply to all assessments subsequently issued by the Inland Revenue regardless of the tax year to which they relate.

THE SDC LAW

Gifts of assets to shareholders

From 1 January 2011 if a company transfers an asset to an individual shareholder or close relative without any consideration, or at a consideration lower than the fair market value of the asset, the difference between the fair market value and the amount of consideration will be treated as a dividend distributed to the individual shareholder and taxed accordingly. This will not apply in the event that the company initially acquired the asset through a donation from the shareholder or close relative.

Deemed dividend distributions

Calculation of deemed dividend

In determining the accounting profit for the purposes of applying the deemed dividend provisions of the SDC Law taxpayers are now entitled to deduct corporate income tax, SDC tax and capital gains tax paid or payable, as well as any amount of foreign tax that is not credited against corporate income tax or SDC tax, in addition to dividends paid, including any actual dividend that was distributed during the year to which the profits relate.

Deemed dividend on liquidation

The deemed dividend provisions of the SDC Law apply to companies being liquidated and returning funds or assets to shareholders. With effect from 1 January 2011 such companies must submit the relevant return and pay the tax due in respect of the deemed dividend on the profit of the final year and the preceding two years within a month from the date of the resolution to liquidate the company.

In specie distributions of assets whose fair market value exceeds cost will be treated as a dividend distribution equal to the difference between fair market value and cost on the date of the distribution, less any capital gains tax paid.

Deemed dividend on reduction of capital

Until now the amount deemed as distributed to shareholders in the event of a reduction of capital was limited to the undistributed chargeable income of any year before any deduction in respect of losses brought forward from previous years. This ceiling has now been abolished.

SDC on rents

Deduction at source

With effect from 1 January 2011 all persons paying rents apart from individuals are required to withhold SDC at 3 per cent on 75 per cent of the gross rent and remit it to the Inland Revenue with a statement containing full particulars of the circumstances as a result of which the deduction has been made and showing how the deduction has been calculated. This provision applies to companies, partnerships, the Government and local authorities.

Payment dates

SDC on rents from overseas will now be payable in two instalments before 30 June and 31 December of the year in which they are received, bringing the payment arrangements into line with those for SDC on dividends and interest received from abroad.

Penalties

New penalties have been introduced for failure to comply with the requirements of the SDC Law. There is a €100 penalty for failure to submit any return or meet any deadline prescribed by law, which is doubled to €200 if the taxpayer does not comply with the requirements of the law after being given written notice from the Director of Income Tax setting a deadline for compliance (which should be not less than 60 days). This €200 penalty is also applicable to persons required to submit information or make payments on behalf of third parties. In addition, late payment of SDC tax is subject to an additional penalty of 5 per cent on the amount of tax due.

The amendments relating to penalties will take effect on 30 June 2011 and will then apply to all assessments subsequently issued by the Inland Revenue regardless of the tax year to which they relate.

THE ASSESSMENT AND COLLECTION OF TAXES LAW

Obligation to register for a Taxpayer Identification Number

Companies are now required to submit the relevant return and obtain a Taxpayer Identification Number within 60 days after the date of incorporation or, in the case of companies incorporated overseas, within 60 days after becoming tax resident in Cyprus. Companies are also required to notify the tax authorities of any changes that affect their tax status within 60 days. Existing companies which have not yet obtained a Taxpayer Identification Number are required to do so prior to 30 June 2011.

Bank confidentiality

The existing legal provisions regarding the Inland Revenue's powers to obtain information from banks and the court procedure for lifting bank confidentiality are abolished and replaced by new provisions, which are summarised in the following paragraphs.

After obtaining the written consent of the Attorney General and notifying the person under investigation in writing, the Director of Income Tax may require any bank to provide any information in its possession in respect of a period of up to 7 years preceding the date of his request concerning any existing or closed bank account of a person under investigation by the tax authorities. In order to obtain the Attorney General's consent both the bank concerned and the Attorney General must be given the following information:

  • details of the identity of the person under examination;
  • a description of the information requested including the nature and manner in which the Director wishes to receive the information from the bank;
  • the reasons which lead to the belief that the requested information is in the possession of the bank;
  • the specific period of time for which the information is requested;
  • a declaration that the Director has exhausted all other reasonable means to obtain the requested information.

In addition, the Director of Income Tax is required to inform the Attorney General of the purpose and the reasons for which the information is sought. The Director must notify the person under investigation of the Attorney General's decision immediately. If the request is approved by the Attorney General the bank is required to provide the information within 60 days.

In the case of joint accounts the same procedure must be followed as regards each party to the account.

Provision of information by civil servants

The previous confidentiality requirement has been abolished and civil servants are now obliged to disclose any information they may have on a taxpayer to the Department of Inland Revenue on request. Officials of the Central Bank of Cyprus and the Authority for the Supervision and Development of Co-operative Societies are exempt from this obligation.

Electronic filing

Any person required under the Income Tax Law to submit a tax return by 31December of the year following the tax year concerned (that is companies and traders with an annual turnover in excess of €70,000) may file their tax return electronically or by any other means the Director of Income Tax may stipulate from time to time. If the return is filed electronically an additional 3 months will be allowed for filing.

Estimated assessments

In the absence of a tax return the Director of Income Tax was authorised to determine the object of the tax and assess the taxpayer according to the nature and extent of his business. As a result of the 2010 amendments the Director may also take account of findings resulting from a review or an investigation and data and information already in his hands, including information submitted to the tax authorities in relation to previous years.

Objections

In general, an objection to a tax assessment must be submitted in writing no later than the end of the month following the month of issue. The 2010 amendments extend the deadline for filing objections to assessments issued in December to the end of the following February.

It is now explicitly provided that any objection should precisely specify the grounds on which it is based and state the correct amount of tax payable, income exempted, deductions restricted, or tax credited and include any documentation supporting the objection.

Inspection powers

The 2010 amendments include an explicit provision allowing the Director of Income Tax to enter and inspect any business premises, building premises or rooms, including any goods and documents found in them, during business hours in the course of a tax inspection, provided reasonable notice is given to any interested party. Residential premises are exempt.

Bookkeeping requirements

The amendments formalise and tighten up taxpayers' obligations regarding record keeping. Accounting records must be updated no later than the end of the fourth month following the month in which a transaction takes place and invoices must be issued within 30 days of the sale transaction unless the Inland Revenue Department agrees a longer period. Businesses holding inventories must conduct a verification of inventory and evaluation at each financial year-end and make it available to the Director of Income Tax on request.

Penalties

The amendments to the Assessment and Collection of Taxes Law include parallel penalties to those introduced in relation to the SDC Law. There is a €100 penalty for failure to submit any return or meet any deadline prescribed by law, which is doubled to €200 if the taxpayer does not comply with the requirements of the law after being given written notice from the Director of Income Tax setting a deadline for compliance (which should be not less than 60 days). This €200 penalty is also applicable to persons required to submit information or make payments on behalf of third parties. In addition, late payment of tax is subject to an additional penalty of 5 per cent on the amount of tax due.

With the introduction of these new penalties, the existing €51 penalty for not submitting a tax return is abolished.

The amendments relating to penalties will take effect 6 months after publication in the Official Gazette and will apply to all assessments subsequently issued by the Inland Revenue regardless of the tax year to which they relate.

THE CAPITAL GAINS TAX LAW AND THE IMMOVABLE PROPERTY TAX LAW

Penalties

The only amendments to the Capital Gains Tax Law and the Immovable Property Tax Law are the introduction of parallel penalties to those introduced in relation to the SDC Law and the Assessment and Collection of Taxes Law. There is a €100 penalty for failure to submit any return or meet any deadline prescribed by law, which is doubled to €200 if the taxpayer does not comply with the requirements of the law after being given written notice from the Director of Income Tax setting a deadline for compliance (which should be not less than 60 days). This €200 penalty is also applicable to persons required to submit information or make payments on behalf of third parties. In addition, late payment of tax is subject to an additional penalty of 5 per cent on the amount of tax due.

The amendments will become effective on 30 June 2011 and will then apply to all assessments subsequently issued by the Inland Revenue regardless of the tax year to which they relate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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