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Changes to the Cyprus Legislation – December 2010

Changes to the Cyprus tax legislation On 14 December 2010 the House of Representatives approved the amendment of the Cyprus Tax legislation, with the aim to simplify certain of its provisions and also to extend and strengthen the anti avoidance and anti evasion provisions contained therein.These changes also include the imposition of additional taxes and penalties for late payment of taxes and non compliance with the tax legislation.

A summary is outlined here below: 

 

1.Changes to The Income Tax Law

Disallowed expenditure Any expenditure which is not supported by invoices and relevant receipts or other supporting documents as required by relevant Regulations will not be deductible for tax purposes. This provision will apply as from the tax year 2011. Imposition of notional interest on receivables from directors or shareholders.Up to 31 December 2010, interest at the rate of 9% on the shareholders and directors debit balances was  deemed as interest income of the company. As from 1 January 2011, this provision will not apply in the case where the directors or shareholders are companies. In this case, the provisions of Article 33 relating to arm’s length conditions in  transactions between related parties would apply.Tax withheld on payments to non Cyprus residents Tax withheld on  payments to non Cyprus residents should be paid to the tax authorities by the end of month following the month in which it  was withheld.

 

2.Changes to The Special Defence Contribution Law

The following provisions will enter into force as from 1st of July 2011 i.e. 6 months from the date of the enactment of the law.Amendments of provisions for deemed dividend distribution.

• In the case where a company disposes an asset to its shareholder who is an individual or to his/her relative for consideration   which is below the market value of the asset, it will be deemed that the company has distributed dividend to its shareholder, and will be subject to 15% defence contribution.

•This provision will not apply in the case where the asset had been acquired by the company by way of donation from its  shareholders 

In arriving at the income for deemed distribution purposes the following taxes are deductible:

 

  (i). Corporation Tax

 (ii). Special Defence Contribution (SDC)

 (iii). Capital Gains Tax, and Foreign taxes

 

• Companies which are under voluntary dissolution or liquidation are obliged to submit within one month from the date of approval of the relevant resolution, the deemed dividend declarations and pay any resulting SDC regarding the accounting profits of the current tax year and the two preceding tax years. It should be noted that upon the dissolution or liquidation of a company, any profits realized, the deemed dividend distribution of such profits may not exceed the amount or the value of the net assets distributed. 

• Any accounting profits arising during the period of dissolution or liquidation will not be subject to a deemed dividend distribution in case the available assets of the company are not sufficient for the settlement of its liabilities

• When assets are deemed to be distributed during the period of dissolution or liquidation of a company, which have a market value exceeding the cost of their acquisition by the company, the deemed distribution provisions will apply. In this case any asset distributed in spicy to the shareholders, equal to the difference between the market value of the asset and its cost of acquisition.

• The deemed dividend distribution provisions which apply upon a capital reduction have been simplified. More specifically, in the case of reduction of the capital of a company, any amounts paid to the shareholders in excess of share capital which had actually been paid by a shareholder will be treated as deemed dividends and taxed accordingly.Withholding of SDC at source with respect to rents Companies, partnerships, the Government orsemi government organizations any local authorities that pay rents should withhold SDC at source at the rate of 3% on 75% of the gross amount of the rent and remit the tax so withheld to the Inland Revenue by the end of the month following the month of payment Payment of SDC on dividends or interest income received from abroad It has been clarified that the SDC on dividends or interest from sources outside the Republic is payable in two six-monthly installments, i.e., by 30 June and 31 December of each year respectively.

 

3.Amendments to The Assessments and collection of Taxes Law 

The following provisions will be in effect as from 1 July 2011. Registration with the tax authorities.New companies which are incorporated or registered or become tax resident in Cyprus should register with the tax authorities and obtain their Tax Identification Code within 60 days from their incorporation or registration.Already existing companies which are not yet registered with the tax authorities may register by 30 June 2011 without suffering any penalties.Any companies which are already registered with the tax authorities should inform the authorities within 60 days of any relevant amendment to their records which affect theTax Authorities Register.All companies which fail to register as stated above will be subject to penalties.

Lifting of banking secrecy

The lifting of banking secrecy for the purposes of imposition of taxation on Cyprus tax residents will be effected with the approval of the Attorney General after the supply to him of the following information:

• The identification of the person under investigation.

• The nature and the form of information requested.

• The reasons the Commissioner believes that the bank is in possession of the information.

• The period to which the information relates.

• A statement that the tax authorities exhausted all available means for collecting the information.

• The tax reasons which justify the information requested.

 

Electronic submission of returns.

The tax returns of companies or other persons that prepare audited accounts will be submitted electronically. Consequently, thedeadline for submission is extended to 31st of March of the following year.

Objections

Any objections against assessments raised by the tax authorities should outline the specific reasons for objection and should be accompanied by the appropriate supporting evidence. The deadline for submission of an objection is normally the end of the month following the month in which the assessment is issued. If however the assessment is issued in December of a certain year, the deadline for the submission of an objection is extended to theend of February of the following year. This provision comes to effect as from 1 July 2011.Exchange of information between the tax authorities and other governmental departments.It has been clarified that the tax authorities may ask for information for the purpose of imposing taxation, from other governmental departments, local authorities and semigovernmental organizations, excluding the Central Banks of Cyprus and the Department of Supervision and Development of Cooperative.

Field audits

It has been clarified that the Inland Revenue officials may, during the normal hours of operation of a busines, enter into any work place used by such busines and inspect any goods or documents located therein. Private residences are excluded form these provisions.

Recording of transactions

The transactions of a business must be recorded by the end of the fourth month following the end of the month in which the transaction takes place. In addition, businesses must issue invoices within 30 days from the date of the transaction.Any deviations from the above deadlines need the prior approval of the commissioner of the Income Tax.

All businesses which maintain stocks should carry out annual stock takes at the end of each accounting period and relevant stock sheets must be available for inspection by the tax authorities.

Payment of disputed tax in the case of litigation

In the case where a recourse is made to the Supreme Court against an assessment raised by the tax authorities, the payment of the disputed amount of tax only will be deferred until the final decision of the Court is issued.

 

4.Imposition of additional penalties

As from 1st July 2011 the following provisions will apply: Administrative penalties amounting to €100 or €200 will be payable for non submission of declarations, non supply of evidence or non compliance within the prescribed deadlines. Further more an additional tax of 5% will be imposed for non payment at a due date in thecase of the following taxes.

 

(i) Income Tax

(ii) Tax withheld with respect to payments tonon Cyprus tax residents

(iii) SDC (iv) Capital Gains tax

(v) Immovable property tax

 

 


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