The Inland Revenue Department of Cyprus (IRD) has released a document to provide assistance to taxpayers in relation to provisions on taxation.
The clarifications addressed by the IRD, amongst other, includes the below:
Income from financing activities and loans between related companies
Loans between related companies are considered to be part of the normal operating activities of a company which are taxed under Corporation Income Tax (CIT) and not Special Defence Contribution (SDC). The pre-accepted profit margins by the IRD are only for transactions between related companies which are free from credit and currency risk. Alternatively, the IRD has the right to calculate deemed income which is subject to CIT.
Balances between related companies/ related parties
Deductions for Interest paid
Until December 31 2011, any interest paid for the acquisition of shares or deemed to be interest paid for the acquisition of shares was a disallowed expense for tax purposes (applied for the first seven years from the acquisition of the investment). From January 1 2012, any interest relating to the acquisition of 100% of the shares of subsidiaries in Cyprus or abroad is now a tax allowable expense under some circumstances.
Any interest paid for the purchase of interest bearing securities, is considered an allowable tax expense.
Effective from January 1 2012, 80% of the gross profit arising from the usage of intellectual property which has been acquired before or after the January 1 2012 and which is under the company’s ownership (not sub licensed) is exempt from CIT. As a result from the tax year 2012 and onwards, only 20% of the income generated from IP rights is taxable.
Additionally, a company can also deduct the expenses resulting from the production of the IP income.
Allowable deductions/Income Tax
- Balances between related companies, excluding loans to parent companies, must carry interest based on market rates. If no interest is charged or the interest rate used is lower than the market rate then the IRD is entitled to adjust the interest rate and charge notional income which is subject to CIT (not subject to SDC). The above provisions came into effect from January 1 2011 and until December 31 2010, a 9% notional interest p.a. was charged on related companies’ balances, which was subject to SDC.
- Until December 31 2011, the IRD would charge 9% notional interest on loans given by a company to its shareholder or director (only if physical person). Since January 1 2012 the notional interest is considered a benefit to the director/shareholder and not to the company. Therefore now the 9% notional interest must be taken into account when calculating the Pay As You Earn (P.A.Y.E) for directors/shareholders and are to be taxed as any other income from employment. Since January 1 2012 there is no SDC applicable on this notional interest.
- For directors/ shareholders (physical persons only) who are not Cyprus tax residents and owe money to their companies, the notional interest 9% is calculated based on the days that they were in the Republic.
- In case that the debt of a shareholder, (physical person and Cyprus tax resident) is written off, then this transaction is considered to be a distribution of dividends and is subject to SDC at the prevailing rate.
Amounts paid to the members of provident funds, after the dissolution of the fund, are not subject to tax. Provident Funds must register with the IRD and submit annual tax returns. Upon request, annual financial statements may also be requested to be submitted.
Submission of returns/Payment of taxes/ Penalties and fines
- Remuneration received by a Cyprus tax resident from abroad, from a non Cyprus tax resident or a permanent establishment of an employer resident in the Republic, for services provided outside the republic of more than 90 days is exempt for tax purposes. Such income should not be taken into consideration for the deduction of 50% of income of individuals whose income is above Euro 100,000 and who were not Cyprus tax residents before their employment in Cyprus.
- Any gains from the sale of securities are exempt from tax.
- Any foreign exchange differences arising on borrowings, which have been deposited in a bank and earned interest, are deductible expenses/taxable.
- For the tax years 2012-2014 furniture is considered to be part of Machinery & Equipment and earn capital allowances at a rate of 20 %.
- From the tax year 2012 onwards, contributions to the Social Cohesion Fund are to be treated as an allowable expense for tax purposes.
- Any written off debts of creditors and shareholders are not subject to tax but in the case where the amount written off includes expenses which were previously deducted for tax purposes then that part of the loan relating to the aforementioned expenses is taxable. In the case of a creditor, the amount written off is included in the accounting profits of the company and included for the purposes of deemed dividend distribution. In the case of a shareholder, the treatment of the amount written off depends on the IFRS adopted by the company.
- The unemployment subsidy is not taxable.
- Gains or losses arising from changes in the fair values of assets are not taxable or are not allowable for tax purposes.
- The Annual levy of €350 paid to the Company Registrar is not a deductible expense for income tax purposes.
The clarifications provided by the IRD are intended to guide the professionals as well as the corporations to take necessary actions accordingly in order not to face fines in the future.
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- All companies that in their first year of operations prepare financial statements for a period exceeding one calendar year must prepare an income tax return for each year separately.
- Companies that were deregistered from the Registrar of Companies do not have to submit income tax return, but they must inform the IRD of deregistration.
- Companies that have no employees do not have to submit the Employer’s Tax Return (IR7) provided the IRD has been informed by submitting the relevant forms.
- Any tax withheld from abroad, should be taken into consideration when applying the 10% additional tax due to low provisional tax estimation. From 2013 onwards, companies must submit a temporary tax assessment if they have taxable income even if there is no resulting tax liability after the deduction of foreign tax to be withheld.
- To provide refundable tax offset with tax payable, the IRD should issue assessments showing the refunded tax.