The Cyprus Parliament has voted several amendments to certain tax legislative provisions of Cyprus law in an effort to combat on tax evasion and tax clearance. Also the VAT rate on food and medicines has been increased from zero to 5%. At every extent the amendments are considered an enhancement of the existing Cyprus legislation.
The most significant amendments are being described herein below:
Deemed distribution of Dividend
* If no dividend is paid by a Cyprus company within two years from the end of the tax year, deemed distribution of dividend shall be applicable and the 70% of the company’s profits after taxation (i.e. income tax paid in Cyprus) are considered as distributable dividend to its shareholders and therefore a defence contribution under Special Contribution for Defence of at a rate of 15% is imposed. Under the new amendment the deemed distribution rate shall remain intact and the term taxation shall include special defence contribution, capital gains tax and any taxes paid abroad.
* If a Cyprus company is under a process of voluntary liquidation, an obligation is imposed for declaring the last two years for which the deemed distribution was not applied and any contribution due must be paid within one month after taking the decision for liquidation. Moreover, if during the liquidation procedure the company makes a profit, no deemed distribution tax shall be paid if the assets of the company are not adequate for the repayment of the company’s creditors. Any defence contribution shall not surpass the net value of the assets distributed to the shareholders.
* Upon decrease of the share capital of a Cyprus company any amount paid to a shareholder who is a physical person (but not legal entity) in excess of the amount of the share capital which was actually paid by the shareholder shall be considered as dividend and Special Contribution of Defence law shall be applicable. Until today, in cases of decrease of share capital all undistributed taxable profits of all years were subject to the provisions of deemed distributio
|The provisions regarding deemed distribution are not applicable if the shareholders of the company are not Cyprus tax residents.|
A provision is introduced for withholding of defence contribution on rents paid by a company. The contribution is imposed at a rate of 3% on the 75% of the rents paid.
* If a company fails to submit on time the tax returns or provision of information or the delayed payment of the defence contribution (5% of the defence due) in addition to the applicable interest a penalty shall be imposed at a range of €100-€200 depending on the omission.
* If a company fails to submit on time the return or a requested evidence or the delayed payment of the immovable property tax (5% of the defence due) in addition to the applicable interest a penalty shall be imposed at a range of €100-€200 depending on the omission.
Obligation to provide supporting documents in order to allow the deduction of expenses
Any expenses arising within the business activities of the company shall be deducted from taxable income only if they are supported by invoices and receipts or other evidence provided by Regulations issues under the provisions of the relevant law.
Withholding Tax on Payments to Non Cyprus Residents
Withholding tax for payments to non Cyprus residents must be paid to the tax authorities by the end of the following month. In case this is not paid on time, in addition to the payment of interest (currently 5.35%) an additional tax equal to 5% of the tax withheld must also be paid.
Withholding tax payments are connected to (a) copyrights for use within Cyprus at 10% (b) rights for cinematographic films at 10% (c) income of an individual for professional services, artists and athletes fees at 10%.
The above percentages may be reduced or eliminated under the provisions of the double tax treaties or for payments to residents of EU Member states.
Deemed Interest on Debit Balances of Shareholders
Deemed interest under section 39 of Income Tax Law on debit balances or loans to shareholders or directors at a rate of 9% will be imposed in cases of individuals.
In case of debit balances or loans to shareholders which are legal entities, the provisions of section 33 of Income Tax Law should apply, whereby if no interest is imposed using the market interest rates, then the Commissioner has the right to impute deemed interest on these balances or loans.
Obligation for Obtainment of Tax Identification Number
Upon the registration of a Cyprus company, the company must file an application for registration with the Tax Identification Number within 60 days from the date its incorporation. For all companies which have been registered before the commencement of this law, transitional provisions of 6 months for obtaining the Tax Identification Number have been granted.
Existing companies which are not yet registered with the tax authorities may register by 30 June 2011 without suffering any penalties.
According to Cyprus legislation for being able to lift the Bank secrecy for Cyprus tax residents, a Court Order is required, while for the exchange of information to foreign tax authorities under the agreements for the avoidance of double taxation, then the approval of the Attorney General is required. With the amendment of legislation, the same provisions are adopted for approval of the Commissioner’s request for the lifting of the Bank secrecy by the Attorney General also in the case of Cyprus tax resident individuals or legal entities. The legislation provides for certain conditions and procedures which must be followed by the Commissioner before Bank secrecy is lifted.
Date of Commencement of Relevant Amendments
The amendments will come into effect six months after their publication in the official Gazette of Cyprus.
The above is intended to provide a brief guide only. It is essential that appropriate professional advice is obtained.