Cyprus: Recent changes in tax legislation

The House of Representatives passed amendments to various tax laws in order to combat tax evasion and tax avoidance. The amendment laws were published in the Official Gazette of the Republic of Cyprus, on December 31st, 2010, and will apply from July 1st, 2011. The principal changes in the legislation are analysed below.

➤ Income Tax Law

■ Certificates are required for the deduction of expenses: Costs that are made for the company’s purposes shall be allowed only when supported by invoices (applied on the fiscal year 2011).

■ Virtual interest on debit balances of shareholders:
The imposition of virtual interest under Article 39, regarding debit balances or loans to shareholders or directors will be charged only in the case of individuals at a rate of 9%. In the case of debit balances or loans to shareholders of companies, the provisions of section 33 (transactions between related parties) will be applied (effective from January 1st, 2011).
➤ The Special Defence Contribution Law
Amended provisions for deemed distribution:

■ For purposes of calculating accounting profits subject to a deemed distribution, the term “taxation” has been modified to include the Defence Contribution, the Capital Gains Tax and taxes paid abroad.

■ In case of capital reduction of the company, any amount paid to individual shareholders that exceed the amount of the capital actually paid by the shareholder, shall be treated as a dividend and a 15% Defence Contribution will be paid.

■ The donation of property or transfer of property to a shareholder, (at a lesser value than the one at the current market), will be deemed as a dividend and a 15% Defence Contribution will be submitted (effective from January 1st 2011)

■ If the company decided its voluntary dissolution, the statements of deemed distribution should be submitted for the year in which the decision for dissolution was made, as well as for the last two years. Any levy due must be paid within a month after the decision.

A provision is inserted for withholding Defence Contribution on rent paid by a company, partnership, the Republic or local authority.

➤Assessment and Collection of Tax Act
Ensuring Tax Identification Number:

■ When a company has been registered or incorporated with the Registrar of Companies, then the company is obliged to enrol in the Tax Register within 60 days.
Bank secrecy.

■ Along with the change of the legislation, some provisions are adopted for lifting off the bank secrecy for residents, similar to those for non-residents. This act requires prior approval from the General Attorney.

➤ Submit statements, taxation and appeals:

■ Provisions are introduced for electronic submission of the Income Tax Return.

■ If the taxpayer does not submit the Income Tax Return within the specified timeframe,the Commissioner is entitled to issue a certificate of taxation based on information in his / hers possession.

■ The right of appeal by the taxpayer is extended for one month, if the appeal is regarding a tax imposed during the month of December.

➤ Keeping books and records:

■ For enterprises that are obliged to bookkeeping, the updating of the records should be made within four months, from the month in which the transaction took place.

■ Invoices must be made within thirty days from the date of the transaction.

■ Companies that maintain commercial stocks must conduct an annual inventory.

➤ Administrative fines

■ In addition to the interest applied, various fines and penalties are imposed in the event of failure to timely report or submit the required information, or in case that the tax hasn’t been paid.