Amendments to Cyprus Tax Legislation
On 14 December 2011 the House of Representatives voted a number of amendments to the tax laws in order to face the current economic crisis in Cyprus. These amendments have been published in the Cyprus Government Gazette on the 30th of December 2011 and are the followings:
1. Law Amending the Income Tax Law.
2. Law Amending the Special Contribution for the Defence Law.
3. Law Providing for Special Contribution by the Employees, Self-Employed and Pensioners of the Private Sector.
4. Law Amending the Value Added Tax Law.
The above amendments are effective as from 1 January 2012.
1) Law Amending the Income Tax Law
(a) Loans and advances (financial assistance) to company directors and shareholders
The previous known Article 39, of which a notional interest of 9% was imposed at the level of the Cypriot company on balances receivable (debit balances) from the Directors and/or Shareholders and/or up to their second-degree relatives, is now revoked.
The notional interest of 9% per annum is now calculated as a monthly benefit of 9% per annum on the balance receivable at the end of each month (not yearly) from the Individual Directors and/or Individual Shareholders and up to their second-degree relatives.
This amendment should apply in the same way for both Cypriot and non Cypriot tax resident individuals. For the non Cypriot tax resident individuals, the benefit will be deemed to arise and hence taxable in their hands under the Cyprus Tax only for the days they will physically spend in Cyprus and taking into consideration the personal tax allowance for Income Tax purposes of €19.500
This monthly benefit is assessed and payable through the Pay As You Earn (PAYE) system.
On 1/1/2012, a Cypriot Company Director receives net €2.300 salary on a monthly basis for 12 months. On 15/1/2012 the Company pays on his behalf €5.000 for various other expenses not wholly & exclusively for business purposes.
On 31/1/2012, the Director's total benefit is €2.337,50 [(€2.300 salary + (€450/12)].
Considering that the Director will not return the €5.000 back to the Company and the Company will not pay any additional expenses to the Director during the year 2012, then the Director's tax responsibility for 2012 is:
Director's net annual remuneration: €2.300 x 12 = €27.600 + €450 = €28.050 chargeable income for tax purposes.
|0 - 19.500||0||nil|
|19.501 - 28.000||20||1.700,00|
|Total Tax Due||1.715,50|
Under the P.A.Y.E scheme, the Company should deduct from Director's monthly salary the amount of €142,70 per month and pay this money to Tax office.
On 1/1/2012, a Cypriot Company Shareholder receives €0 salary. On 01/01/2012 the Shareholder has a balance receivable (shareholder owes money to the Company) from prior years of €300.000.
Even if Shareholder does not receive any salaries, he has to pay tax as a result of his balance receivable brought forward from prior years. The Company does not pay any other expenses on behalf of the Shareholder during the year 2012.
The chargeable income for tax purposes is: €27.000 (€300.000 x 9%)
|0 - 19.500||0||nil|
|19.501 - 27.000||20||1.500|
|Total Tax Due||1.500|
Under the P.A.Y.E scheme, the Company should get from Shareholder €125 per month and pay this money to Tax office.
As a result of the abolishment of Article 39, tax will rise at the level of the individual Director / Shareholder instead at the level of the Cypriot Company.
The amendments do not apply In the case of balances resulting from normal commercial transactions between the Company and its Shareholder/Director.
· stop using the Company's money for your private purposes.
· all expenses paid by the Company should be supported by appropriate tax invoices/receipts.
· all expenses paid by the Company should be wholly & exclusively for Company's purposes.
· if your annual salary exceeds the amount of €28.000 and you also have a balance receivable then you can either get dividend from the Company, if applicable, or pay back the balance receivable to your Company.
(b) Tax deductibility of salaries and related costs
Salaries will be tax deductible for corporation tax purposes only if the employer's contributions to:
· Social Security Fund ,
· Social Cohesion Fund,
· Redundancy Fund,
· Industrial Training Fund,
· Pension & Provident fund,
related to the salaries are paid in the year that they are due.
In case the above contributions, as well as related penalties and interests, are paid in full within 2 years after the last due date, then the salaries and the related contributions will be allowed as tax deductible expenses in the tax year during which they were paid.
· make sure that you pay your employer's contributions on a monthly basis
· salaries declared in Employer's Return, IR7, should match the salaries declared in Social Security Office.
2. Law Amending the Special Contribution for the Defense Law
(a) Special Defense Contribution (SDC) rate on dividends
The rate of the SDC levied on dividends is increased from 17% to 20% for the tax years 2012 and 2013.
From 01/01/2014 onwards the SDC is 17%
No SDC is payable in case the dividend is paid to company or to non tax Cypriot resident.
The provisions for deemed distribution do not apply in cases where the shareholders of the company directly or indirectly are non Cypriot tax residents.
(b) Dividends between Cypriot tax resident Companies
Special Defense Contribution will be imposed on dividends paid by a Cyprus Company to another
Cyprus Company, after 4 years from the end of the year in which the profits out of which the dividends are paid.
Any dividends derived directly or indirectly from dividends on which SDC has already been paid are exempt from SDC.
These provisions do not apply in cases where the shareholders of the Company directly or indirectly are non tax residents of Cyprus.
3. Law Providing for Special Contribution by the Employees, Self-Employed and Pensioners of the Private Sector
Each employee or/and self-employed or/and person operating in the private sector receiving a pension, shall pay a special contribution to the Republic in order to strengthen public finances.
The contribution is a percentage levied on the gross emoluments as shown below:
|Gross Monthly Emoluments
|Up to 2.500||0|
|2.501 - 3.500||2,5% with a minimum of special contribution of €10|
|3.501 - 4.500||3%|
|4.501 and over||3,5%|
· There is no upper limit on the amount of emoluments.
· In the case of an employee, the payment of the special contribution is shared equally by the employer and the employee, i.e. 50% of the special contribution is paid by the employee and 50% is paid by the employer.
· In addition, in the case of an employee no contribution is payable on:
1. Retirement bonus
2. Amounts paid by Provident Funds
3. Remuneration of a foreigner who is employed by a foreign government or by an international organization
4. Remuneration of foreign diplomats and consular representatives who are not citizens of the Republic
5. Remuneration of Cypriot ship's crew
6. Allowances paid to employees covering business expenses on behalf of an employer
· In the case of person operating in the private sector receiving a pension, no contribution is payable on:
1. Bonus or
2. One off payment
· In the case of self-employed persons, the income on which the contribution is payable is the earned income of the individual with a minimum the amount on which social insurance contributions are made.
· In the case of an employee of the private sector or/and person receiving a pension from the private sector, the amount of special contribution will be withheld from the wage or pension and will be paid to the IRD on a monthly basis.
· In the case of a self-employed, the amount of special contribution will be declared on a form approved by the Director of IRD and paid in 3 installments following the same procedure and dates provided for the provisional income tax (i.e. August 1, September 30 and December 31).
· All the above contributions are deductible for income tax purposes.
· The above amendment is effective for the period from 1/1/2012 until 31/12/2013.
4.Law Amdending the Value Added Tax Law
Increase in the standard rate of VAT
The standard rate of VAT is increased as from 1/3/2012, from 15% to 17%. The reduced rates of 5% and 8% remain tha same.
Obligation to issue "legal receipts":
- All taxable persons making taxable supplies of goods or services to non-taxable persons, are obliged to issu and deliver legal receipts
- Any person failing to comply with this regulation will be subject to a penalty equal to 20% of the value of the transaction for which the legal receipt relates to.
- In addition, any person failing to issue and deliver a legal receipt at the time of the transaction shall be deemed guilty of an offense and be subject to a fine not exceeding Euro 1,700 or imprisonment up to 3 years or both.
The legal receipts must contain the following Information:
· Issue date,
· ID number,
· Name, address and registration number of the taxable person,
· Adequate description of the goods or services offered,
· Total amount payable, including VAT,
· For each rate of VAT, the total amount payable, including VAT, and the applicable VAT rate,
· Indication of whether the transaction involves deposit payment, part consideration, cash payment or otherwise.
It should be noted that when a cash invoice is issued, the issue of a legal receipt is not required as the cash invoice may also be used as a receipt.
The above amendments come into effect as from 16/1/2012.
The standard rate of VAT is increased as from 1/3/2012.