Tax & Audit

On the 18th of April the Cyprus Parliament voted for new tax laws which are in accordance with the provisions of the loan agreement between EU lenders and Cyprus.

Cyprus Corporate Tax Rate increased from 10% to 12.5% effective for the tax year 2013

Interest income earned by a Cyprus tax resident company and which is not closely connected with its business is subject to Special contribution for defense  15% up to 28 March 2013 and 30%  thereafter

  1. The Double Tax Agreements:

Until the new DTA takes force, the 1982 double taxation agreement between Cyprus and the Union of Soviet Socialist Republics (USSR) will continue to apply.

2. Saving of books and records

For income tax purposes, companies should now keep their accounting records for six years instead of seven after the end of the tax year to which they relate to.

For VAT purposes, the period for keeping accounting records remains to seven years.

3. Provisional tax

The submission of the provisional tax assessment should be made before 31st July of the current year instead of 1st August.

Provisional tax payments should be made in two installments instead of three that was applicable until now:  on 31st July and on 31st December of the current year.

It is not necessary to submit Nil returns by legal entities. However the Inland Revenue will accept Nil returns from individuals.

If company has taxable income but its tax liability is fully off-set by overseas tax credits, this company should prepare and submit a Provisional Tax return even though no tax is due.

If any installment is not paid in time, a penalty interest is charged at the rate of 4.75% per annum starting from the due date (calculated on a complete month basis) plus penalty of 5% of tax due. Where the Provisional Tax per declaration is estimated less than 75% of the final tax assessment, a 10% penalty applies on the balance of the tax due.

4. Employer’s Return (IR7)

The Employer’s Return (IR7 – a summary statement of employees’ data, statement of PAYE lodgments for the year/period ending 31 December of the previous year and a summary of all employees’ emoluments, tax and other deductions ) is now compulsory to be submitted electronically until the 31st of July of the year following the year of assessment.

 5. Income tax returns of employees (IR1)

The submission date of annual income tax returns of employees is extended from 30th April to 31st July following the year of assessment in case that the submission of the return is made electronically. Alternatively, if the submission is made by hand the deadline remains 30th April.

6. Income tax returns of non tax residents

Companies which are incorporated in Cyprus but are not Cyprus tax residents must also submit an income tax return to the Director of Inland Revenue Department until the 31st December of the year following the year of assessment.

7. Increase of the penalty for fraudulent omission or delay in tax payments

Fraudulent omission or delay in tax payments by a natural person is subject to imprisonment for at least one year. Previously, imprisonment term would not exceed six months.

 8. Value Added Tax

From 1st of March 2012 “the standard” VAT rate increased from 15% to 17%.

From 14th of January 2013 to 12th of January 2014 “the standard” VAT rate is be 18% and as from 13th of January 2014 will increase to 19%.

As of 13th of January 2014, the reduced VAT rate will increase from 8% to 9%.

The House of Representatives of the Republic of Cyprus has recently voted amendments to Articles 45 and 46A of the VAT Law 2000 – 2013 reducing penalties for late payments of VAT amounts from 10% to 5% for the VAT periods ending on 30 of June, 31 of July, 31 of August and 30 of September 2013.

Also, there will be no imposition of additional tax and interest for the late payment of VAT by a taxable person, for the periods ending on 28 of February, 31 of March, 30 of  April and 31 of May 2013.

Please note that the changes mentioned above apply only in the case that the taxable person settles the VAT payable and submits all relevant returns up to 10 December 2013.

9 Social Insurance

From 2014, employers’ and employees’ social insurance contributions will increase from 6,8% to 7,8% each. Also, social insurance contribution for self employed individuals will increase from 12,6% to 13,6%.

10. Special Contribution 

The provisions of the Special Contribution law for employees, pensioners and self-employed in the private sector to contribute a percentage of their gross monthly salaries/pensions is extended for an additional period of 3 years (until 31 December 2016).

In addition, from 1st of January 2014 the relevant bands of the special contribution change as follows:

Monthly Salary/Pension  2014 -2016                               Tax rate 2014-2016      

€0-€1,500                                                                                                             0%

€1,501-€2,500                                                                                                    2,5%

€3,501-€3,500                                                                                                    3%

€3,501 –                                                                                                                3,5%

 

Monthly Salary/pension 2013                                                     Tax rate 2013    

€0-€2,500                                                                                                             0%

€2,501-€3,500                                                                                                    2,5%

€3,501-€4,500                                                                                                    3%

€4,501 –                                                                                                                3,5%

 

12. Immovable Property Tax

Rates for 2013 are as follows:

Assessed 1980 Property Value

Tax Rate

Tax

Cumulative Tax

€1 to €12,500

nil

€0

€0

€12,501 to €€40,000

0.6%

€240

€240

€40,001 to €€120,000

0.8%

€640

€880

€€120,001 to €€170,000

0.9%

€450

€1,330

€170,001 to €€300,000

1.1%

€1,430

€2,760

€300,001 to €€500,000

1.3%

€2,600

€5,360

€500,001 to €€800,000

1.5%

€4,500

€9,860

€800,001 to €€3,000,000

1.7%

€37,400

€47,260

More than €€3,000,000

1.9%

Those owning property whose total 1980 value exceeds €12,500 will pay tax on their total 1980 value.

The main changes compared with the old wording:

12.  IP taxation

House of Representatives passed the amendments to the Income Tax Law in May of 2012. The amendments to the law provided that 80% of any income generated from IP rights will be exempt from Corporate Income Tax (CIT); therefore only 20% of the profits generated from IP rights (royalties) are subject to CIT at the rate of 10% in 2012 and 12.5% in 2013.

Furthermore, any dividend income generated out of royalty income earned by a CyCo and paid to its non-resident shareholders is fully exempt from any Cyprus tax. As such, there is minimal tax leakage in Cyprus in the context of a structure involving a CyCo generating royalties under licensing or similar arrangements with third parties and subsequently distributing profits in the form of dividends to its shareholders.

The same 80% exemption is applicable to profit on disposal of IP rights. However, in most cases a more beneficial result from the taxpayer’s viewpoint can be achieved by holding the IP assets in a separate company and disposing of the shares in that company, rather than the IP assets themselves. This option will result in full exemption of the profit as well as stamp duty savings, since gains on disposals of qualifying securities (which includes shares) are exempt from all forms of taxation in Cyprus except to the extent that they derive from the disposal of immovable property located in Cyprus.

With regard to capital expenditure it should be noted that the Cyprus IP Company will be able to write off any capital expenditure for the purpose of the acquisition or development of the IP rights. Such a write off will be permitted for the initial five years of use -20% per year.

After all direct expenses deductions against gross income even with the new rate of 12,5% a Cyprus IP Company is effectively liable to a tax around 2% – the lowest in Europe.