SECOND PACKAGE OF AMENDMENTS TO THE TAX AND VAT LEGISLATION

 

The amendments were published in the official Gazette of the Republic on 30 December 2011. The amendments constitute measures that were introduced by the Government of the Republic for avoiding further deterioration of the fiscal deficit.

 

VAT LAW

 

INCREASE IN THE STANDARD RATE OF VAT FROM 15% TO 17%

 

The standard rate of VAT will rise from 15% to 17%.

 

ENTRY INTO FORCE

 

The increase in the standard rate of VAT will come into force from 1 March 2012.

 

IMPOSITION OF PENALTIES FOR FAILURE OF TAXABLE LEGAL PERSONS TO COMPLY WITH THEIR OBLIGATIONS OF ISSUING A “LEGAL RECEIPT” UPON RENDERING OF TAXABLE SUPPLIES OF GOODS AND SERVICES TO NON TAXABLE PERSONS

 

In accordance with paragraph 1A of the 10th Schedule of the Cyprus VAT Law a taxable person has the obligation to issue a legal receipt containing the following information:

 

  • Issue Date
  • Serial Number
  • Name, address and registration number of the taxable person
  • Adequate description of the goods or services offered
  • Total amount payable including VAT
  • The total amount payable (including VAT) and the applicable VAT rate for each rate of VAT
  • Indication of whether the transaction involved advance payment , cash payment or otherwise

 

In case where a person fails to issue a legal receipt , then a penalty equal to 20% of the value of the transaction for which the person is in default will be imposed.

In addition any person failing to issue a legal receipt, shall be deemed guilty of an offence and in case of conviction will be subject to a maximum fine of €1,700 or imprisonment of 3 years or both.

ENTRY INTO FORCE

 

The imposition of penalties for failure to comply with the obligation to issue legal receipts will come into force on 16 January 2012.

 

SPECIAL CONTRIBUTION FOR THE DEFENCE OF THE REPUBLIC LAW (SDC)

 

INCREASE IN THE RATE OF SPECIAL DEFENSE CONTRIBUTION (SDC) ON DIVIDEND INCOME FROM 17% TO 20%

 

The rate of SDC tax on dividend income received by a Cyprus tax resident individual is increased from 17% to 20%. Companies are generally exempt from the payment of SDC tax on dividends received.

The rate of 20% also applies when the deemed dividend distribution provisions of the legislation are applied, in case where a company does not distribute at least 70% of its accounting profits after tax as dividends within 2 years after the end of the tax year under review.

In addition to the above, it is reminded that dividends received by non Cyprus tax resident companies and individuals are not subject to SDC tax and that the deemed dividend distribution rules do not apply in cases where the company’s shareholder (direct or indirect) is not a Cyprus tax resident.

 

IMPOSITION OF SPECIAL DEFENSE CONTRIBUTION (SDC) ON DIVIDENDS PAID INDIRECTLY AFTER THE ELAPSE OF 4 YEARS FOLLOWING THE YEAR IN WHICH THE PROFITS THE DIVIDEND RELATES TO AROSE

 

In case where a Cyprus resident company receives a dividend from another Cyprus resident company, and such dividend is paid indirectly after the elapse of four years following the year in which the profits that the dividend relates to arose, then the dividend will be subject to SDC at the rate of 20%.

The above measure will not apply in cases where the dividend declared relates to profits arising directly or indirectly from dividends on which SDC had previously been imposed.

 

ENTRY INTO FORCE

 

The above amendments came into force on 1 January 2012 and is applicable on income arising or deemed to arise from 1 January 2012 to 31 December 2013

 

Note:

 

The above measures targets primarily the Cyprus resident individuals and companies, while this does not significantly affect the international companies which use Cyprus tax resident individuals and companies within their group structures. The above amendments give an opportunity to international group companies to reassess their current structure and ensure tax efficiency.

 

INCOME TAX LAW

 

Section 39 is abolished-Notional Interest on shareholders loans from the Special Contribution of Defence Law but it is incorporated in section 5 of the Income Tax Law

 

In accordance with section 39 where a company grants a loan or any other financial facility to its shareholders/ directors who are individuals, such company is deemed to have interest income at the rate of 9% per annum, on the amount of the loan facility.

This notional interest was subject to Special Defence Contribution at the rate of 15% and was exempt from Income Tax

Thus section 39 of Special Defence Contribution Law is abolished but the provisions of it are introduced in section 5 of the Income Tax Law. This means that the 9% notional interest on shareholder/director loans who are individuals will now be subject to Income Tax and will be treated as a benefit in kind for the shareholder /director. This benefit will be calculated on a monthly basis at the rate of 9% and will be taxed and paid through the Pay As You Earn (PAYE) system.

 

Note:

 

The above measure came in an effort to offset the effect of the other measures that came into force and creates positive conditions for Companies as the abolition of section 39 of Special Defence Tax and inclusion in the Income Tax Law moves the tax burden on loans granted to Directors and shareholders who are individuals from the Company to the individual shareholder /director.

 

Areti Charidemou & Associates LLC Law Firm