CHANGES IN THE CYPRUS TAX LEGISLATION

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1 CHANGES IN THE CYPRUS TAX LEGISLATION On 14 December 2010 the Cyprus Parliament, in its efforts to combat tax evasion and tax avoidance has passed a number of changes in the tax legislation. 1. AMENDMENTS TO THE INCOME TAX LAW Treatment of expenses Any expenditure which is not supported by invoices, receipts or other supporting documents as required by relevant Regulations will not be deductible under income tax. This provision will apply with respect to tax liabilities which arise during the tax year 2011 and any subsequent tax years. Loans to directors/shareholders Up to 31 December 2010, for a company controlled by up to 5 persons, the Commissioner of Inland Revenue had the authority to impose notional interest on any receivables from directors/shareholders at the rate of 9% per annum. Following the amendments of December 2010 this interest will not be imposed in the cases when the directors/shareholders are companies. In such case the provisions of article 33 relating to arm s length transaction between related parties would apply. Penalties for late payment of withholding tax In the event of non payment, to the tax authorities by the end of the following month of the tax withheld on payments to non Cyprus tax residents, a penalty of 5% will be imposed on the amount of the outstanding tax. This penalty will be in addition to the interest which is currently imposed at the rate of 5.35%. Enforcement date All of the above amendments will come into force as of tax year 2011, except for the additional penalty on late payment of withholding tax which will come into force 6 months after the publication of the relevant amending law in the official Gazette of the Republic.

2 2. AMENDMENTS TO THE SPECIAL CONTRIBUTION FOR DEFENCE LAW Transfer of Assets In the case where a company disposes an asset to its shareholder who is an individual or to his/her relative up to second degree (including a spouse) without any consideration, or for consideration which is below the fair market value of the asset, it will be deemed that the company has distributed dividend to its shareholder, equal to the difference between the market value of the asset and the amount of the consideration. However this will not apply in the case where the asset had been acquired by the company by way of donation from its shareholder(s). Deemed dividend distributions In determining the accounting profit for the purposes of calculating Deemed Dividend Distribution, the following taxes suffered by the company for the specific tax year, will be taken into account: (i) Income tax (ii) Special Defence Contribution (SDC) (iii) Capital Gains Tax, and (iv) Foreign taxes It has also been clarified that any actual dividend distributed during the tax year to which the profits relate to, will be taken into account for the purposes of deemed dividend distribution. Liquidation Companies which are under voluntary dissolution or liquidation are obliged to submit within one month from the date of approval of the relevant resolution, the deemed dividend declarations and pay any resulting SDC with respect to the profits of the specific tax year and the two preceding tax years. It is noted that in case where, upon the dissolution or liquidation of a company, any profits become realized, the deemed dividend distribution of such profits may not exceed the amount or the value of the net assets distributed to the shareholders. Moreover the deemed distribution provisions will not apply if the assets of the company are not sufficient for the repayment of its creditors and no amount is available to be distributed to the shareholders. When assets are being distributed upon the dissolution or liquidation of a company, which have a fair market value exceeding the cost of their acquisition by the company, then it will be deemed that a dividend has been distributed to the shareholders, equal to the difference on the date of distribution between the market value of the asset and its cost of acquisition (after the deduction of any Capitals Gains Tax). Capital Reduction In the case of reduction of the capital of a company, any amounts paid to the shareholders in excess of share capital which had actually been paid by a shareholder will be treated as deemed dividends and taxed accordingly. Withholding of SDC at source with respect to rents

3 Companies, partnerships, the Government and any local authorities that pay rents should withhold SDC at source at the rate of 3% on 75% of the amount of the rent. The lessee in these cases is responsible to submit to the tax authorities a statement showing all details of the lessor and how the special defence contribution has been calculated. Payment of SDC on rent received from abroad It has been clarified that the SDC on rent from sources outside the Republic is payable in two six-monthly instalments, i.e, by 30 June and 31 December of each year respectively, in a similar way as is currently the case with dividends or interest received from abroad. Enforcement date All of the above amendments will come into force 6 months after the publication of the relevant amending law in the official Gazette of the Republic, except from the amendment in connection to the distribution of assets by a company to its shareholder which will come into force as of tax year 2011.

4 3. AMENDMENTS TO THE ASSESSMENTS AND COLLECTION OF TAXES LAW Registration with the tax authorities Companies which are incorporated or become tax resident in Cyprus should register with the tax authorities and obtain their Tax Identification Code (T.I.C.) within 60 days from their incorporation or registration or from the date that they become tax residents in Cyprus. In addition, companies which are already registered with the tax authorities should inform the authorities within 60 days of any relevant amendment to their records which affect the Tax Authorities Register. Existing companies which do not have a T.I.C. may register by 30 June 2011 without suffering any penalties. Exchange of information and lifting of banking secrecy The lifting of banking secrecy for the purposes of imposition of taxation on Cyprus tax residents will be effected following the issuance of a relevant approval by the Attorney General of the Republic. The Commissioner of Income Tax is required under the law to inform the bank and the office of the Attorney General (AG) about the following: 1. The identity of the person under investigation. 2. The nature and the form of information requested. 3. The reasons the Commissioner believes that the bank possesses the information. 4. The specific period of time, with reasoning, for which the information is requested. 5. A declaration that the Commissioner has exhausted all available means for collecting the information 6. The justified tax reasons for which the information is requested. In case the person under investigation retains a joint account with one or more other persons, the Commissioner is oblidged to follow the procedure as outlined above for all these persons separately. Following the approval of the AG the bank should comply within a period of 60 days from the daye of receipt of the written notice. The Commissioner should inform the person under investigation of the written consent or the refusal of such consent by the AG as soon as this information is made available. Electronic submission of returns The tax returns of companies or other persons that prepare audited accounts may be submitted electronically. In such a case, the deadline for submission (which is the 31 st of December of the year following the year under review), is extended by three months. Issuance of assessment by the Commissioner

5 The Commissioner may decide to issue an assessment for a tax year for which the taxpayer has not submitted a return within the specified deadline or in the case when the tax payer does not maintain proper books and records. Such assessment will be based on information available to the Commissioner. Objections Any objections against assessments raised by the tax authorities should state specifically and precisely the reasons for objection and should be accompanied by the appropriate supporting evidence and a computation of the amount of tax as per the position of the tax payer. In addition, the deadline for submission of an objection against assessments raised in the month of December is extended to the end of February of the following year. Exchange of information between the tax authorities and other governmental departments It has been clarified that civil servants in other governmental departments, local authorities and semi-governmental organizations have the obligation to disclose any information that the tax authorities may ask for a specific tax payer.. Officers of the Central Bank of Cyprus and the Department of Supervision and Development of Cooperative Societies, are exempted from the obligation to disclose any information to the tax authorities. Field audits It has been clarified that the Commissioner may, following the provision of reasonable notice and during the normal hours of operation of a business, enter into any space used by the business and inspect any goods or documents situated therein. Private residences are excluded from these provisions. Updating of accounting records The accounting records of a business should be updated within 4 months from the date of each transaction. In addition, businesses should issue invoices within 30 days from the date of the transaction, unless the approval of the Commissioner has been obtained for the contrary. All businesses which maintain stocks should carry out annual stock takes and the related documentation should be available for inspection by the tax authorities. Payment of disputed tax in the case of litigation In the case where a recourse has been filed at the Supreme Court against an assessment raised by the tax authorities, the payment of the disputed amount of tax only (and not of the total amount of tax) will be postponed until the issuance of the decision of the Court. Penalties The penalty of 50 for not submitting a tax return on a timely basis is abolished and replaced by the following:

6 (i) (ii) (iii) (iv) A penalty of 100 for not filing a notification or tax return, not performing any duties or not providing any information requested explicitly by the law on a timely basis. A penalty of 200 is imposed in the case where a tax payer has not complied with any provisions of the law and receives written notice by the Commissioner for such compliance and he fails to do so within the deadline specified by the Commissioner, which should not be less than 60 days. A penalty of 200 is imposed to any person refusing or failing to submit any information or to perform any of his duties as those are explicitly prescribed by the law for which no deadline is prescribed by the law, and this information or duties relate to a third party and the Commissioner has served a written notice for such compliance and he fails to do so within the deadline specified by the Commissioner, which should not be less than 60 days. In the event of non payment within the deadline set by the law or in a written notification by the Commissioner, an additional 5% penalty will be imposed on the amount of tax due. All the above apply to Income Tax, Special Defence Contribution, Capital Gains Tax and Immovable Property Tax. Enforcement date All of the above amendments will come into force 6 months after the publication of the relevant amending law in the official Gazette of the Republic.