Contents. 1-2 Contact Details 15. Part 1 Introduction. 3-4 Disclaimers 16. Part 2 Brief News 5-9. Part 3 Austerity Measures Amendments to Tax Laws

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3 Contents Part 1 Introduction 1-2 Contact Details 15 Part 2 Brief News 3-4 Disclaimers 16 Part 3 Austerity Measures Amendments to Tax Laws 5-9 Special Feature Members Voluntary Liquidation 10-14

4 1 Introduction In the last edition of our Newsletter, we left the window open for coming back to you before the end of the year so, in light of the recent amendments to local legislation, part of the third package of austerity measures for combating the financial crisis, here we are with a special edition of our Newsletter. In addition, we take advantage of this communication to provide you with a separate publication about a topic so current during the last three years, and one involving such a lengthy and technical procedure, as no other. We are talking about liquidation in its wider sense, or dissolution as it is most widely known. As the saying goes, the devil is in the detail and there is nobody better placed to provide you with this detail than the very people who practice it on a daily basis. I am talking about members of our team, from different departments, who will give you their insight on the complex procedure of liquidation. The procedure involves professionals from many different backgrounds and, as such, we are glad and thankful that in our effort to provide a comprehensive overview of this procedure we have the kind contributions of some of our professional associates, namely the legal firm A. Katchies LLC, and the audit company Alathea Audit Ltd, who will provide insight on their involvement and responsibilities within the procedure. We will cover issues such as the comparison between the pure liquidation procedure and the strike-off procedure (when, and where, the latter is available), the tax clearance process, the detailed steps and their sequence within the liquidation procedure, as well as the accounting and tax implications. We hope that by the end of this feature we will have managed to dispel many myths surrounding the liquidation procedure and affecting many areas; from the time required to complete the procedure, to the detailed process of getting rid of all assets and liabilities. 1

5 Although we do not usually include the Small News section in Special Newsletters, due to the fact that a number of small, but very important, news issues have arisen since the last edition of our standard Newsletter (and despite the fact that this edition was only recently released) we will start this edition by covering these points. Of particular importance is the increased interest noticed lately for replacement of Madeira companies with Cyprus companies because of some adverse changes in Portuguese legislation. We hope that you will find both publications useful. As always, we will be happy to discuss with you any query you may have on the matters above, or on any other matter concerning Cyprus. You can find our contact details on the last page of this publication. For previous editions of our Newsletter, as well as other publications, please refer to our website: Finally, we take the opportunity to wish you a joyful festive season and all the best for the New Year With my best regards, George Savvides Partner 2

6 2 Brief News Law providing for the Special Settlement of Tax Liability of 2011 As previously mentioned in Newsletter 15, on 24 November 2011, a new Law was voted through Parliament, which waives all penalties and interest for taxes pending for all years up to and including This Law was published in the Gazette of the Republic on 12 December 2011 and its details are as follows: The Law provides for the imposition of a flat penalty of 5% on taxes due for tax years up to Any other penalties or interest accruing on these taxes previously imposed by the legislation are waived by this Law. For the purposes of this Law, taxes due include the following: o Taxes assessed by 30 March 2012, o Taxes which were withheld or should have been withheld at source by 30 March 2012, o Taxes arising in accordance with a tax payer s tax return filed for any tax year up to 2008 which is submitted by 30 March 2012, and o Taxes imposed by a relevant Court of Law until 30 March The Law provides that no interest or financial penalties which have already been paid towards the settlement of taxes for tax years up to 2008 will be refunded. Where tax liabilities are settled under the provisions of this Law along with the submission of a person s tax return but this has not been assessed by the Director of Inland Revenue, and after the period during which this Law is in force the Director makes an assessment with an additional amount due to be paid, this additional amount will not be subject to the provisions of this Law and will be subject to normal interest and penalties. This Law applies from the date it was published in the Official Gazette, 12 December 2011, up to and including 30 March Amendment to the Land Registry (Duties and Fees) Law On 2 December 2011, an amendment to the Land Registry (Duties and Fees) Law has entered in to force. This provides for full exemption from transfer fees for all transfers of real estate property for which VAT was payable on the transaction and 50% exemption from transfer fees for all other transfers. The Law will be in effect for six months starting from 2 December 2011 and ending on 1 June 2012 and covers all new contracts to be executed during this period. 3

7 Replacement of Madeira with Cyprus in tax structures Lately we have noticed increased interest in replacing Madeira companies with Cyprus companies in international structures. The reason for this, as we have been informed by Portuguese colleagues, is because as from 1 January 2012 the withholding tax exemption on payments of dividends and interest to shareholders of entities licensed within the Madeira IBC will be abolished as provided by the Portuguese 2012 State Budget. This means that the withholding tax rate can go up to 30% in case of shareholders from countries included in the Portuguese black list. The removal of Cyprus from the black list of Portugal on 8 November 2011 as reported in our Newsletter 15, could not have come at a better time, especially for cases where as part of the restructuring approach a Cyprus company will need to own a Madeira company for some time. The capacity offered by the legislation of both jurisdictions to transfer the legal seat of a company, offers an additional option for the restructuring mentioned above, especially for cases where the maintenance of corporate history is important. Leasing regime A number of laws are expected to be enacted soon, after a long period of consultation between all parties involved, in order to create a special regime for leasing. The laws are expected to specify the bodies which will be entitled to provide leasing services, the range of services to be covered by the general term leasing services, the requirements for obtaining and maintaining a license for provision of leasing services, the supervision of providers of leasing services and related offences and penalties. They will also provide the terms and the procedure for mutual recognition of subsidiary companies of financial institutions situated in other EU Member States, providing leasing services. Positive report by MONEYVAL for Cyprus The Committee of experts on the evaluation of anti-money laundering measures and the financing of terrorism (MONEYVAL) has expressed satisfaction in its latest report, with the way Cyprus handles the phenomenon of money laundering and financing of terrorism. It specifically welcomes the fact that Cyprus has taken extra measures for fighting this phenomenon, enacting a relevant legislation and applying the standards previously introduced by MONEYVAL in its previous report on Cyprus. The recent report also states that the legal regime applied with regards to mutual co-operation with other countries and international bodies is very strong. 4

8 3 Austerity Measures Amendments to Tax Laws On 14 December 2011, the Cyprus Parliament voted a number of amending laws which were presented by the Government as a third package of austerity measures to combat the effects of the financial crisis. The provisions most relevant to the international business sector are analysed below by order of importance/applicability to the sector. A summary of all other measures, which are very important, is presented at the end of this report. It is very important to state that every effort has been made by the Government for these measures to have the minimum possible impact on the international business sector in Cyprus. The effective date of these new provisions is the 1 January 2012, unless otherwise stated below. It is noted that as the laws are yet to be published in the Gazette of the Republic, they are not considered as official and effective at the moment. Income Tax Amending Law In the case of provision of a loan, or other financial assistance (or financial withdrawal), from a company to its individual directors, or shareholders, or to their spouse, or up to second degree relatives, then it will be deemed that this person has a monthly benefit equal to 9% of the balance of this arrangement, and this amount will be included in the income of this person for Income Tax purposes. The amount of tax will be withheld from his/her emoluments and will be contributed to the Cyprus Tax Authorities on a monthly basis. Article 39 of the Income Tax Law, which provided for imposition of interest at 9% on loans and other financial facilities provided by a company, to the above mentioned persons, which interest was then subject to Special Contribution for Defense, is repealed. Any emoluments which concern employment services provided within the tax year for which the related pension fund, social insurance and related contributions are not paid in the year in which they fall due will not be deducted from the taxable income of the employer. In case such contributions (including resulting penalties) are fully paid within two years from the last day they are due, then both the emoluments and the related contributions will be deducted in the tax year in which they are paid. 5

9 The Special Contribution for the Defence (SCD) Ameding Law The changes in the Law solely relate to the rates of contribution, with the basis of taxation remaining unaffected. More specifically, the following changes have been voted: An increase in the rate of SCD from 17% to 20% for dividend income received by Cyprus resident persons only for 2012 and This increase will apply to all dividends arising or accruing from 1 January 2012 to 31 December It is reminded that dividends received by a resident company from another Cyprus resident company are exempt from SCD. Dividends received by a resident company from a company that is not resident in Cyprus, in which the Cyprus company has a direct participation, irrespective of the percentage shareholding, are also exempt from SCD, provided that at least one of the following conditions are met: the company paying the dividend does not directly or indirectly engage more than 50% in activities which lead to investment income; OR the foreign tax burden on the income of the company paying the dividend is not substantially lower than in Cyprus. Substantially lower is interpreted as a tax rate lower than 5%. When dividend income is not exempt from SCD it will now be taxed at the rate of 20%, instead of 17% as was the case so far. Tax credits for taxes paid abroad are available. Dividends paid to non-residents of Cyprus are not subject to SCD. SCD is imposed on dividends paid by a company, resident in the Republic of Cyprus, to another resident company, after the lapse of a period of four years from the end of the year in which the profits deriving the dividend are generated. Dividends deriving themselves from dividends for which SCD has already been paid either directly, or indirectly, are exempt from SCD. 6

10 Law providing for the special contribution of the employees, the self-employed persons and the pensioners of the private sector. The special contribution is calculated as a percentage of gross emoluments, as per the table below: Gross monthly emoluments Rate % 0 2, ,501 3, * 3,501 4, ,501 and over 3,5 * Minimum contribution: EUR10 The special contribution is calculated on total gross emoluments without any restriction either on the level of emoluments, or that of the contribution. The following are exempted from special contribution: Retirement bonus Provident fund contributions Emoluments of a foreigner who is employed by a foreign government or an international organization Emoluments of foreign diplomatic or consular missions, which are not citizens of the Republic of Cyprus Emoluments of the crew of Cyprus flag vessels Allowances for covering professional costs for the purpose of the employer. As the title suggests, public servants are exempted from the provisions of this Law, since their contribution is covered by a different Law, which was part of the first package of austerity measures (presented in our related Newsletter Tribute to that package). For employees the payment of the special contribution is done equally by the employer and the employee. For self-employed persons the income on which such a contribution is paid is the earnable income, which cannot be lower than the one on which contributions to the social insurance fund are made. All contributions are deductible for Corporation Tax/Income Tax purposes for the employer and the employee respectively. The imposition and settlement of the special contribution will be as follows: For employees and pensioners the contribution will be withheld from the salary and pension respectively, and will be paid to the Tax Authorities on a monthly basis. 7

11 For self-employed the contribution will be stated on a special form to be approved by the Tax Authorities and will be paid in three installments following the same procedure and dates as with the provisional tax system for Income Tax purposes (i.e.1 August, 30 September and 31 December). As with the increase in SCD on dividend income, this measure is temporary and will be in effect up to 31 December The Value Added Tax Law As from 1 March 2012, the standard rate of VAT will be increased from 15% to 17%. The reduced rates of 5% and 8% will not be affected by this amendment. All taxable (subject to VAT) persons who provide taxable delivery of goods, or provision of services, to non-taxable persons are obliged to issue and deliver legal receipts. Non compliance with this provision will entail a penalty equal to 10% of the value of the transaction. Furthermore, such an offence will result in a monetary penalty up to EUR1,700, or to a jail term of up to 3 years. Legal receipts must include the following items: 1. Date of issue 2. Tracking number 3. Name, address and registration number of the taxable person 4. Sufficient description of the goods, or services 5. Total payable amount, including the VAT 6. The total payment amount (including VAT) per VAT rate 7. Indication whether the transaction concerns a prepayment, part of the price, a cash transaction, or otherwise. It is noted that when a cash invoice is issued the legal receipt is not required. Creation and Operation of an Independent Financial Stability Law of 2011 The ultimate aims of this Law are the improvement of the existing regime for management and resolution of financial crises, the safeguarding of the financial stability and the recovery of affected credit institutions. All credit institutions, which have been incorporated in the Republic of Cyprus, including their branches outside Cyprus, as well as all credit institutions, which have been incorporated outside the Republic but they operate in Cyprus through branches are obliged to pay a basic contribution. The basic contribution is equal to 0.03% of the relevant liabilities of the credit institution. The special contribution made by the credit institutions equal to 0.095% on their deposits will be repealed when this Law will come in to effect. 8

12 This Law will come in to effect as from the financial year Other Measures Income criteria will be introduced as from 2012 on provision of student grants, providing for the gradual reductions of the grants and their total elimination when the income of a family exceeds a certain amount. Income criteria will also be introduced as from 2012 on provision of child benefits, providing for the gradual reductions of the grants and their total elimination when the income of a family exceeds a certain amount. All increments and inflation-related adjustments on salaries and pension of government employees and the employees of the wider public sector for 2012 and A Law for management of financial crises has been enacted, which aims to provide for a regime for assigning powers to the Council of Ministers, in order for this body to be able to take austerity measures in periods of such crises. The purpose of such measures can be to increase the liquidity in the market or to protect or restore the solvency of the financial system or to support the capital base of financial institutions in Cyprus. 9

13 Special Feature Members Voluntary Liquidation Introduction There are different reasons why a company may need to close down and different procedures that have to be followed depending on those reasons and the individual circumstances. In this feature we will focus on liquidation decided by the shareholders of a company, also known as Members Voluntary Liquidation. Yet, for the sake of clarity and for pointing out the differences with other procedures, we briefly present in the Statutory Background section, immediately following, the main characteristics of the other procedures with which a company may close down. We also point out from the beginning that, while in a formal liquidation procedure it is the liquidator who is responsible to dispose off all assets and settle all liabilities of the company, it is our internal policy to clear the company of any assets before proceeding with the liquidation in order to ensure that the procedure will run smoothly, and without avoidable delays or complications. In addition to the practical benefits of clearing the assets there are also financial benefits from avoiding high fees that would be incurred if this work was left to the liquidator to perform. Statutory Background Subject to the provisions of the Companies Law, Chapter 113, sections 203 through to 344, insolvencies fall into two categories: Compulsory Liquidation by the Court; Voluntary Liquidation by the company or its creditors. A compulsory liquidation results from a compulsory winding up order obtained pursuant to a creditor filing an insolvency petition with the competent Court (which according to section 209 is the Court in the district in which the company to be liquidated has its registered office). A compulsory liquidation is conducted by an official receiver, or an insolvency practitioner. A voluntary liquidation, meanwhile, results from a resolution passed by members or directors, subject to the approval of creditors, to wind up a company. 10

14 There are two kinds of voluntary liquidation: (i) Members' voluntary liquidation which means that the directors need to make a statutory declaration of solvency. (ii) Creditors' voluntary liquidation which means that the directors do not need to make such a declaration. Under section 261, voluntary liquidation is acceptable when: A statutory period comes to an end or a statutory event occurs and as a consequence a company approves a winding up resolution in a general meeting; The company votes for liquidation on a special resolution; The company votes for liquidation on an extraordinary resolution because it is impossible to continue its business due to its debts. If the company approves the voluntary winding up resolution, it is obliged to publish it in the Official Gazette of the Republic of Cyprus within 14 days (section 261). The insolvency procedure begins on the day of the approval of the resolution (section 263). The consequences of a voluntary winding up are that: The company cannot perform any activities except those necessary for its favourable liquidation (section 264). Any change in the membership of the company or any sale of the company s shares without the approval of the liquidator is invalid (section 265). The liquidator has the following powers, subject to the approval of the Court or the passing of a special resolution of the company (section 286(1)(a)): To satisfy fully any ranking of creditors; To reach a compromise with the creditors; To compromise every claim, whether present or future, ascertained or unascertained, and every duty that can become a debt. Furthermore, section 286(1)(a) gives to a liquidator the same powers as those given to a liquidator in a compulsory insolvency under section 233(2). 11

15 Financial Statements Once the instruction to liquidate a company is confirmed, it is important to determine the present position as regards to the company s accounting records. To be able to move forward with the liquidation, any prior year accounts that are not finalised must be brought up to date, audited, approved by the directors and the shareholders at the Annual General Meeting and submitted to the Registrar of Companies. Interim accounts are then prepared and presented together with the Statutory Declaration by the directors of the company that the company is solvent, i.e. in a position to repay all its debts within 12 months of entering liquidation, before the District Court. Following that, the company must be cleared of any assets and liabilities (please refer to the second paragraph under the Introduction section) and the liquidator must be appointed within five weeks. This means that the company must not hold any investments (tangible, or intangible). Indeed, where possible, it is advisable to clear the company of all assets and liabilities - excluding at least one bank account. If investments in participated companies remain, the liquidation cannot commence. In this regard, steps must be taken to dispose off, or transfer the assets out of the company. The method for ensuring the company is free of assets will vary from case to case and we will happily advise as to the best option available at the point in time. Tax Clearance After the publication of the appointment of the liquidator in the Gazette of the Republic, which usually takes one month, the auditors will send the audited interim accounts to the Tax Authorities for tax clearance, which is one of the most complex, and time consuming, steps within the liquidation procedure. The average time needed for this procedure is currently around three months. The Tax Authorities will only consider accounts for tax clearance that are made up to a date no greater than one month before the tax clearance is requested. In this regard it is vital that the accounts are prepared and reviewed without delay, so that they may then be submitted for audit. Any delay could seriously jeopardise the liquidation procedure. Indeed, a delay in excess of two weeks could necessitate the preparation of further accounts and thus incur additional costs for the company. Once approved, the accounts will then be sent for audit and submitted by the auditors to the Tax Authorities for tax clearance. 12

16 One of the key stages of the tax clearance procedure concerns the handling of queries that are raised by the tax officers about the financial affairs of the company. On receipt of the request for tax clearance, the tax authorities will review all of the company s activities from the date of its incorporation, or since the last tax assessment (if applicable) to check whether the provisions of the relevant tax laws have been consistently applied. Therefore, when making the request for tax clearance, all financial statements of the company (from incorporation, or from the date of last tax assessment) up to the date of commencement of the interim accounts must also be submitted to the tax authorities. This is the point at which the quality of the work of the accountants and the auditors of the company comes to light since they may be asked to explain the reasoning behind the accounting and tax treatment of certain past transactions. Therefore, the decision to appoint a reputable and professional accounting and auditing office from the very beginning of the company s life will show its importance. On completion of their assessment, the Tax Authorities may, or may not, depending on their findings, raise additional tax assessments against the company. Any such final tax liabilities will have to be settled by the liquidator of the company. Once this is done, the liquidator will then proceed to close the bank account/s of the company; distributing any final balance to the shareholders as liquidation proceeds. It is important to stress that the distribution of funds from the company (other than dividends paid from any available distributable profits) prior to the receipt of the Tax Clearance Certificate is not advisable. Whether such proposed distributions are referred to as advance liquidation proceeds, interim liquidation dividends, or distributions under any other guise, they cannot be made prior to the obtaining of the Tax Clearance Certificate. Such transactions may result in a debit balance with the shareholder(s) and result in adverse tax implications; notional interest would be applied on the debit balance and taxed accordingly. Final accounts of the Liquidator to be presented at the Final General Meeting Once the Tax Clearance Certificate is obtained, a notice for the Final General Meeting will be sent to the Registrar. Upon the publication of the date of the Final General Meeting in the Gazette of the Republic, the liquidator will prepare and submit the final summary accounts. The final summary accounts must be filed with the Registrar within one week from the date of the Final General Meeting. Finally, approximately three months after the Final General Meeting is held, the liquidation of the company is published in the Gazette of the Republic, and the Certificate of Liquidation can be requested. 13

17 Conclusion Voluntary liquidation is a very time consuming procedure and it is important that a systematic and methodical approach is followed. In this respect, we would like to reiterate (below) the three areas which we consider as the most critical to ensure that the procedure can progress as effectively as possible: Firstly, the importance of applying the Income Tax law provisions consistently during the life cycle of a company cannot be stressed too much. This is to avoid any nasty surprises upon the tax clearance process, which may result in significant penalties and interest, depending upon the length of time the assessed tax liability is outstanding. Secondly, for the effective and swift liquidation of a company, it is essential to ensure that the company is freed from assets and liabilities as quickly as possible. Finally, prompt and effective communication between all parties is a must, in ensuring that the accounts to be sent for tax clearance are finalised and sent for audit in a timely fashion. We are at your entire disposal to provide any further information or clarifications you may require on this procedure and to discuss any specific cases you may have in mind. With the kind contribution of: 14

18 C ontact Details Fiducenter (Cyprus) Limited Vashiotis Business Center 1 st floor, office 101 1, Iakovou Tompazi Street 3107 Limassol P.O. Box Limassol Tel: Fax: fiducenter@fiducenter.com.cy Website: Working hours: 08: local time (GMT+2). 15

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