Paper P6 (CYP) Advanced Taxation (Cyprus) Thursday 10 December Professional Level Options Module. Time allowed

Transcription

1 Professional Level Options Module Advanced Taxation (Cyprus) Thursday 10 December 2015 Time allowed Reading and planning: Writing: 15 minutes 3 hours This question paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 5 Do NOT open this question paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (CYP) The Association of Chartered Certified Accountants The Institute of Certified Public Accountants of Cyprus

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances shown below will apply for the foreseeable future unless you are instructed otherwise. 2. Calculations and workings need only be made to the nearest unless you are instructed otherwise. 3. All apportionments should be made to the nearest month. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following rates and allowances for the year 2014 are to be used in answering the questions Income tax rates 0 19,500 nil 19,501 28,000 20% 28,001 36,300 25% 36,301 60,000 30% Over 60,000 35% Corporation tax All companies 12 5% Special modes of taxation of certain kinds of income Pensions of residents from services rendered outside the Republic (which exceed 3,420) 5% Gross amount of royalties, premiums, compensation, etc 10% Film rental, etc of non-residents 5% Profits of non-resident professionals, artists, etc 10% Widow s pension (in excess of 19,500) 20% Capital allowances Annual (wear and tear) allowances Tractors, trenchers, excavators, bulldozers, transcavators, self-propelled shovels and loaders, drums, oil tanks 25% Motor vehicles other than saloon cars 20% Computer hardware and operating software 20% Application software (a) if not exceeding 1, % (b) if exceeding 1, % Agricultural machinery and tools acquired in the years 2012, 2013 and % otherwise 15% Other plant and machinery acquired in the years 2012, 2013 and % otherwise 10% Hotel, industrial and agricultural buildings acquired in the years 2012, 2013 and % otherwise 4% Commercial and other buildings 3% Glass houses, metallic skeleton 10% Glass houses, wooden skeleton 33 3% 2

3 Amortisation allowance On the cost of purchase or development of intellectual property rights (from 1 January 2012) 20% Special defence contribution On dividends received (where applicable) 17% On interest received standard rate 30% reduced rate (applicable under specific circumstances) 3% On rental income (on 75% of the gross rental income) 3% Interest and surcharge on unpaid tax Interest on income and corporation tax assessments Additional tax PAYE assessments 4 5% p.a. (interest is calculated on the basis of completed months) The same rate applies to overpayments of tax) 5% of tax due 4 5% p.a. plus surcharge of 1% per month Value added tax (VAT) Registration limit 15,600 Deregistration limit 13,669 Standard rate: until 12 January % from 13 January % Reduced rates: until 12 January %, 8% from 13 January %, 9% Capital gains tax Rate 20% Life time exemptions (maximum 85,430) General 17,086 Farmer 25,629 Residential dwelling 85,430 Immovable property tax On every Euro not exceeding 40,000 6 On every Euro from 40,001 to 120,000 8 On every Euro from 120,001 to 170,000 9 On every Euro from 170,001 to 300, On every Euro from 300,001 to 500, On every Euro from 500,001 to 800, On every Euro from 800,001 to 3,000, On every Euro from 3,000, Note: If the total 1 January 1980 value of property amounts to 12,500 or less, no tax is due. 3 [P.T.O.

4 Stamp duty nil for amounts up to 5, for every 1,000 or part of 1,000 for amounts from 5,001 up to 170, for every 1,000 or part of 1,000 for amounts exceeding 170,000 with a maximum amount of stamp duty of 20,000 Land transfer fees 1 to 85,000 3% 85,000 to 170,000 5% Over 170,000 8% Social insurance Self-employed 14 6% Employer 7 8% Employee 7 8% Maximum annual insurable income of employees 54,396 Other contributions by employers Social cohesion fund 2% Redundancy fund 1 2% Industrial training fund (also known as Human resource development fund) 0 5% Central holiday fund (also known as Vacation leave fund) 8% 4

5 Retail Price Index for Capital Gains Purposes Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec [P.T.O.

6 Section A BOTH questions are compulsory and MUST be attempted 1 You should assume the date today is 20 July You are a tax senior working in an international accounting firm in Cyprus, and are about to enter into a meeting with Tanaz, who is the sole director and shareholder of Emily Food Products Ltd (EFP). Both Tanaz and EFP are tax resident in the United Arab Emirates (UAE). EFP runs a chain of fast-food restaurants in the UAE under the trade name Em s Foods. Tanaz was referred to you from the UAE office of your firm. You enter the meeting and after a few minutes of exchanging pleasantries, Tanaz explains why she has requested a consultation with you. I am very glad to be back in Cyprus. I am currently considering two transactions here. Firstly, I am looking to buy Esmeralda Complex which is a building developed in 2014 by Andriana Development Ltd (ADL), a Cyprus tax resident company. Tanaz passes you a sheet with information she tells you was prepared by ADL s accountants. It shows the following: Asset Note 000 Current assets Inventory Esmeralda Complex N1 1,700 Value added tax (VAT) refundable N2 228 Notes: N1: ADL was incorporated to construct Esmeralda Complex, which is shown as inventory on its balance sheet. The balance sheet amount includes the purchase of the land as well as the cost of construction of the building. The building is made up of one ground floor commercial shop, two offices on the first floor, and a residential apartment on the top floor. N2: ADL claimed back all the input VAT on the construction, but to date this sum has not been refunded by the Tax Department. Tanaz waits a moment for you to look through the information and then continues. I am thinking of either purchasing the shares of ADL, or purchasing the Esmeralda Complex outright in my own name. If I purchase ADL, I will appoint local directors in order to maintain the company s Cyprus tax residency, but will also be a director myself. With regards to the building, this is what I am thinking. I intend to rent out the shop on the ground floor. EFP will then incorporate a wholly owned Cyprus subsidiary, Em s Cyprus Food Ltd (EMC), which will use one of the offices on the first floor free of charge for its business affairs I will explain these further when I discuss the second transaction that I am considering. I plan to sell the other first floor office to a third party buyer, who I have already found, within a few weeks following the acquisition of the building. Finally, I intend to keep the residential apartment on the top floor for my own use when I visit Cyprus, which will be for around one month every year. The second transaction is that I am looking to expand EFP s business in Europe, to allow others to trade under the Em s Foods franchise, for which they will pay a royalty fee. The idea is that EMC, which will be a Cyprus tax resident company, will pay EFP a royalty for the right to sub-lease the franchise Em s Foods to third parties in Europe. The royalty to EFP will be 80% of the total income received by EMC for the use by lessees of the franchise. The remaining 20% will remain with EMC. I am already talking with an interested party in Cyprus who wishes to open various restaurants in Cyprus, as well as one person in France who is interested in opening restaurants in Paris. 6

7 Required: Draft a memorandum to your tax partner, which addresses the following issues: (a) (b) The tax savings which will arise if Tanaz purchases the shares of Andriana Development Ltd (ADL) rather than the Esmeralda Complex building itself in her own name. (2 marks) The tax consequences specific to the transactions below, both in the case that Tanaz purchases the shares of ADL and if Tanaz purchases the Esmeralda Complex building outright in her own name: (i) The shop on the ground floor is rented to a third party. (7 marks) (ii) One of the offices on the first floor is used, for free, by Em s Cyprus Food Ltd (EMC), the Cyprus subsidiary of Emily Food Products Ltd (EFP). (iii) One of the offices on the first floor is sold to a third party. (iv) Tanaz keeps the top floor apartment for her own use. (8 marks) (4 marks) Note: For each transaction, your answer should include an explanation of any corporation tax, income tax, special defence contribution (excluding any deemed distribution considerations), capital gains tax and value added tax (VAT) consequences. (c) With regards to the expansion of the fast-food business through EMC: (i) (ii) The basis on which the royalty income and expense of EMC will be taxed under Cyprus corporation tax, stating any tax obligations arising for EMC with regards to these, as well as the further information required, if any, to advise on this fully. (5 marks) By reference to the place of supply rules, the value added tax (VAT) implications of the payment made by EMC to EFP. (2 marks) Professional marks will be awarded in Question 1 for the appropriateness of the format and presentation of the memorandum, and the effectiveness with which the information is communicated. (4 marks) (35 marks) 7 [P.T.O.

8 2 Joanna, who is a Cyprus tax resident, has received the below from her Ildorian tax advisers who are based in the country of Ildoria. The is in reply to an Joanna sent to them with questions relating to a proposed investment she wishes to undertake. Dear Joanna Thank you for your . From its content, we understand the following: You are the owner of a Cyprus tax resident company, Mardon Ltd (Mardon). Currently Mardon has no assets or liabilities. Mardon will receive a loan of 10 million from your father s investment company, Tiger Ltd (Tiger), a company resident in the British Virgin Islands (BVI). The loan will be provided on to Danwek Ltd (Danwek), an Ildorian tax resident company, which owns and runs a biodiesel refining plant in Ildoria, as per the diagram below. We also understand that Danwek is a related company to Mardon. We further understand that the loans will be provided for a duration of ten years, whereby only the accrued interest will be paid at the end of each year, with the capital being repaid in total at the end of the tenth year. Tiger (BVI) Mardon (Cyprus) Danwek (Ildoria) Loan We confirm that the corporation tax rate in Ildoria is 30%. We also confirm that, as per the double tax treaty between Cyprus and Ildoria, withholding tax at source of 10% will apply to dividends arising in Cyprus and payable to a resident of Ildoria, or vice-versa. As per the treaty, double tax relief is applied using the credit method. We can confirm that the interest rate of 5% per annum you mentioned in your to us, as having been agreed between Mardon and Danwek, is acceptable to the Ildorian tax authorities. We understand you will impose the minimum acceptable margin on back-to-back loans in Cyprus. We also confirm that the withholding tax on interest income as per the double tax treaty between Cyprus and Ildoria is a maximum of 3%, and that Ildoria implements this withholding tax as per its national legislation for interest which is paid by an Ildorian tax resident company to a Cyprus tax resident company, if the latter is the beneficial owner of the income. However, given the back-to-back loan relationship, and that there is effectively no risk to Mardon attached to the loans, the Ildorian tax authorities would consider Tiger to be the beneficial owner of the income and not Mardon. Ildoria does not have a double tax treaty agreement with the BVI, so the withholding tax at source in this case would be 20%. In order for the Ildorian tax authorities to consider Mardon as the beneficial owner of the interest income, at least 60% of the funds lent should form part of the Cyprus company s capital. The remaining amount can be derived from borrowed funds. We therefore recommend that Tiger invest 6 million as share capital in Mardon and lend to it the remaining 4 million. Mardon can then lend the entire amount of 10 million to Danwek and enjoy the treaty benefits in terms of the 3% withholding tax on the interest income. Following the , Joanna contacted her father who told her that he did not want Tiger to invest as a shareholder in any company. Loan 8

9 Required: (a) (b) (c) (d) (e) (f) State and briefly explain the two methods of relief found in double tax treaties for the avoidance of double taxation. Explain how double tax relief may be provided in Cyprus where no double tax treaty exists with the foreign country in which the income arose. (2 marks) When the Ildoria Cyprus double tax treaty provides for a 10% withholding tax on dividends payable by a Cyprus company to an Ildorian tax resident, explain why Cyprus will apply no withholding tax to such dividend payments. Explain your understanding of the Ildorian tax advisers statement that the interest rate of 5% per annum, which has been agreed between Mardon Ltd and Danwek Ltd, is acceptable to the Ildorian tax authorities. Determine the total tax which Mardon Ltd would pay annually using the structure proposed by the Ildorian tax advisers, giving supporting explanations and clearly identifying the tax payable in Cyprus. (5 marks) Advise on an alternative structure which would reduce the overall annual tax exposure of Mardon Ltd and, at the same time, maintain the requirement for Mardon Ltd to be considered the beneficial owner of the interest income by the Ildorian tax authorities. Your advice should be supported by a calculation of the total annual tax savings when compared to the total annual tax as calculated in part (e). (9 marks) (25 marks) 9 [P.T.O.

10 Section B TWO questions ONLY to be attempted 3 Eftychia is the financial director of one of your clients, Germagio Cyprus Public Company Ltd (GCP), which is listed on the Cyprus Stock Exchange. Eftychia has provided you with a list of questions, as follows: (i) (ii) We recently recruited Maria to one of our senior management positions. Her package includes an option right, lasting for one month, to purchase in six months time 10,000 GCP shares at a price of 1 58 per share. Under the agreement, she will be able to sell this right after three months have passed from the date of granting the right. The current share price is What are the tax implications of this for the employee? GCP is considering raising capital through a rights issue. All of its shareholders will be offered the opportunity to purchase three shares for every ten shares held, at a price which will be around 5% less than their current market value. The rights issue will also include two bonus shares for every ten shares held. Effectively this will mean that those shareholders who exercise the rights issue will receive a total number of shares at approximately 10% less than the market value of the shares. What are the tax implications of the issue of rights and bonus shares for the employees of GCP, who are also GCP shareholders? (2 marks) (iii) One of our departments has been performing very poorly over recent years. We are considering downsizing by making five of the oldest employee positions in this department redundant. These five employees will be offered six months worth of pay as a redundancy payment. Under their employment contracts, they are only entitled to two months pay in the case that they are made redundant. What are the tax implications of the proposed redundancy payment for the employees as well as for GCP? (iv) A few months ago, we terminated the employment of one of our engineers, Panos. Subsequently, he instigated legal proceedings against GCP for unlawful dismissal and was successful. The court has now ordered us to pay Panos s legal costs, amounting to 3,500. Do we have to deduct any tax under pay-as you-earn (PAYE) on this amount of 3,500? (1 mark) (v) GCP purchased a large parcel of land in Larnaka 20 years ago, but has never used it. GCP is currently negotiating an agreement to lease the land to Rotso Limited (Rotso) for ten years for an annual rental of 20,000. Rotso plans to erect a factory to make bricks on the land, for a total cost of 5,000,000. At the end of the lease period, the factory will become the property of GCP. Aside from recognising the rental income for the land, is there anything else that GCP should do with regards to this transaction for tax purposes and, if so, can you explain the procedure, the income which will be assessed to tax, and the expenses which are tax deductible for GCP as well as for Rotso? (6 marks) (vi) It is possible that GCP may sell the land in Larnaka (discussed in (v) above) during the lease period. I understand the capital gains tax consequences of such a sale, but are there any other tax matters to be considered which would impact on your advice above? (5 marks) Required: Provide the answer to each of the questions posed by Eftychia. Notes: 1. You should justify your advice but are not required to produce any calculations. 2. The split of the mark allocation is shown against each of the queries above. (20 marks) 10

11 4 You should assume the date today is 5 August Panayiotis and his wife, Eleni, are both Cyprus tax residents. Panayiotis is the owner of 100% of the shares of Potato Development Cyprus Limited (PDC), a Cyprus tax resident company. PDC has been researching and developing a synthetic fertiliser which, when applied in potato farming, can enhance both the size of each potato as well as the total quantity of the potato crop in a field. PDC currently has no income. PDC employs three engineers and chemists and has also purchased its own offices and laboratory. PDC s activities have been financed entirely from a Cyprus discretionary international trust, whose sole beneficiary is Eleni. The trust charges interest at the rate of 5% per annum to PDC, with the interest being capitalised every year, and not paid. The trust was set up many years ago by Eleni s father, before Eleni and Panayiotis moved to Cyprus. PDC s product development activities have resulted in interest for its acquisition by Cyprus Potato Public Company Limited (CPP), a Cyprus tax resident company listed on the Athens Stock Exchange. The deal was brokered by a UK law firm, which will invoice Panayiotis for its commission, equal to 3% of the gross sales price. One of the issues which has arisen in the negotiations is that PDC is carrying a significant amount of debt, owed to the trust, which needs to be repaid or somehow removed from the balance sheet before any sale can be made. Panayiotis and Eleni are considering having the loan capitalised by the trust, such that PDC will issue shares to the trust, of the same value as the amount of the loan outstanding, in lieu of the debt. The result would be that the trust would become a 99% shareholder in PDC, with the remaining 1% still being held by Panayiotis. The two shareholders would then both sell their shares in PDC to CPP. Once the acquisition takes place, CPP will apply to include PDC in its existing value added tax (VAT) group registration. Required: (a) (b) (c) (d) (e) (f) Define what is meant by an innovative business and explain the tax treatment of the research and development expenses incurred by Potato Development Cyprus Limited (PDC). (5 marks) Explain any tax benefits arising for Cyprus Potato Public Company Limited (CPP) directly from the purchases of the shares in PDC. (1 mark) Explain how the interest income received by the trust will be taxed, given that it has never been paid but has been capitalised every year. With reference to the place of supply rules, explain the value added tax (VAT) treatment of the commission payment made by Panayiotis to the UK law firm. Explain the tax treatment of the proposed capitalisation of the loan by the trust, and the ensuing sale of the shares in PDC to CPP by the trust and Panayiotis. (5 marks) State the circumstances in which companies can apply for a value added tax (VAT) group registration and explain the effects for the companies within such a group. (20 marks) 11 [P.T.O.

12 5 Tryfonas has been studying at the University of Cyprus, in Nicosia. He undertook his bachelor and masters degrees there, and has recently finished the University s MBA programme. Tryfonas has now been offered his first employment as CEO of Everything Diamond Bright Ltd (EDB), a Cyprus tax resident company which will open a number of retail shops, both in Cyprus and in Dubai in the United Arab Emirates (UAE), selling expensive jewellery. The agreement he is about to sign offers him a net annual salary of 100,000, i.e. after the payment of social insurance contributions and income tax. As per the agreement, his duties will require him to work at EDB s Dubai branch for around one third of his annual working days. He will be in Cyprus for the remaining days of the year. In addition, Tryfonas remuneration package includes the use of a leased company saloon car in Cyprus, which costs EDB 30,000 per year. EDB has already agreed with the Cyprus Tax Department that the business use of the car will be 50%. Required: (a) (b) (c) State, giving reasons, whether Tryfonas will be eligible for any expatriate relief, given his employment with Everything Diamond Bright Ltd (EDB) is his first employment. (2 marks) Based on the information provided, calculate Tryfonas s gross annual salary, excluding any benefit-in-kind. Provide clear explanations of the treatment of all stages/amounts comprising your final answer. (12 marks) Determine, giving supporting explanations, the total cost of Tryfonas s remuneration package to EDB. Note: You should assume that EDB is exempt from the central holiday fund for employer s contribution purposes. (6 marks) (20 marks) End of Question Paper 12