Important tax adjustments of a Cyprus Company or a Cyprus entity Important income tax adjustments in arriving at the taxable profit/loss of a Cyprus Company / Cyprus Entity
The following summarises the major allowable and disallowable expenses in arriving at the taxable profit/loss of a Cyprus Company / Cyprus Entity
1. Major adjustments increasing taxable profit or reducing taxable loss of a Cyprus company / Cyprus entity
- As a general rule expenses not incurred wholly and exclusively for the production of income
- Depreciation of fixed assets
- Interest and penalties on income tax and defence contribution
- Loss on disposal of fixed assets
- Loss on disposal from investment in shares
- Loss on disposal from saloon cars – (balancing statement) adjustment
- Mortgage expenses and immovable property taxes
- Incorporation fees/listing expenses/ share capital expenses
- General provision for bad debts
- Donations to non-approved charities
- Balancing addition
- Saloon car expenses other than those considered as a benefit in kind
- Entertainment expenses (1% of turnover max 17.000 Euros is allowable)
- Cyprus Company’s annual levy
- Any social insurance expense not paid including current year
- Social insurance expense payments paid after 2 years from the due payment date
- Loan receivable or debit balances are written off
- Interest not for the production of income
- Interest restriction on investment if not 100% owned before 1st January 2012
- Interest restriction on investment if 100% owned after 1st of January 2012 owning (directly or indirectly) assets not used in the business
- Interest payable or deemed to be payable in relation to the acquisition of a private motor vehicle, irrespective of whether it is used in the business or not, or another asset not used in the business. This restriction ceases after 7 years from the date of acquisition of the relevant asset.
- Interest limitation on excess borrowing cost that exceeds 30% of taxable earnings before interest, tax, deductions and additions in respect of fixed and intangible assets used in the business (EBITDA). The Excess Borrowing Cost is deducted up to the amount of €3.000.000 per fiscal year, per company or Cypriot group, as the case may be. Rules do not apply to loans concluded prior to 17 June 2016. Applicable for group companies with an interest of 750.000 Euros in aggregate (Applicable from 1st July 2019)
- Interest on loan or facility intra-group arrangements not financed by equity capital if not at arm’s length. Interest on loan or facility intra-group arrangements is considered at arm’s length if (1) a transfer pricing study is prepared or (2) if subject to a minimum interest of 2,29%
- Non-distributable income of a Cyprus Controlled Foreign Company (CFC) or of a foreign permanent establishment arising from non-genuine arrangements that are controlled by the controlling company resident in Cyprus. Any foreign tax paid is credited against income tax payable in Cyprus.
- Any deduction resulting in double non-taxation in respect of a foreign company
2. Major adjustments decreasing taxable profit or increasing taxable loss of a Cyprus Company / Cyprus entity
- Wear and Tear (Capital Allowances)
- Balancing deduction
- Profit on the disposal of fixed assets
- Profit on the disposal of investment in shares
- Profit on disposal from saloon cars with no tax (balancing statement) adjustment
- 80% of profits from the exploitation and disposal of intellectual property rights. In case of loss, can be carried forward up to 20%. (subject to conditions)
- Profits from a foreign permanent establishment abroad (subject to conditions)
- Foreign income (subject to conditions)
- Dividend income (subject to conditions)
- Interest not arising from ordinary course of business
- Rent from a preserved building (subject to conditions)
- Waiving of Loans payable or credit balances
- Government grants – in certain cases only
- As of 1.1.2015 Interest payable to related parties if accounted for by the recipient
- Cyprus Notional Interest deduction (NID) when new equity is introduced to the business using the rate of 10-year government bond yield of the country in which the new capital is invested increased by 5% (the minimum amount of the deduction is restricted at the rate of the 10-year Cyprus government bond increased by 5%)
- Applies for share capital/share premium issued after 1st January 2015.
- Restricted on 80% of taxable profits. Notional Interest Deduction cannot generate taxable losses
- Does not apply in case share capital is used for not generating business income.
- Applies to each type of activity
- Not granted for more than one company within a group unless additional income is generated
- In case of group companies’ interest from one company reduces Notional Interest Deduction of the other
- Granted in cases of subsidiary acquisition
- Not granted for share capital issued out of profits accumulated before 31.12.2014
- Applies on loans, creditors, and related party credit balances if converted into share capital and used to acquire business assets
3. Other income tax computations adjustments and considerations on Cyprus Companies / Cyprus entities
- Apportionment of immovable property between the land element and building element for wear and tear allowance purposes
- Adequate interest profit margins based on arm’s principal rules on related party receivables – Cyprus companies other than back-to-back loans (If the simplified method is used 2,29%) (Applicable from 1st July 2017)
- Related parties – Cyprus companies transfer pricing considerations on interest loan margins for back-to-back loans (Applicable from 1st July 2017)
- Related party – Cyprus companies transfer pricing considerations on other transactions i.e. (goods and services) (Applicable from 1st July 2019)
- Cyprus company / Cyprus entity losses
- Not fully set off against a Cyprus company’s profits are carried forward over the next five years provided in any period of three years there is no change in the ownership of the company shares or there is a substantial change in the nature of the Cyprus company’s business
- Transferred from natural persons or partnerships to a new company is permissible.
- Arising from a permanent establishment outside Cyprus can be set off against the profits that arise in Cyprus. The subsequent profits of the permanent establishment abroad are taxable up to the amount of the utilised losses.
- Current losses of a Cyprus company may be surrendered by one Cyprus tax resident group company to another. A group company that is tax resident in another EU country may also surrender current year tax losses to a Cyprus tax resident company, provided such company firstly exhausts all possibilities available to utilise its tax losses in its country of residence or in the country of any intermediary EU holding company. Group relief is available if both companies are members of the same group for the entire tax year. Companies are considered to be part of a group for group relief purposes if one is at least a 75% subsidiary of the other, or both are at least 75% subsidiaries of a third company. The interposition of a non-Cyprus tax resident company does not affect the eligibility for group relief (subject to conditions). Where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member of the group for group relief purposes for that tax year.
- As per Country-by-Country (‘CbC’) Cyprus reporting requirements, a CbC report must be prepared and submitted to the Cyprus tax department by Multinational (‘MIME’) Groups, if the annual consolidated group revenue exceeds €750 million during the fiscal year immediately preceding the reporting fiscal year. The Country-by-Country (CbC) report must be submitted either by the Ultimate Parent Entity (‘UPE’) of an MNE Group which is tax resident in Cyprus or the Surrogate Parent Entity (‘SPE’) of an MNE Group which is tax resident in Cyprus and has been appointed by the MNE Group as the reporting entity for Country-by-Country (‘CbC’) reporting purposes.
4. Cyprus company’s major defence tax contributions considerations
- The following Cyprus company income is subject to defence tax contribution
- Dividends at 17% (exempt if the paying company’s activities lead to investment income is less than 50% of the total income or the foreign tax is significantly higher than the tax in Cyprus. Significantly higher means are higher at 6,25%. Foreign tax paid on income subject to Special Defence Contribution may be credited against Special Defence Contribution (SDC) payable on such income irrespective of the existence of a double tax treaty
- Non-business Interest at 30%
- Rent (less 25%) at 3%
- Dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are tax-free unless they are declared indirectly after the lapse of four years
- Defence tax on deemed dividend distribution applies to Cyprus tax resident shareholders if a Cyprus resident company does not distribute dividends to another Cyprus tax resident company within 4 years from the date of the relevant tax year
- Deductions from Cyprus company’s profit for defence tax contribution purposes
- excess depreciation charges due to revaluation
- excess revaluation of assets
- sale of shares
- fair value adjustments
- Cyprus companies are deemed to have distributed, in the form of dividends, 70% of their accounting profits after deducting the Cyprus corporation tax (Cyprus corporation tax means income tax, capital gains tax, special defence contribution and foreign taxes), from the end of the second year of the year when the profits have been related
- Share capital reduction of a Cyprus company is subject to defence tax for Cyprus tax resident shareholders to the extent that the reduction relates to untaxed retained earnings. Capital Reduction of the share capital of a Cyprus Company previously created from revaluation reserve may not be subject to defence contribution tax.
- Cyprus company dissolution. The total of the last five years’ profit preceding the liquidation which has not been distributed or deemed to be distributed will be considered as distributed on liquidation and are subject to defence contribution. The deemed dividend distribution provisions do not apply to any accounting profits arising during the dissolution or liquidation of a Cyprus company if the assets of the Cyprus company are not sufficient for the repayment of its creditors and no amount is available to be distributed to its shareholders.
- Disposal of an Asset to a shareholder or to its relatives at a price less than market value is subject to a special defence contribution. The provision doesn’t apply for assets gifted by an individual shareholder or a relative of his up to second degree or spouse.
- Waiving / witting off of balance due to a Cyprus company by Director/shareholder or relative up to second degree or spouse
5. Major capital gains considerations for Cyprus companies / Cyprus entities
- Tax is levied on Cyprus companies on capital gains from the disposal of Cyprus immovable property at the rate of 20%, as well as capital gains from the disposal of shares in Cyprus companies owning immovable property.
- Capital gain from the disposal of shares of a Cyprus company that own indirectly immovable property in Cyprus is subject to Cyprus capital gain tax, provided that the market value of this property exceeds 50% of the shares market value.
- In the case of transfer – sale – placement of shares in a Cypriot company that owns real estate, the real estate of the Cyprus company stands out and its market value as at the date of sale of the shares is determined. The cost is determined by referring to the value on 1/1/1980 or on the date of acquisition of the real estate or on the date of acquisition of the shares by the holder, any date is later.
6. Major VAT considerations in arriving at the taxable profit/loss of a Cyprus company / Cyprus entity
- If necessary for a Cyprus company / Cyprus entity to register for VAT
- Taxable supplies are properly categorised with respect to:
- the correct Cyprus VAT rates charged
- Rental (including L/T leased land) subject to VAT
- Immovable property (including non-developing land intended for construction) subject or not subject to VAT at 5% or 19%, or in case of building exempt if transferred after its first occupation
- Non-EU supplies outside the scope of VAT
- Intra-community supplies outside the scope of VAT
- Income not subject to VAT
- Importing of services from non-EU countries subject to VAT reverse charge
- Intra-community acquisitions subject to VAT reverse charge
- Domestic supplies subject to VAT reverse charge
- Those described in Parts I and II of the Thirteen Annex of the Cyprus VAT Law i.e., in installation supplies, services relating to immovable property, transportation of passengers, transportation of goods, services relating to the hiring of goods subject to conditions, telecommunications services, and short-term hiring of means of transport.
- 11 B – Taxable persons in relation to construction – extended to non-VAT registered Cyprus suppliers
- 11 C – Trade of specific goods (I.e., scrap metals)
- 11 D – Disposal of immovable property and plots to the borrower as part of loan restructuring
- 11 E – Supply of certain electronic devices, mobile phones, Integrated circuit mechanisms, game consoles, computer tablets and laptops
- The necessity to account for Intrastat
- The necessity to account for VIES
7. Proper treatment of Input VAT in Cyprus
- Generally, VAT cannot be claimed as input VAT, on expenses not used for business purposes
Input VAT cannot be claimed in Cyprus on:
- Purchase fixed assets
- Purchase or lease of saloon cars
- Purchase of petrol for saloon cars not used for business purpose
- Expenses on entertainment, hospitality, hotel and travel costs not related to Directors and employees
- Invoices not issued in the name of the business
- Incorrectly charged to the business
- Cyprus holding companies with no business activities
- In Cyprus financing companies
- In Cyprus financing companies providing services outside of the EU
- On allocation for VAT purposes between various types of activities, Holding Companies, exempt supplies, taxable supplies
- On bad debts provided that VAT has been paid on the transaction, a period of 12 months has elapsed, the claim is lodged within four years, the taxable person has proved that the necessary measures have been taken to a collection of the amount due, a customer is a taxable person and the supplier must inform the customer about the submission of the claim within seven days from the date of submission of the claim.
- Input VAT cannot be recovered for the period before Cyprus company registration
- three years for goods (unless the goods were consumed before the date of registration) and
- six months for services.
8. Intra-community trading reporting for VAT purposes and other important Cyprus VAT considerations
- Include in the VAT return (total)
- Intrastat-dispatches VAT
- Information Exchange System (VIES form)
- Included in the VAT return (total with 0%)
Taxable persons who deliver goods and/or services to persons registered in the VAT register of another Member State
In Cyprus businesses that undertake intra-community trading, i.e., acquisitions and sales of goods from/ to EU member states are subject to Intrastat. 2020 thresholds:
Exemption threshold: €230,000
Simplification threshold: €2,700,000
Exemption threshold: €75,000
Simplification threshold: €5,800,000
9. VAT refund application in Cyprus
VAT refund applications in Cyprus cannot be submitted after six years after the end of the relevant tax period. Any requests submitted after the six-year period has elapsed will be examined at the discretion of the Tax Commissioner.
10. Cyprus VAT Law in relation to Invoicing
Where applicable an invoice should include, a sufficient description to identify goods or services, the amount of any cash discount provided, name, address and VAT registration number, VAT reference to VAT reverse charge or if the VAT is payable by the recipient including the VAT number of the provider, for domestic VAT reverse charge, reference to Cyprus VAT domestic law i.e., Article 11, 11A,11B, 11C, 11D and 11E, reference to a triangular transaction where the invoice is issued as an intermediary in triangulation.
An invoice must be issued within thirty days of the time of the supply or in most cases, be considered the earliest of the following:
- date of delivery of goods/services
- invoice issuance
- date of receipt of payment
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