Cyprus Law Firms

On the 14^th of December 2011 the House of Representatives voted the following Laws:

• Law amending the Value Added Tax Law
• Law amending the Income Tax Law
• Law amending the Special Contribution for the Defence Law
• Law providing for Special Contribution by the employees, self-employed and pensioners of the private sector.

The Value Added Law changes

The basic VAT rate will be increased by 2% from 15% to 17% as from the 1^st day of March 2012. The reduced rates of 5% and 8% remain unchanged. Additionally all taxable persons when they deliver taxable supplies of goods and services to non-taxable persons are obliged to issue a ‘legal receipt’.

The penalty if in default is equal to 20% of the value of the transaction for which the ‘legal receipt’ should have been issued.

Any person failing to issue such a receipt shall be deemed guilty of an offence and be subject to a fine not exceeding €1700 or imprisonment up to 3 years or both.

The legal receipt must contain the following:

• 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
• For each rate of VAT, the total amount payable (including VAT) and the applicable VAT rate
• Indication of whether the transaction involves advance payment, part payment, cash payment or otherwise.

When an invoice is paid in cash, then there is no need of issuing a ‘legal receipt’ as the cash invoice is also a receipt.

The Income Tax Law changes- Effective as from the tax year 2012

a)      Loans or other financial assistance provided to individuals who are directors or shareholders.

• In such a case, the director or shareholder is deemed to have received a monthly benefit equal to 9% per annum, calculated on a monthly basis.
• This measure also affects the spouses and second-degree relatives.
• This benefit will be taxed and paid through the Pay As You Earn (PAYE) system.
• This measure abolishes section 39, according to which interest was deemed to accrue to the company at the rate of 9% on the debit balance.

b)      Employer contributions to be treated as deductible expense for tax purposes.

• Employer contributions to Social Insurance Fund, Redundancy Fund, HRDA Fund, Social Cohesion Fund, Pension Fund and Provident Fund are deductible for tax purposes only if paid in the year they are due.
• If paid within two years from the last date these were due, then these contributions will become deductible in the tax year these are paid.

The Special Contribution for the Defence Law changes – Effective as from the tax year 2012

a)      Increase of Special Defence Contribution (SDC) rate on dividends

• The SDC rate on dividends paid or deemed to have been paid has been increased from 17% to 20% for a period of two years, beginning on 1^st January 2012 until 31^st December 2013.

b)      Special Defence Contribution (SDC) on dividends paid indirectly more than four years from the end of the year in which the profits arose.

• In such a case the dividends are subject to SDC if the shareholder is Cyprus-resident, irrespective of whether the shareholder is a company or individual.
• In the case where dividends are declared from profits arising directly or indirectly from dividends on which SDC has been paid, these are exempted from the payment of SDC.

The Special Contribution by the employees, self-employed and pensioners of the Private Sector Law

• This law covers private sector employees, self-employed persons and private sector pensioners.
• Special Contribution will be imposed on the total gross income of the above persons.
• In the case of private sector employees or pensioners, the employee or pensioner will be paying 50% of this contribution and the remaining 50% will be paid by the company and will be withheld and paid in accordance with the PAYE regulations.
• In the case of self-employed persons the declarations will be made on a form approved by the Commissioner of Inland Revenue and paid via the provisional assessment system in three installments.
• This contribution will be deductible for Income Tax purposes, both for the employer and the individuals.
• Special Contribution does not apply to the following:

-          Retirement bonus

-          Payments from approved Provident Funds

-          Remuneration of the crew of qualifying Cyprus ships

-          Reimbursement of expenditure paid on behalf of the employer

The rates of special Contribution are as follows:

The above Law is effective for the period from 1^st January 2012 until 31 December 2013.

Cyprus Corporate Services Multilysis Services Limited

Cyprus Lawyers N. Pirilides & Associates LLC

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