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Tax Update

Tuesday, 03 January 2012 16:32

On 14 December 2011 the House of Representatives voted for a number of amendments to the following tax Laws.

• Law Amending the Income Tax Law

• Law Amending the Special Contribution for the Defence Law

• Law Providing for Special Contributions by the Employees, Self-Employed and Pensioners of the private sector

• Law Amending the Value Added Tax Law

Law Amending the Income Tax Law

• In the case of a company director, or an individual shareholder, or his/her spouse, or any relative up to second degree, receiving a loan or financial assistance from the company, then that person is deemed to have obtained a monthly benefit in kind equal to 9% p.a. on the above facility. This amount will be included in the individual’s taxable income.

• Article 39 “Loans to directors,” which provides for 9% interest to be applied on loans or any financial assistance provided by a company controlled by not more than five persons, to its directors, or its individual shareholders, or relatives up to second degree of relative is abolished.
The amount of tax on the monthly benefit in kind must be withheld from the individual’s monthly salary and paid to the Inland Revenue on a monthly basis under the PAYE system.

• If any contributions to the Social Insurance Fund, Redundancy Fund, Human Resource Development Fund, Social Cohesion Fund, Pension Fund and Provident Fund on wages and salaries relating to services offered within the tax year are not paid in the year in which they are due will not be tax deductible for the calculation of taxable income.
In case the above contributions (including any penalties and interest) are paid in full within two years after the last due date, such wages and salaries will be tax deductible in the tax year during which they were paid.

Effective date

The above changes come into effect as from 1 January 2012.

Law Amending the Special Contribution for the Defence Law

• The rate of the Special Defence Contribution levied on dividends is increased from 17% to 20% for the tax years 2012 and 2013.

• Special Defence contribution will be imposed on dividends paid by a company resident in the Republic, to another company, resident in the Republic, after four years from the end of the year in which the profits which were distributed as dividends were made.

• Any dividends derived directly or indirectly from dividends on which Special Defence Contribution has already been paid are exempt from Special Defence Contribution.

Effective date

The above amendments come into effect as from 1 January 2012. The increased rate of Special Defence Contributions shall apply to income derived or deemed to have been derived or accrued in the period from 1 January 2012 until 31 December 2013.

Law Providing for Special Contributions by the Employees, Self-Employed and Pensioners of the private sector

Each employee, self-employed, or person operating in the private sector receiving a pension, shall pay a special contribution to the Republic in order to strengthen public finances. The contribution is a percentage levied on the gross earnings as shown in the table below.

Gross Monthly Salary €    Special contribution rate
Up to 2.500                         Nil
2.501 – 3.500                      2,5 (with a minimum amount of special contribution of €10)
3.501 – 4.500                      3
4.501 and over                    3,5

The above special contribution is calculated on the total gross earnings with no restriction or maximum limit on the amount of the levy.

For employees of the private sector, the following are exempt from the special levy:

• Retirement bonus

• Amounts paid by provident funds

• Remuneration of a foreigner who is employed by a foreign government or by an international organization

• Remuneration of foreign diplomats and consular representatives who are not citizens of the Republic

• Remuneration of Cypriot ship’s crew

• Allowances paid to employees covering business expenses on behalf of an employer

Employees or pensioners, who pay the Special Contribution under the Officers, Employees and Pensioners of the State and Public Sector Law on their salaries or pensions, are exempt from the above payment.

In the case of an employee, the payment of the special contribution is shared equally by the employer and the employee. (i.e.50% of the special contribution is paid by the employee and 50% is paid by the employer).

The special contribution paid is deductible from the taxable income of the employee/employer that it relates to.

Imposition and payment of special contribution

The imposition and payment of the special contribution will be as follows:

a) In the case of an employee of the private sector and / or person receiving a pension from the private sector the amount of special contribution will be withheld from the wages or pension and will be paid to the Inland Revenue on a monthly basis.

b) In the case of a self-employed, the amount of special contribution will be declared on a form approved by the Director of Inland Revenue and paid in three installments following the same procedure and dates provided for the provisional income tax (i.e. August 1st, September 30th and December 31st).

Effective date

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

Law amending the Value Added Tax Law

From 1 March 2012, the basic VAT rate will be increased from 15% to 17%. The reduced rates of 5% and 8% would not be affected by this amendment.

By changing Schedule 10 of the Law, all taxable persons making taxable supplies of goods or services to non-taxable persons are obliged to issue and deliver “legal receipts”.

Any person failing to comply with this regulation will be subject to a penalty equal to 20% of the value of the transaction for which the legal receipt relates to.

Any person failing to issue and deliver a legal receipt at the time of the transaction shall be deemed guilty of an offense and be subject to a fine not exceeding € 1.700 or imprisonment of up to 3 years or both.

The legal receipts must contain the following information:
I. Issue Date
II. ID number
III. Name, address and registration number of the taxable person
IV. Adequate description of the goods or services offered
V. Total amount payable, including VAT
VI. For each rate of VAT, the total amount payable (including VAT) and the applicable VAT rate.
VII. Indication of whether the transaction involves deposit payment, part consideration, cash payment or otherwise.

It should be noted that when an invoice is paid in cash, the issue of a legal receipt is not required as the cash invoice may also be used as a receipt.

Nicosia, 3 January 2012

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Last modified on Tuesday, 31 January 2012 10:21