Cyprus: Clarifications published by Inland Revenue on taxation
Zoe Kokoni, Eurofast Taxand
The Inland Revenue Department of Cyprus (IRD) has released a document to provide assistance to taxpayers in relation to provisions on taxation.
The clarifications addressed by the IRD include the below:
Income from financing activities and loans between related companies
Loans between related companies are considered to be part of the normal operating activities of a company which are taxed under corporation income tax (CIT) and not special defence contribution (SDC). The pre-accepted profit margins by the IRD are only for transactions between related companies which are free from credit and currency risk. Alternatively, the IRD has the right to calculate deemed income which is subject to CIT.
Balances between related companies/related parties
Balances between related companies, excluding loans to parent companies, must carry interest based on market rates. If no interest is charged or the interest rate used is lower than the market rate then the IRD is entitled to adjust the interest rate and charge notional income which is subject to CIT (not subject to SDC). The above provisions came into effect from January 1 2011 and until December 31 2010, a 9% notional interest per year was charged on related companies' balances, which was subject to SDC.
Until December 31 2011, the IRD would charge 9% notional interest on loans given by a company to its shareholder or director (only if physical person). Since January 1 2012, the notional interest is considered a benefit to the director/shareholder and not to the company. Therefore now the 9% notional interest must be taken into account when calculating the pay as you earn (PAYE) for directors/shareholders and are to be taxed as any other income from employment. Since January 1 2012 there is no SDC applicable on this notional interest.
For directors/shareholders (physical persons only) who are not Cyprus tax residents and owe money to their companies, the notional interest 9% is calculated based on the days that they were in the Republic.
In the case that the debt of a shareholder, (physical person and Cyprus tax resident) is written off, then this transaction is considered to be a distribution of dividends and is subject to SDC at the prevailing rate.
The clarifications provided by the IRD are intended to guide the professionals as well as the corporations to take necessary actions to not face fines in the future.
Zoe Kokoni (Zoe.firstname.lastname@example.org)
Eurofast Taxand, Cyprus
Tel: +357 22 699 222