In December 2011 a number of amendments were made to the laws regarding income tax, SDC tax and VAT in order to reduce the government deficit. The main changes are as follows.

The Income Tax Law

Deductibility of payroll costs

Employment costs will not be allowed as a tax deductible expense unless social insurance, provident fund and pension fund contributions have been paid within the year due for payment.

If unpaid contributions and any related penalties are paid within two years from the due date, the emoluments and associated contributions will be allowed as a deductible expense in the year of payment.

Loans and advances to directors and shareholders

If a company provides a loan or advance to a director or shareholder (including their spouse and relatives up to the second degree) other than in the normal course of business and on normal commercial terms, the relevant director or shareholder will be liable to income tax on the benefit in kind, calculated at 9 percent per annum on the balance. The benefit will be taxed as income subject to tax under the PAYE system.

These provisions replace article 39 of the Income Tax Law, which provided for deemed interest at the rate of 9% on loans to directors and shareholders of closely-held companies to be attributed to the company and subjected to SDC tax at 15%.

SDC Tax Law

Dividends paid after more than four years

Dividends paid by one Cyprus-resident company to another are generally exempt from SDC tax. However, dividends paid more than four years after the underlying profit was earned are now subject to SDC tax if the recipient is a tax resident (whether corporate or individual) of Cyprus.

Increase of SDC rate on dividends

For 2012 and 2013 the rate of SDC tax applicable to dividends or deemed distributions is 20%.

Neither of these changes will affect companies whose ultimate shareholders are non residents of Cyprus.

The VAT Law

Increase in the standard rate of VAT

With effect from 1 March 2012 the standard rate of VAT will increase from 15% to 17%. The reduced rates of 5% and 8% will remain unchanged.

Obligation to issue receipts

A taxable person who supplies goods or provides services to a non taxable person is now obliged to issue a receipt showing the name, address and VAT registration number of the supplier, the description of goods or services and the total amount payable including VAT. Failure to issue a receipt incurs a penalty of 20% of the amount of the receipt. On conviction by the court, an additional fine of up to €1,700, imprisonment for up to six months or both may be imposed.

Levy on private sector earnings and pensions

For 2012 and 2013 a special levy will be payable on wages, salaries and pensions paid by private sector employers and on self-employed earnings at the following rates:

  • On the first €2,500 of gross monthly earnings - nil;
  • On the next €1,000 of gross monthly earnings above €2,500 - 2.5%, with a minimum of €10;
  • On the next €1,000 of gross monthly earnings above €3,500 - 3%;
  • On all monthly earnings above €4,500 - 3.5%.

In the case of employees the levy is payable by the employer and the employee in equal shares. No levy is payable on retirement gratuities, payments out of provident funds, emoluments of foreigners employed by a foreign government, emoluments of the crew of a Cyprus ship or allowances to cover business expenses for the account of the employer.

For self employed persons the income on which the contribution is payable is the individual's earned income, with the minimum being the amount on which social insurance contributions are paid.

For employees or pensioners the levy will be deducted and paid in the same way as PAYE. For self employed persons there will be a self-assessment system.

The levy is deductible for income tax purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.