The determination of taxable income is based on the results shown by the annual accounts as adjusted to comply with prevailing tax provisions. The taxable income from all sources is aggregated together and after deducting all allowable expenditure, capital allowances and any prior years allowable losses, the balance is charged to tax at the prescribed rates.
Allowable expenditure is generally all outgoings and expenses incurred "wholly and exclusively" in the production of the income. This, however, does not mean that no deduction at all is allowed unless an item is to its full extent spent on the production of income. If, for example, an expense is incurred partly for business and partly for private purposes, the part of the expense that relates to business is deductible.
Expenditure which is specifically deemed to be incurred in the production of income is briefly examined below:
- repairs on premises, plant, machinery or other assets employed in the business except for improvements, alterations and additions
- ordinary annual contributions paid by an employer to an approved fund
- bad debts written off and specific provisions for bad debts. Any bad debts recovered are taxable; expenditure on scientific research incurred for the use and benefit of the trade or business. If such expenditure is of a capital nature, not qualifying for any capital allowances, it is apportioned equally over six years
- expenditure on patents or patent rights incurred for the use and benefit of the trade or business. If such expenditure is of a capital nature it is spread over the life of the patent or patent right. Any sums received or receivable, however, from the sale of such patents or patent rights and all royalties or other income in respect thereof are included in taxable income
- donations or contributions made for educational, cultural or other charitable purposes to the Republic or a local authority or to any charitable institution in Cyprus approved as such by the Council of Ministers up to C£20.000 and 50% of any excess over C£20.000. Such donations or contributions are not allowed to form part of a loss to be carried forward. Voluntary Defence Contributions are allowable, whereas compulsory Defence Contributions are not. Political contributions are not allowable
- interest on business loans is generally allowable. Interest, however, on a loan used to acquire shares in a company is not allowable, even though the acquired shares produce dividends, which are taxable. Interest payments to related parties may be allowed to the extent that the rate is at arm's length
- rental payments for an asset used in the business
- salaries and other compensation payments to directors and employees.
Inventories are commonly valued at the lower of cost and market value. On discontinuance of a trade, inventories are valued at open market value. There is no inventory relief. In valuing inventories the FIFO (First In First Out) method is accepted whereas LIFO (Last In First Out) is not.
Capital and Investment Allowances
Annual allowances
Depreciation included in the accounts of a business is disallowed for tax purposes; this is, however, substituted in the computation of taxable income by wear and tear allowances at rates prescribed by the Inland Revenue.
Wear and tear allowances are calculated on a straight-line basis with reference to the cost of construction or the cost of acquisition of the relative asset. Private motor vehicles are not deemed to be depreciable assets for income tax purposes. The main annual wear and tear allowances are:
Plant, machinery and furniture and fittings 10% Farm machinery and construction equipment 15% Computer hardware and operating software 20% Motor vehicles (except saloon cars) 20-25% Loose tools 33 1/3% Hotel, industrial and agricultural buildings 4% Other buildings 3%
Depletion allowances for mines are calculated in accordance with special rules and may be taken in lieu of any investment and annual allowances which are calculated as follows:
First year: investment allowance of 25% on plant and machinery and 10% on other expenditure;
Following years: the balance of expenditure is written off according to a formula based on yearly output or 5% whichever is the greater.
Accelerated allowances
A regional bus company is eligible for a 100% accelerated allowance on the cost of new buses acquired during the period October 26, 1989 to December 31, 1997.
Investment allowances
These allowances are granted in the year of acquisition of the asset only, in addition to the normal or accelerated allowances and are calculated on the cost of new machinery (including second hand imported plant and machinery) and buildings, as follows:
% New machinery acquired and used by manufacturing, mining, farming, poultry or fishing businesses 20 New plant and machinery used in production by manufacturing joint ventures (note 1) 40 New robots, computers and computer programs 40 Regional bus companies for new buses till December 31 1996 and for used buses when businesses are merged (note 2) 45
Buildings
% Tourist villages 25 Ancillary tourist projects (note 3) 25 Mountain tourist villages, hotels or hotel apartments (note 4) 25 New three to five star hotels in Nicosia including extensions and additions to existing hotels 25Note 1:
"Joint venture" means at least three manufacturing entities which carry on independently their businesses and are co-operating for the design of new products or for the setting up of common exhibition grounds.
Note 2:
The investment allowance for regional bus companies is granted in the case of an existing regional bus company on the cost of new public service buses and in the case of a new regional bus company for each of the first five years since incorporation.
Note 3:
"Ancillary tourist building or project" means golf courses, marinas, camping sites, theme parks and health clubs.
Note 4:
The investment allowance is granted only on those projects situated over 2.000 feet above sea level.
Losses
Subject to the limitations mentioned below, losses from one source of income may be set off against profits from other sources of the same year. Any unrelieved losses may be carried forward and be relieved against future income until 1995. From the year 1996 and thereafter any loss incurred during any year of assessment till 1995 as well as losses incurred for any year after 1995 shall not be carried forward and set off against the profits of any year after the expiry of 5 years from the end of the year in which the loss was incurred.
Certain losses can be set off only against profits of the same source. These are:
However, no losses can be carried forward where:
- losses incurred in any trade, business or profession abroad cannot be set off against profits made in Cyprus. Such losses have to be carried forward and be set off against future profits from the business abroad
- life insurance company losses cannot be set off against any other income of the same year but can only be carried forward to the following year or years and be set off against income from the same source
- any farming losses incurred by an individual or company are not deductible from other salaried or trading income. The losses can be carried forward and be set off against any future income from farming
- losses arising from exports cannot be set-off against income from other sources but will be carried forward and set-off against income from exports of subsequent years.
- the company's trade becomes small or negligible and before any considerable revival of the trade there is a change in the company's ownership.
Losses cannot be carried back. As from the year 1988 a tax loss of a company within a group can be claimed as a deduction against the profits of another group company. However, group tax relief is subject to regulations yet to be prescribed thus this provision of the Law is not operative for the time being.
Filing Requirements and Payment of Tax
Company tax returns, which must be filed annually in respect of each fiscal (calendar) year, are due by December 31, in the year following the fiscal year.
Additional documents required to be filed with the return include the company's accounts (balance sheet and profit and loss account), a copy of the auditors' report, an income tax computation and a special Defence Contribution computation and additional information report.
Companies are required to submit their tax return and pay any tax due on a self-assessment basis. The balance of the tax for a year of assessment is due on or before 1 August of the following year.
Companies that fail to pay their tax on the due date have to pay interest at 5% p.a. on the amount of tax payable, provided the tax is paid within six months from the due date. If, however, the tax is paid after the expiration of six months from the due date, the defaulting company will pay interest at the rate of 9% p.a. from the due date to the date of payment.
Where the assessment is delayed by reason of failing to submit the return and accounts within the time limits, a surcharge of 5% is payable on the outstanding tax payable in addition to the interest of 9% p.a.
An objection to an assessment must be made not later than the end of the month following the month in which the assessment is raised.
Tax payments are also made during the year of assessment, on account of the final liability. The prepayments are made on 1 August, 30 September and 31 December in amounts determined by the taxpayer's provisional assessment under a self-assessment system. If the provisional assessment falls short by more than 25% of the final assessment a 10% additional tax is payable on the balance of tax due. Any refund of tax overpaid under the current payment system carries interest at 9% p.a. as from January 1 following the year of assessment.
Tax on employment income and pensions must be withheld by the employer, under the Pay As You Earn (P.A.Y.E.) system, and remitted to the Inland Revenue monthly. This tax is credited to the employee's final tax liability. A return for employees should be filed by the employer not later than 30 April of the following year.
Treatment of Dividends
When dividends are paid by a company there is a withholding tax of 20%. The dividend will carry a tax credit of 20%. When the recipients of the dividend are:
- an individual: such dividend received is separately liable to a final tax of 20% and the 20% tax withheld by the company when paying the dividend, as long as it pays the tax withheld to the Inland Revenue, is considered to extinguish the individual's liability of the final tax on the dividend. Alternatively if it is to his benefit, the individual may exercise the option every year to include the gross dividend in his total taxable income.
- a company: the dividend received is not subject to corporation tax and the tax credit withheld is not refunded unless the recipient company declares a dividend itself, in which case, the withholding tax due is set off against the withholding tax suffered on the dividends received.
Tax withheld on dividends payable to a foreign company is refunded if a claim is filed with the tax authorities within six years from the date the dividend was declared.
According to a transitional provision, if dividends are declared until 31 December 1995 from profits taxed under the previous system i.e. profits up to 31 December 1990, there is no requirement to withhold tax and the dividend paid will carry a tax credit equal to the amount of tax paid by the company on that part of taxable profits distributed.
Part of the undistributed profits, within a year, of a company controlled by not more than five persons, may be treated as distributed in certain circumstances and the persons concerned assessed to tax accordingly.
Taxation of Non Corporate Entities
Foreign investors wishing to carry on a business can do so either through a Cyprus registered subsidiary, or through a branch registered under s.347 of the Companies Law. Generally, the tax advantages and disadvantages of each form of organisation must be considered on an individual basis. The corporation tax rates are the same whether the foreign investor is a branch or a company but the determination of the taxable income will be different. As a result, the overall tax burden as well as the provisions of the relevant double taxation treaties are important factors to be considered.
The contents of this article are intended to provide a general guide to the subject matter. Specialist advice should be obtained before any action is taken.