On 5 October 2020 the Cypriot Tax Department (“TD”) issued Application Guidance No 2 relating to VAT and Income Tax refunds.
Based on the provisions of the amending Assessment and Collection of Taxes Law (L.126(I)/2020) and amending VAT Law (L.122(I)/2020), no income tax or VAT will be refunded to taxpayers who fail to comply with their tax filing obligations.
In this respect the TD has clarified the following:
- Upon filing of a VAT refund request (Form VAT 4B), the TD will examine whether the taxpayer has submitted the required tax returns as per the provisions of the assessment and collection of taxes law. Once it is determined that all required tax returns have been submitted then the officer of the TD will proceed with the examination of the refund request. In case the required tax returns have not been submitted then the vat refund request will not be further examined (i.e. no substantial examination), and the taxpayer will be notified accordingly via email. The refund request will be cancelled in the electronic records of the VAT service, and as such the taxpayer would have to submit a new refund request notifying the TD that is now in compliance with the submission of pending tax returns.
- With regard to income tax refunds, the TD will examine that all required VAT returns have been submitted. In case it is determined that not all returns have been submitted, then the examination for a refund will not progress further and the taxpayer will be notified accordingly via an email. Upon submission of the required tax returns the taxpayer should notify the TD accordingly.
- The amount of the refund can be affected by other liabilities that the taxpayer may have towards the TD and/or other Government services.
George Liasis, Partner, Indirect Tax Services
According to the new law passed by the Cyprus Parliament, persons and companies engaged in economic activity have the obligation to accept credit card payments. Failure to comply will result in penalties from the Tax Department, which may to reach up to € 2,000. It is worth noting that offenders can file an appeal with the Tax Officer within 30 days. According to the circular, the administrative fine is reduced by half when the offender pays the fine and proves they will purchase a terminal for accepting payment cards as a means of payment within 30 days.
It is worth noting that another decree is expected to be issued, which will determine the companies that will be required to install a terminal and accept payments by credit card.Click our recent alert for more information: https://assets.ey.com/content/dam/ey-sites/ey-com/en_cy/tax/09-20/taxnewsletter-amendmentstotheassesmentandcollectionoftaxeslaw.pdf
Michalis Karatzis, Manager, Business Tax Compliance Services
On 7 October 2020, the Cypriot Tax Department ("TD") issued Application Guidance No 3 relating to Tax Audits and Revision of Tax Returns in the context of the Assessment and Collection of Taxes Law (Article 5B).
Based on the provisions of the amending Assessment and Collection of Taxes Law (L.126(I)/2020), the submission of a revised tax return can be made within a period of 3 years from the date the relevant return was due for submission. Furthermore, a revised tax return cannot be submitted during a tax audit, including field audits and investigation of a taxpayer's tax affairs.
In this respect, the TD has clarified the following:
- Upon commencement of a tax field audit and/or tax desk review, the officer in charge from the TD will send a written notice (via email and/or letter) to the taxpayer and/or its representative, allowing the taxpayer to submit a revised tax return within a set period which may vary from 1 to 3 months.
- The revised tax return must be accompanied by a justification note, fully explaining the circumstances and relevant evidence/supporting documentation. Upon receipt of the relevant notice the taxpayer or its tax representative has an obligation to inform the TD about its intention to submit a revised tax return, explaining in detail the nature of the correction. Such correction could relate to:
- Correction of accounting records and consequently of financial statements;
- Correction of tax treatment (computation of taxable profits, correction of salaries and PAYE, correction of Special Defence Contribution on deemed dividend distributions, rents etc).
- In the case of submitting a request for the issuance of a tax clearance certificate, the date of receipt of the relevant request by the TD will be regarded as the date of commencement of a tax audit. As such, in the case that the taxpayer or its representative wishes to proceed with the submission of a revised tax return, such a revised tax return should be submitted concurrently with the submission of the tax clearance request. In such instances, the TD will not send a notification to the taxpayer that a tax audit has been initiated.
- If it is determined that there has been a mistake in favour of the taxpayer during the tax audit, the taxpayer will not be required to submit a revised return. The officer of the TD may request additional documentation/evidence/information for further examination and once a final conclusion is reached the officer can make the relevant adjustments without the need for any further actions by the taxpayer.
- The results of the tax audit will be notified without any delay to the taxpayer and/or its representative, through a letter, which will also state that the tax audit has been concluded and will notify the taxpayer of relevant adjustments in detail, if any. Such a letter should also state the taxpayer's rights in terms of filing an objection. During the examination of an objection, evidence can be submitted which relates to the revised return. Such evidence/information will be examined by the TD officer in charge.
Petros Liassides, Partner, Direct Tax
In July 2020, Cyprus and Switzerland signed an amending protocol (the “Protocol”) to update the 2014 Cyprus - Switzerland Income and Capital Tax Treaty (the “DTT”). The Protocol has been ratified by Cyprus and was published in the official gazette of the Republic on 24 July 2020. The Protocol is currently in the process of being ratified by the Swiss Federation.
The Protocol, inter alia, introduces the minimum standards of the Base Erosion and Profit Shifting (BEPS) actions of the Organization for Economic Co-operation and Development (OECD).
The amendments to the Protocol include the following:
a) Amendment to the preamble of the DTT
b) Introduction of the ‘Entitlement to Benefits’ Article
c) Introduction of specific wording in the ‘Mutual Agreement Procedure’ Article
d) Amendment to the ‘Business Profits’ Article
e) Amendments to the ‘Associated Enterprises’ Article
A. Amendments to the Protocol
a) Preamble of the DTT
In line with the OECD minimum standard in BEPS Action 6, the preamble to the DTT was amended to specify that the DTT’s intention is to eliminate double taxation with respect to taxes on income and on capital, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this convention for the indirect benefit of residents of third states).
b) Entitlement to Benefits
An ‘Entitlement to Benefits’ articles was introduced in line with the OECD minimum standard and in accordance with the Principal Purpose Test (PPT) in BEPS Action 6.
Notwithstanding the other provisions of the DTT, a benefit shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this DTT.
c) Mutual Agreement Procedure
In line with OECD minimum standard in BEPS Action 14, the ‘Mutual Agreement Procedure’ Article was amended so that if a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of the DTT, he may, irrespective of the remedies provided by the domestic law of those states, present his case to the competent authority of either contracting state.
d) Business Profits
A new paragraph was added to the ‘Business Profits’ article which essentially introduces a six-year limitation in relation to the right to make an adjustment to the profits that are attributable to a permanent establishment of an enterprise of one of the contracting states. However, this provision does not apply in the case of fraud, gross negligence or wilful default.
e) Associated Enterprises
The ‘Associated Enterprises’ article has been amended to require the other Contracting State to make an appropriate adjustment to the adjustment made by the first Contracting State. Previously, the other Contracting State was required to make such adjustment only if it agreed that the adjustment made by the first Contracting State was justified both in principle and as regards the amount. In addition, the right to make an adjustment is subject to a 6-year limitation unless there is fraud, gross negligence or wilful default.
B. Dates of entry into force
As noted above, the Protocol has already been ratified by Cyprus and shall enter into force upon its ratification by the Swiss Federation as follows:
· In respect of taxes withheld at source, for amounts paid or credited on or after the first day of January of the year next following the date on which the Protocol enters into force.
· In respect of other taxes, for taxation years beginning on or after the first day of January of the year next following the date on which the Protocol enters into force.
Notwithstanding the above, the amendments relating to the Business Profits article, Associated Enterprises article and the Mutual Agreement Procedure article shall have effect from the date of entry into force of this Protocol irrespective of the taxable period to which the matter relates to.
Elina Papaconstantinou, Manager, International Tax and Transaction Services
The Council of Ministers, with its Decision of 7.10.2020, reviewed the policy regarding the issuance of temporary residence and employment permits to employees of existing and new companies of foreign interests (IBC) registered in the Republic, as well as companies that have joined the Fast Track Business Activation Mechanism.
Main differences from previous policy are as follows:
- For new companies to be registered, an investment of €200.000 is required (previously investment was €171.000).
- For new Directors, minimum salary in now set to €4.000 and for new Key Personnel to €2.000
- A new category of employees is created, called Specialists (in addition to the Directors, Key Personnel and Supporting Staff). Companies are entitled to employ third country nationals in professions / with skills as listed in Table below:
Professions / Skills
Software and System Engineers
Application and Data Architects
Information and Communication Technology and Enterprise Solution Architects
Technical Assurance Professionals
Telecom and Space Engineers
Machine Learning Engineers
Web Developers and designers
UX User Experience Professionals
Quality Assurance Analysts
Mobile Application Developers
Augmented Reality/ Virtual Reality Programmers
Digital Marketing Specialists
Video Production Multimedia Specialists for Mobile Apps and Software
Analysts for Mobile Apps and Software
Designers of Prototype for Mobile Devices
Cyber Security Specialists
Artificial Intelligence, Robotics and Big Data Specialists
Pharmaceutical Formulation Technologists
Pharmaceutical Engineer Validation Specialists
Pharmaceutical Patents Specialists
Pharmaceutical Regulatory and Quality Assurance Professionals
- The minimum acceptable gross monthly earnings for Specialists is €2.000, an amount that can be adjusted from time to time, depending on fluctuations in the wage index.
- Maximum number of third country employees per staff category, as per new policy:
Maximum allowed number
Middle management executives and other key personnel
Based on annual turnover*
≤1 million: 5
>€1 – €3 millions: 10
>€3 – €5 millions: 20
>€5 – €10 millions: 30
>€10 – €20 millions: 50
>€20 – €30 millions:100
>€30 millions: 200
* For eligible companies that relocate to Cyprus and have joined the Fast Track Business Activation Mechanism, the turnover that will be taken into account will be the one of the company's abroad. This will be valid for the first two years of operations in Cyprus. Following the first two years, the annual turnover of the company in Cyprus will be taken into account.
30% of the total staff (will be reviewed by the Department of Labour during the labour market test).
For more information, feel free to contact our Immigration Specialists, that will be able assist you implement the above policy and take advantage of the new potentials that can give to your company.
Riginos Polydefkis, Senior Manager, Head of Immigration Services - People Advisory Services
The current year will more likely be remembered as the year prompting for change. The questions raised during the pick of the COVID-19 pandemic hinted that we shall not “go back to normal.” Instead, we shall push for innovating the field of taxation, both on a global as well as on a local level. The sprinkling of advancement in the tax department (i.e. going digital through the launch of the online tax portal and changing the stamp duty procedure) is a first step to collect taxes more efficiently without needing to attend the premises of the tax department physically.
THE TAX PORTAL
The tax portal is a central service line where people and companies can be informed about their debts and payments towards the tax department and pay their taxes online. The physical presence of the taxpayer in the District Office is therefore not required for certain services. This is a step forward to the electronic communication of the people with the tax department.
Indeed, throughout the past 6 months, the communication with the Cypriot tax department underwent some changes in light of the COVID-19 pandemic. Cases which previously required the taxpayers to physically attend the premises are now being accepted via the primary e-mail address of the tax department and are subsequently distributed to the appropriate administrator.
UPDATES IN THE AREA OF STAMP DUTY
The Tax Department announced that, as of 29/6/2020 the stamping of documents with fixed fees will be done by the interested parties themselves (i.e. they will bear the cost directly) and the purchase of stamps will be carried out only by authorized representatives and not by the District Offices of the Tax Department.
Moreover, as of 27/07/2020, the process of stamping documents based on the value of the contract has changed.
Stamping of certain categories of documents whose stamp duty is calculated based on the value of a contract.
This concerns the below categories of contracts:
(a) real estate leases,
(b) rental documents,
(c) employment contracts and
(d) purchase and sale documents.
The new stamping process concerns only original/ initial contracts and not additional/ supplementary / addendum to the original contract.
Description of procedure
1. Special Stamp Fee Calculation Tool
For the new process of stamping documents based on the value of the contract, a special "Stamp Fee Calculation Tool" has been created, which is posted on the website of the Tax Department here.
2. Stamping of contracts when the stamp duty does NOT exceed € 100 (one hundred EUR) - Timely stamping (within 30 days from signing or drafting the document).
The interested party:
i. Calculates the stamp duty, using the "Stamp Fee Calculation Tool".
ii. Sends to the Tax Department via e-mail the form "Calculation of Stamp Fee", which appears on the screen.
iii. Purchases stamps from the authorized representatives (Table 1 of the update) and NOT from the District Offices of the Tax Department.
iv. Affixes and cancels the stamp with the same procedure as applies to fixed charges.
Late stamping and issuance of true copies
The same procedure is followed as in the stamping of documents with fixed stamp duties.
3. Stamping of contracts when the stamp duty exceeds € 100 (one hundred EUR)
The interested party:
i. Calculates the stamp duty using the "Stamp Fee Calculation Tool".
ii. Prints the form "Calculation of Stamp Duty", which is submitted to the District Tax Department Offices for payment of the stamp duty (payment code 0800).
iii. Presents to a Tax Officer the receipt of payment together with the document to be stamped, who then seals and cancels the stamp.
Needless to state that the validation of the accuracy of the information for the purposes of calculating the stamp duty is still the responsibility of the Tax Department, which will carry out the necessary checks to ensure proper tax compliance.
If you need any further guidance, you can refer to the tax department’s website.
Fragkeska Lampidoniti, Assistant Advisor, Business Tax Advisory
Effective from 01 October 2020, where the purchaser of certain types of electronic devices is a taxable person, and provided the devices will be used for business purposes, the purchaser must self-account for VAT under the reverse charge provisions. These electronic devices include:
i. Mobile phones;
ii. Integrated circus devices (such as microprocessors) and central processing units;
iii. Gaming consoles, computer tablets and laptops.
The above amendment, introduced by Article 11E, is widely anticipated to improve VAT collection and tackle the growing concern of tax evasion. Below we examine the VAT implications, resulting from the sale of the aforementioned goods, by focusing on the VAT-status of both the customer and the supplier.
Scenario-1: Both the customer and the supplier are VAT-registered
Where a VAT-registered company purchases, for business purposes, a mobile phone from a Cypriot VAT-registered supplier, the seller will not impose VAT on the invoice and instead the buyer will account for VAT, at the applicable standard VAT rate (currently at 19%), based on the reverse charge provisions. In addition, the supplier should state on the invoice, using the wording “Reverse Charge Article 11E, that the transaction is subject to VAT under the reverse charge provisions of the Cypriot VAT law.
Scenario-2: The customer is VAT-registered but the supplier is not
The responsibility of the buyer to self-account for VAT does not change in cases where the supplier is not VAT-registered. The customer must, just like in Scenario-1, self-account for VAT by applying the reverse charge provisions of the Cypriot VAT law, while the supplier must examine his/her potential obligation for VAT registration.
Scenario-3: The customer is not VAT-registered but the supplier is
In cases where the customer is not VAT-registered, purchases of the above-mentioned devices will be taken into consideration when determining whether the customer has exceeded the statutory VAT-registration threshold (currently €15,600). The supplier must issue an invoice imposing the relevant VAT on the transaction. It is important to note that the imposition of VAT by the seller will not lift the purchaser’s obligation to self-charge VAT, if he ought to have registered.
Scenario-4: Neither the customer nor the supplier is VAT-registered
In cases where neither is registered then the supplier will not charge VAT on the invoice and the buyer will not have the responsibility to apply the reverse-charge provisions to self-account for VAT (since anyone not registered for VAT does not have any VAT obligations). Nevertheless, the sale will count towards the VAT-registration threshold of both the customer and the supplier.
It is noteworthy that effective from 01 July 2021, failure to comply with the reverse charge provisions of the Cypriot VAT law, such as the ones described above, will result in the imposition of a one-off penalty of €200 per VAT return (subject to a maximum penalty charge of €4,000).
Constantinos Kolokotronis, Senior, Indirect Tax Services