Overview of the legal and other requirements

June 1, 2012

Residency status of Cyprus incorporated companies

Companies are considered as tax resident in Cyprus if they are managed and controlled from Cyprus.

Even though no definition in the legislation, in accordance with the practice of the Cyprus tax office and relevant case law it has been established that management and control is exercised where the major decisions for the operations of a company are taken by the board of directors or by any other authorised by the company individual or corporation.

 

Main determining factor for establishing management and control in Cyprus is to ensure that all board of directors meetings and decision making take place in Cyprus.

Practically, the following are advisable to be followed so as the Company to strengthen its position to be considered as Cyprus tax resident:

  • Majority of directors reside in Cyprus,
  • The Board meetings must be held in Cyprus,
  • The general policy of the company must be formulated in Cyprus,
  • Non-resident directors should not be in a position to form a quorum abroad,
  • Board of directors meetings in Cyprus should be properly documented and kept in Cyprus,
  • Any non Cyprus tax resident directors or other person, individual or corporation, should not be vested with power to override the Board’s decisions (i.e. general power of attorneys)

Annual Returns

Under the provisions of the Companies Law, Cap. 113, every company shall hold a general meeting as its Annual General Meeting (AGM) within eighteen months from the date of its incorporation and thereafter it must hold its AGM in each calendar year, provided that not more than fifteen months have elapsed from the date of the previous AGM.

Every company must, within forty-two days following its AGM, file an Annual Return with the Registrar of Companies containing the particulars prescribed by the Law.

The Annual Returns, as a matter of practice, are prepared by the Company’s Secretary and filed with the Registrar of Companies together with the accounts of the Company which must be audited by the Company’s auditors. These accounts must be properly signed and delivered to the Secretary.

Audited Accounts

The audited accounts are necessary for the following reasons:

  • The Companies Law requires every company to keep proper books of accounts and to have such accounts audited by qualified auditors authorised to practice in Cyprus
  • For submission to the Cyprus Registrar of Companies as stated above
  • For the preparation of the company’s tax return which is submitted to the Income Tax Authorities of Cyprus.

Repercussion for non compliance

In the event that the above requirements are not observed, the Registrar of Companies will, in the first instance, refuse to issue any certificates when required by the company, such as list of directors, certified copies of documents etc. He may also proceed to strike the company off the Register of Companies.

Finally, note that in the event that the Company fails to submit its audited financial statements to Cyprus Registrar of Companies, the Directors of the Company will be held responsible.

Taxation

A company in each financial year (assuming year end is the 31st of December) has to submit its temporary income tax assessment by 1st of August within the year of assessment (i.e. by 1/8/2012 for the financial year 1/1/2012 to 31/12/2012).

Thus, a company is required to estimate the profit that will make in the year and pay tax on it provisionally (i.e. in advance) in three equal instalments i.e. on 1/8, 30/9 and 31/12 within the year of assessment.

In addition, if the estimated taxable income submitted (from which temporary tax payable is calculated) on the temporary tax assessment is less than 75% of the actual taxable income for the year, then there is a penalty of 10% on the final balance payable (note that the final balance is payable by 1/8 of next year i.e. for year 2012 this is payable by 1/8/2013).

Apart from the above, the Company also needs to submit its income tax return by the end of the year following the year of assessment (i.e. the income tax return for the financial year 1/1/2012 to 31/12/2012 has to be submitted by 31/12/2013).

Thus, it’s recommended that the financial statements of the Company for, say, the financial year 1/1/2012 to 31/12/2012 are subject to audit by 31/12/2013, so as the income tax return which will be based on the audited financial statements, be submitted by the due date (31/12/2013).

Dividends received by a Cyprus company from overseas:

Income tax

Dividends received by a Cyprus tax resident company are exempt from Cyprus income tax.

Special Defence Contribution

Dividends received by a company which is tax resident in Cyprus from an overseas company (not resident in Cyprus):

  • The company paying the dividend is engaged directly or indirectly more than 50% in activities which lead to investment income
  • The foreign tax burden of the company paying the dividend is substantially lower than the Cyprus tax burden.

Consolidation

Based on the amendments of the Cyprus Companies Law, Cap. 113 which have been issued in the Government Gazette on 14 August 2007 and are effective from that date, financial statements should be prepared in accordance with IFRSs as adopted by the EU and the Cyprus Companies Law, Cap. 113.

The amendments provide more flexibility to preparers since the Cyprus Companies Law, Cap. 113 (as permitted by the EU 7th Directive) allows companies the following which are not generally allowed by the IFRSs as issued by the International Accounting Standards Board (IASB):

  • A company need not prepare consolidated financial statements if it qualifies as a small group (see limits below);
  • A company need not prepare consolidated financial statements, even if not a small group, if its parent company or ultimate parent company prepares consolidated financial statements in accordance with Generally Accepted Accounting Principles which are accepted by recognised Stock Exchange authorities of countries which are members of the International Organisation of Securities Commission (IOSCO).

To qualify for the consolidation exemption, a Group needs to meet at least 2 out of the following 3 criteria on a consolidated basis. In other words, the group’s consolidated accounts must meet at least 2 out of the 3 criteria below:

  • Turnover not exceeding Euro 35,0m
  • Total Gross Assets not exceeding Euro 17,5m
  • Total Employees not exceeding 250

 


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