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The Law Providing for Special Tax Settlement of Debts 2011

2011-12-21T09:16:00Z

We would like to bring to your attention the recent changes in the law, as voted by the Cypriot Parliament on the 24th November 2011.

The new Law outlines that penalties and interest amounting to greater than 5% on the total tax liability, for all years up to and including the year ended the 31st December 2008 will be written off.

As a result, this will mean that tax payers (both individuals and companies) must pay the tax due for these years to the Inland Revenue Department together with a 5% penalty.

The Government’s objective is to collect all unpaid taxes for the referred to period.

This Law will be effective from the date that it is published in the Cyprus Government Gazette until the 30 March 2012.

Further clarifications for the matter can be given by members of Fidelico team.

Cyprus Tax Update

2011-10-02T08:45:00Z

On the 26th August 2011 the House of Representatives in Cyprus voted on a number of new amendments to the tax legislation which are set out below.

Tax Law Amendments

1. Income Tax Law

A new tax rate has been introduced at 35%, to be imposed on individuals with taxable income greater than € 60.000.

This rate will be effective as from the 1st January 2011, and will therefore be relevant to the tax year of 2011.

Tax incentives will be offered for employment in Cyprus for persons who are not tax residents of Cyprus, with the intention to encourage establishment and expansion of businesses. The incentive may apply to both Cypriots and non-Cypriots providing that prior to their employment in Cyprus they were a resident outside of Cyprus and were not considered to be a tax resident.

For employment income over € 100.000 per annum, there will be a 50% deduction allowed for the first five years of employment.

This incentive will be effective as from the 1st January 2012.

2. Special Contribution Defence Law

The defence tax payable on interest received or credited by a Cyprus tax resident from sources both within and outside Cyprus, has been increased from 10% to 15%, for both individuals and companies.

Financing companies are not affected by this amendment in the law given that interest is earned in the ordinary course of business and therefore subject to income tax, and not defence tax.

The defence tax payable on dividends received by a Cypriot tax resident has increased from 15% to 17%, for individuals..

This rule will also be applicable in relation to deemed distributions, where a tax resident company does not distribute at least 70% of profits after tax, within two years of the financial year to which they relate.

It is noted however that no special defence contribution is imposed on dividends paid to non Cyprus residents and therefore the above amendment does not affect foreign individuals.

These rules relating to Special Contribution for Defence will be effective once the new law has been published in the official gazette of Cyprus.

Furthermore according to the tax circular 2011/10 issued by the tax authorities on 13 September 2011, it is important to note that the deemed distribution provisions are not applicable in the case where shares in a Cyprus company are held indirectly through another Cyprus company by non Cyprus residents.

3. Immovable Property Tax Law

New tax rates together with a lower threshold from which taxes will be paid have been introduced for immovable property tax, for both individuals and companies on property they own in Cyprus.

The new tax bands and applicable rates are as follows: Please click here to see the rates

The increase in rates for immovable property tax will be effective from the 1st January 2012.

4. Value Added Tax Law

Under existing VAT Law, individuals who buy or construct a flat or a house to be used as private main residence are entitled to a refund of VAT from the Government for the amount of up to €17.000. This will now be replaced by a reduction in the VAT rate at 5% on the purchase or construction of a flat or a house to be used as private main residence, with the provision that the property is not greater than 200 square meters.

If the total area of the property is greater than 200 square meters but does not exceed 300 square meters, a reduced rate of 5% can be applied to the first 200 square meters.

This reduced rate of VAT will be effective from the 1st November 2011.

The Companies’ Law

A fixed levy of €350 per annum will now be imposed on all Cyprus companies, payable to the Registrar of Companies. For a group of companies this levy will be capped at € 20.000.

The levy will not apply to:

Dormant companies (companies which do not own any assets)
Companies that own property in a territory not controlled by Cyprus Government

For the year of 2011, this levy will be payable by the 31st December 2011. For each subsequent year the payment date will be the 30th of June that year. No levy will be imposed during the year of registration of the company.

Late payment of the levy will result in penalties being incurred by the company as follows:

10% penalty for up to 2 months delay
30% penalty for 2 to 5 months delay
Possible removal from the register will result for non-payment

If a company that has been stricken-off by the Registrar of Companies and is then reinstated within 2 years of its strike-off a penalty of € 500 per annum will be incurred (in addition to the outstanding amount of the levy due). If the company is reinstated after the 2 year period has elapsed the penalty will be at € 750 per annum.

Recent Amendments to the Law of Assessment and Collection of Taxes

2011-09-30T08:40:00Z

According to the recent amendments of the Assessment and Collection of Taxes Law, as from the 1st July 2011 all companies as well as self employed whose annual turnover exceed the €70,000 per annum must submit their Income Tax Returns electronically via the TaxisNet electronic System for the year 2010 and subsequent years.

Therefore each relevant person must submit an application to become registered with TaxisNet.

For the clients of Fidelico our Accounting Department will proceed to register our clients’ companies with TaxisNet to avoid unnecessary delay, unless otherwise instructed by the client.

Further clarifications for the matter can be given by members of Fidelico team.

Audit, accounting and tax requirements for Cyprus companies

2011-06-23T14:50:00Z

Companies registered in Cyprus must comply with local laws, rules and regulations whereby they are expected to maintain complete and accurate accounting records and make appropriate submissions for their financial and tax results. As such, it is important for companies to consider the requirements of accounting, audit and taxation with which they should comply.

In this report we consider and outline these requirements for a Cypriot Company regarding Accounting, Audit and Taxation (including VAT). Our analysis is not intended to be exhaustive and professional advice should be sought.

Accounting and Audit Requirements

Cyprus does not have its own statutory or local financial reporting standards and therefore the International Financial Reporting Standards (IFRS) have been adopted and must be complied with, by all Cypriot companies.

Book-keeping is performed in order to facilitate the preparation of financial statements and management reports that contribute to the decision making process of a company. When performing book-keeping it is important to consider the nature of the business, the company’s reporting currency and relevant supporting documentation for transactions completed during the year. Company’s Law, Cap. 113, Article 141 states that the Company is required to keep “proper books of accounts” and the Law for Assessment and Collection of Taxes requires that for every transaction the Company is required to produce supporting documentation in the form of invoices (sales and purchases).

Proper books of account are also required under the same law as per the amendment of 14th December 2010 whereby book-keeping records are required to be updated every quarter (at the end of the month following the quarter). They must be retained by the company for a minimum of seven years from the date of completion of entries of transactions, as per VAT Law, section 43, schedule 10 as well as according to the Assessment and Collection of Taxes Law.

Failure of directors to take reasonable steps to ensure compliance with the requirement of this section is a criminal offence and will result in them being liable to conviction for imprisonment for a period of up to one year, or fined up to €1.000, or both.

Under Company Law Article 142 all companies are expected to draw financial statements under International Financial Reporting Standards. Qualifying Companies must appoint an approved local auditor to audit the company’s financial statements. The auditor is required to issue an annual financial audit report to that effect. The annual audit report shall indicate whether or not the financial statements reflect a true and fair view of the company’s financial results and position. The audit of a company must be performed in line with ethical requirements as well as the IFRS, as mentioned above.

Audited financial statements must be prepared and submitted to the Registrar of Companies, together with the annual report by the 31 December following the financial year being audited.

Small sized companies are exempt from the requirement to submit audited financial statements under Company Law Article 152A. Small sized companies are defined as those companies which do not exceed during a whole financial year two of the following criteria:

Total Gross Assets of €3,400,000;
Net Turnover of €7,000,000; and
Number of employees of 50

A company will lose its status as a small sized company if the criteria, outlined above, is exceeded during two consecutive financial years.

Holding companies are required to prepare and submit consolidated financial statements except for small groups which are defined as follows, as per Cyprus Company Law Article 142:

Non publicly traded;
The drawing up of consolidated financial statements is not subject to other legislation; and
Two out of the following three conditions are met as of the Balance sheet date:

The total Gross Assets do not exceed €17,500,000;
Net Turnover does not exceed €35,000,000; and
Number of employees of the group does not exceed 250

Directors also have a collective duty to ensure that annual accounts and annual consolidated financial reports are prepared. Failure to comply with the requirements and the duties of Section 142 of the Companies Law Cap. 113 will result in the directors being guilty of an offence and liable for conviction to imprisonment for up to one year, fined of up to €1.700, or both.

Taxation

The financial tax year begins on the 1 January and ends as at 31 December, for each year. If the financial reporting year overlaps two tax years it is important to ensure that the results are apportioned over the correct tax years. A company may be taxed under corporation tax and also special defense contribution tax for special types of income like interest income, dividend income and rental income.

Corporation Tax

The corporation tax rate for Cyprus companies is 10%. Some income is exempt from corporation tax, being the following:

100% of interest income (from 1st January 2009) – except where interest earned is of a trading nature
100% dividend income (subject to conditions)
Profits on disposal of securities
Profits from a foreign permanent establishment – except where the permanent establishment directly or indirectly engages in more than 50% investment activities and the foreign tax burden is significantly less than the Cyprus tax burden.

Interest income and dividend income will instead be subject to special defense contributions, as described below.

All Cyprus companies as of 1 July 2011 are required to register as Taxpayers with Cyprus Inland Revenue Department and obtain a Tax Identification Code (TIC) within 60 days from registration date. Companies must submit Provisional Tax Returns to the Inland Revenue by 1 August of each tax year. The Provisional Tax Return includes the estimated taxable profits and tax payable for the year in question. Tax payable arising from the Provisional tax Return is paid in three installments, being on 1 August (together with the Provisional Tax Return), 30 September and 31 December of the tax year. Any revisions of the estimated taxable profits and tax payable can be made on the second or third installments.

The final tax payment, for the balance due, is paid by 1st August following the tax year in question. For example, for the year 2010, the final tax payment will be due on 1st August 2011. Penalties on any tax liability arising from the difference between the final tax and the tax paid during the year under the provisional tax assessment accumulates from 1 August of the year following the year in question.

If provisional estimated profits are less than 75% of the actual profits for the year, a 10% penalty is imposed on the tax payable by the company.

Every company must submit their tax return by the end of the year following the year of assessment. Late submission of declarations or delay, omission, refusal in providing information requested by the Commissioner of Inland Revenue within the deadline required by law will result in a penalty of €100 or €200.

Additionally late payment of the tax due will be subject to an additional tax of 5% on the tax due. The tax return shall be signed by the auditors who must confirm adherence to the audited results and for tax returns submitted on or after the 1st April 2011 a tax certificate signed by the auditor confirming that the tax calculation has been produced taking into account all circulars issued by the Income tax authorities to date will be also included.

Special Defense Contribution (SDC)

Special defense contribution tax is a method of imposing tax on gross interest income, gross dividend income and rental income. Dividend income is exempt from SDC in the following scenarios:

Dividends received from a Cypriot company
Dividends received by a company that maintains a permanent establishment in Cyprus
Dividends received from a company not resident in Cyprus
Dividends received from shipping profits, for example from a shipping company or a ship-management company

Interest income is taxable under SDC at 10% (if it does not form part of the company’s normal trading activity), whilst dividend income is taxable at 15% and rental income at 3% on 75% of the gross amount.
All Cypriot companies with one or more Cyprus tax resident shareholders are deemed to distribute 70% of their net profits, as dividends for any particular year by the end of the two year period following the year being assessed. It is the company’s responsibility to ensure that these dividends are paid.
If any actual dividends are paid during the two year period, this will reduce the taxable deemed dividends. SDC is payable on deemed dividend distributions at 15%, and is due by the end of the month following the end of the two year period for the year being assessed. These provisions apply only in the case where the shareholders of the company are Cyprus tax residents.

Under self assessment the company must ensure that payments are made twice a year, in June and December of the current year, as appropriate. Should tax be deducted at source, it must be paid within one month after the tax has been withheld.

If the company’s special defense contribution liability is not settled by the company by the due dates interest is imposed on the amount due at the current rate of 5% per annum.

Value Added Tax (VAT)

VAT is imposed on all goods and services provided in Cyprus, on the acquisition of goods from other Member States and on imported goods.

Obligation for VAT registration:

Persons which at the end of any month their taxable supplies in the last 12 months amount to greater than €15.600, or at any point in time it is expected that the taxable supplies will exceed €15.600 in the next 30 days.
Persons that provide services to EU VAT registered clients (the obligation to register to the Cyprus VAT is immediate ie no VAT threshold exists).
Persons involved in the acquisition of goods from other EU member states and relates to persons who offer exempt supplies of goods and services or are non profitable organizations with registration threshold of €10.250.
Persons who offer zero rated supplies of goods or services.

Late VAT registration will result in a penalty of €85 for every month of delay.

VAT Rates:

Standard rate: 15% ( applies to all goods and services in Cyprus which are not exempt from VAT or are not subject to reduced or zero rates)

Reduced rate: 8% (applies to restaurant, catering services, hotel accommodation etc)
Reduced rate: 5% (applies to fertilizers, pharmaceutical products, vaccines, books etc)
Zero rate:0%( e.g. Exportation of goods)
Exempt Supplies (e.g. Hospital and medical caring services, rental of immovable property, training)

Late submission of the VAT return results in a penalty of €51 (one-off).

Late payment of VAT is subject to a penalty of 10% on the VAT due plus an interest at the current rate of 5% p.a.

Once a company is registered for VAT it must submit a VAT return within 40 days from the end of the month following the end of the VAT quarterly period, together with the payment of VAT.

If a company ceases to make taxable supplies or enters into liquidation is required to notify the Commissioner of VAT within 60 days of the cessation and deregister from VAT, from that date. Late deregistration of VAT, will result in the company incurring a penalty of €85 (one off).

Administration of intra-community trading and intra-community services for VAT purposes

Businesses that undertake intra-community trading, i.e. purchases and sales of goods and provision of services from/to EU member states need to complete the following forms:

Intra-Community Acquisitions

Intrastat – Arrivals of Goods
Inclusion in the VAT return (on a total basis)

Intra-Community Supplies

Intrastat – Departures of goods
Recapitulative statement for supplies of goods and services (VIES form)
Inclusion in the VAT return on a total basis

Intrastat forms are submitted to the VAT authorities no later than the 10th day which follows the end of the month stated on the Intrastat form, either in a manual or electronic form.

The Recapitulative statement (VIES), is submitted to the VAT authorities within 15 days from the end of the related month in an electronic form only.

Late submission of Intrastat form results in a penalty of €15 for each return and late submission of VIES results in €50 for each statement.

Please click here for TAX submission and payment deadlines

2011 Amendments to the Cyprus Tax Laws

2011-06-21T15:24:00Z

Amendments to the Cyprus Tax Laws have been recently voted as a means of improving tax compliance and further discouraging tax avoidance and tax evasion and include amendments to the following laws:

Income Tax Law
Special Defense Contribution Law
Assessment and Collection of Taxes Law
Immovable Property Tax Law
Value Added Tax Law

These amendments are being explained below. The list is not intented to be exhaustive. Further information of the recent amendments may be made available upon request.

Income Tax Law

Disallowed Expenditure

For expenditure to be recognized and treated as deductible for tax purposes relevant and reliable supporting documentation must be provided. Such supporting documentation includes invoices, receipts or other evidence as specified in the Regulations issued according to the provisions of the Assessment and Collections of Taxes Law.

Effective date: This amendment is effective and applicable as from 1st January 2011.

Notional Interest on Receivables from Directors and / or Shareholders

Loans to shareholders or any other receivables from shareholders and directors were previously subject to a notional interest of 9% which was subject to Special Defense Contribution at 10%.

The above provision has been amended and the notional interest is imposed only in the case where the shareholder/director is a physical person (is not applicable in the case where the shareholder/director is a corporate entity).

Therefore transactions incurred with corporate shareholders/directors are now subject to the arm’s length principle according to section 33 of the Law (ie at arm’s length principle).

Effective date: This amendment is effective and applicable as from 1st January 2011.

Administrative Penalties

Late submission of tax returns and, or delay, omission, refusal in providing information requested by the Commissioner of income Tax within the deadline required by law will now result in a penalty of €100.

Late submission of tax returns and, or a delay, omission, refusal in providing information requested by the Commissioner of income Tax within the deadline required by law and when the Commissioner has given written notice to comply with its obligations within a specified period of time (not less than 60 days) will result in the penalty being increased to €200.

Furthermore, default in settlement of payment of taxes due by the dates outlined by law or determined in a notice issued by the Commissioner will result in an additional penalty of 5% on the tax payable.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Tax Withheld on Payments to Non-Cypriot residents

Tax withheld on payments made to non-Cypriot residents on certain types of income, must be paid to the Inland Revenue Department by the end of the month following the month in which the payment is made. Delays in payments will result in an additional tax of 5% on tax withheld and will be payable together with interest imposed at the current rate of 5% on the tax payable.

These include the following types of income:

Income of an individual for professional services, artists and athletes fees
Copyrights for use within Cyprus
Rights for cinematographic films

Special Defence Contribution Law

Deemed Dividend Distribution

The law of deemed dividend distribution applies only to Cypriot companies with a Cypriot resident shareholder(s). It should be noted that if a Cypriot company is a Cyprus tax resident person acting as a nominee shareholder, holding shares on behalf of a foreign person, the law does not apply.

Following the amendment it has been clarified that when calculating a deemed dividend distribution actual dividends include the following:

Any actual dividends that were declared during the year to which the relevant profits relate and
Any actual dividends that were declared 2 years after the year to which the relevant profits relate to.

Accounting profits for deemed distribution purposes

According to the new definition of accounting profits which are subject to deemed distribution provisions the following taxes are deducted:

Income tax
Special defense contribution
Capital gains tax
any tax paid abroad that has not been credited against income tax or defence tax

Effective date: This amendment is effective and applicable as from 1st January 2011.

Transfer of Assets

If a company disposes of / transfers assets to a shareholder (individual) or relative (up to second degree relationship) or spouse, for no consideration or for a consideration which is below the asset’s market value, the difference between the actual market value of the assets and consideration amount will be deemed as dividend distributed to shareholders.

However, if the asset was received by the company by way of gift or donation from its shareholder (his spouse or other relative), this rule will not apply.

Effective date: This amendment is effective and applicable as from 1st January 2011.

Voluntary Dissolution or Liquidation

A company under voluntary dissolution or liquidation is obliged to submit, within one month following the approval of the resolution, the deemed distribution declaration and pay Special Defense Contribution tax relating to profits for the specific tax year and two preceding years.

The commissioner has the right to issue an assessment to collect any Special Defense Contribution tax.

It should be noted that the deemed distribution provisions will not apply to any accounting profits arising during the dissolution or liquidation of the company, where its assets are not sufficient for the settlement of its creditors and there are no amounts available to be distributed to the shareholders.

However, for assets that are distributed to a company’s shareholder on dissolution or liquidation, having a higher market value (less any capital gains tax paid) than the original cost on acquisition, deemed distribution rules will be applied such that the difference between the market value and cost of the asset will be considered to be deemed dividends distributed and therefore taxed accordingly.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Reduction of Capital

In case of capital reduction of a company; any amounts paid to the shareholder in excess of the initial amount of share capital contributed by the shareholder will be treated as deemed dividend distribution.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Withholding tax on rental payments

According to this new provision, corporate entities, partnerships, Government or local authorities that pay rent must withhold special defense contribution on the rental amount paid. The defense tax is calculated at a rate of 3% on the 75% of the gross rents payable. The tax withheld must be paid to the Inland Revenue Department the month following the month in which the tax was withheld.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Administrative penalties

Penalties have been introduced in case of non-compliance with the provisions of the Special Defense Contribution Law which may be €100 or €200 for late submission of declarations or delay, omission, refusal in providing information requested by the Commissioner of Inland Revenue within the deadline required by law.

Additionally late payment of the tax due will be subject to an additional tax of 5% on the tax due.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Assessment and Collection of Taxes Law

Obligation to Register to Inland Revenue Department

All Cypriot companies will now have an obligation to register with the Inland Revenue Department (IRD) and ensure that they are assigned a Tax Identification Code (TIC). This will include Cypriot companies which were originally incorporated under foreign jurisdictions but have subsequently come to be considered Cyprus tax residents (for example, in the case of cross-border mergers, corporate migrations or registration of a branch in Cyprus).

A company must register with the IRD within 60 days of incorporation or registration to the Companies Registrar or from the date which it is considered to be a Cyprus resident (for those incorporated under foreign jurisdictions).

Further, it should be noted that for those existing companies registered with the Companies Registrar to date, but which are not registered to the IRD, they must be registered by 30th June 2011.

Additionally; in case of any changes to the company’s details that might affect the records of the IRD these must be communicated to the Commissioner within 60 days of the relevant change.

Books and Records

The accounting records of a company must be kept up to date and updated no later than four months after the month the transaction has taken place.

Additionally, invoices must be issued within 30 days of the transaction, unless an exemption has been granted to the company by the Commissioner of Income Tax.

Companies that maintain inventory must perform stock take at year end and keep records. These records should be available for access by the Commissioner should they be requested.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Electronic Submissions of Tax Returns

Under the new amendments of the tax law, tax returns for persons (both individuals and corporate entities) that need to be filed by the 31st December they must now be submitted electronically.

The deadline for submitting tax returns electronically is extended by 3 months.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Bank Secrecy

The Tax Commissioner, upon a tax examination, has now been given the right to request the bank to provide them with any information that they require which is in the possession of the bank for a period of 7 years preceding the request.

This request will be subject to the approval and consent of the Attorney General in Cyprus.

Consent will only be given upon provision of adequate evidence by the Commissioner justifying his request for information. A declaration from the Commissioner that he has exhausted all other possible sources available for obtaining the required information will also be required.

The Commissioner must also give notice to the company that they are intending to investigate before the examination is to take place.

Objections

The company has the right to object to an assessment issued by the Commissioner by the end of the month following the month the assessment is issued, in writing, detailing the following:

Reason for the taxpayers’ objection and why they do not believe they have an obligation to pay the tax being assessed
Corrected amounts where the tax payer believes the assessment states amounts different from those on the original tax return, providing appropriate supporting documentation

Additionally for any assessments issued in December the deadline for filling an objection has been extended to 60 days (ie by the end of the following February) while for the assessments issued in other months the deadline of 30 days applies.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Tax assessment based on judgment

The Commissioner has the power to raise an assessment based on estimates and judgment in the case where a person omits to submit a tax return within the time limit set specified in the law.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Administrative penalties

As stated above penalties have been introduced in case of non-compliance with the provisions of the relevant law which may be €100 or €200 for late submission of declarations or delay, omission, refusal in providing information requested by the Commissioner of Inland Revenue within the deadline required by law.

Additionally late payment of the tax due will be subject to an additional tax of 5% on the tax due.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Tax Inspection Visits

The tax Commissioner has the right to visit the company (except private residence), during working hours of the business to inspect goods, records and other documents in relation to the business.

Effective date: This amendment is effective and applicable as from 1st July 2011.

Value Added Tax Law

Value Added Tax (VAT) has been increased from the 10th January 2011 to 5% and 8% for certain products like food products, on pharmaceutical products and vaccines, VAT on catering services, including the supply of alcoholic drinks and soft drinks, previously at the reduced rate of 5% has been increased to the reduced rate of 8%.

Euro Pro Golf Tour Championship 2010

2010-08-20T10:29:00Z

Fidelico is proud to announce that we will be co-sponsoring this year’s golf championship PGA EuroPro 2010 Tour that is being hosted by the Aphrodite Hills Resort in Cyprus and would like to invite all of our clients, associates and friends to take this opportunity and visit us in Cyprus, stay at the resort and enjoy the game. For those who love the sport this will be a great destination to mix pleasure and business.

We are delighted to provide our esteemed network of clients with special rates for Aphrodite Hills resort during the time of the tournament. If you are further interested please contact any person from our team who will be happy to assist you.

Aphrodite Hills will play host to the prestigious PGA EuroPro 2010 Tour Championship between September 30-October 2. An unprecedented event for Cyprus, the Professional Golfer’s Association tour finale is undoubtedly a high profile professional golf event for the island.

The PGA EuroPro Tour Finale, which will be staged at the 18-hole Aphrodite Hills Golf Course, is sponsored by the Cyprus Tourism Organization. Aphrodite Hills will be the 13th and final venue for 2010, and will host the top 60 competing golfers to claim the final winners of the year. The general public will also have the opportunity to watch this prestigious event while they will also be able to participate in a series of activities organized by the Aphrodite Hills Golf Academy for a fun-packed “Golf Festival”. “I am thrilled that Aphrodite Hills will host the 2010 Tour Championship for the PGA EuroPro Tour,” said Danny Nickless, Operations Manager of the Tour. “It’s a simply stunning venue that will provide a fitting finale for what looks like being the best year of the Tour to date.”

The 2010 PGA EuroPro Tour looks to be the strongest yet with Aphrodite Hills the 13th venue on the calendar for the year!

Security over shares in Cyprus

2010-03-16T10:56:00Z

Companies incorporated in Cyprus are widely used in connection with structured financing and other transactions. Typical structures involve a Cypriot holding company holding 100% shares in a foreign subsidiary. Where finance is granted to the foreign subsidiary, it is common for the lender to request that security be granted directly or indirectly on more than one level of the borrower’s group (two-tier security).

It is quite often that we see security been taken in Cyprus by way of a pledge and charge over shares. The complexity, perfection and the extent of involvement of the company registered in Cyprus (“Cyprus Company”) will depend on the corporate structure of the group and which shares are being pledged as security.

The following may be involved:

(a) pledge and charge of shares in a Cyprus Company by a foreign company as pledgor; or (b) pledge and charge of shares in a Cyprus Company by another Cyprus Company as pledgor; or (c) pledge and charge of shares in a foreign company by a Cyprus Company as pledgor.

In cases (a) and (b) the agreement to be put into place should ordinarily be governed by Cyprus law for enforcement purposes. The perfection of the security will involve satisfaction of the requirements of section 138(2) of the Contract Law, Cap 149, including, inter alia, the following:

(i) delivery of share certificates to pledgee; (ii) delivery of notice of the pledge by the pledgee to the Cyprus Company; (iii) making of an entry of a memorandum of pledge in the register of members of the Cyprus Company; (iv) delivery by the secretary of the Cyprus Company of a certificate evidencing that the entry of the memorandum of pledge has been made.

It is common for the parties to engage Cyprus counsel to undertake the drafting of such agreements. Parties should also seek legal advice from counsel in the jurisdiction of the foreign company which acts as pledgor in the structure.

In situation© the agreement will ordinarily be governed by the law of the jurisdiction of the company in which the shares are being pledged. In that case the role of Cyprus counsel is usually limited to review of the agreement for identification of any Cyprus law issues.

Where the pledgor/chargor is a Cyprus Company it is common for a charge to be registered at the Cyprus Registrar of Companies (“Registrar”) in favour of the pledgee. The procedure for undertaking this involves the filing of Form 24E and a certified true copy of the agreement. The Registrar will then issue a certificate of registration of charge in favour of the pledgee. It is possible to have the certificate issued in the English language.

Notably it was not clear from the original wording of section 90 of the Company Law, Cap 113, that security taken over shares required registration as a charge for its perfection. Despite this prevailing practice in Cyprus has been to register charges in situations such as (b) and©.

Law N.99 (I)/2009 has brought about a recent amendment to these provisions. The amendment legislation has expressly excluded the following from the requirement to register a charge in Cyprus for perfection purposes (free translation):

(i) a pledge of shares of Cypriot companies and all the rights attached to the same; (ii) a financial collateral arrangement falling within the ambit of the Financial Collateral Arrangements Law, N. 43(I)/2004 as amended and enforced from time to time.

The amendment, so far as it refers to a pledge of shares, is ambiguous in its interpretation. The Registrar of Companies has not altered its practice and continues to accept applications for registration of charges on Cypriot Companies in relation to shares.

Amendments to Cyprus Tax Laws

2009-11-08T15:56:00Z

This article will consider the recent amendments to the Income Tax law and Special Contribution for Defence Law (the ‘Tax Laws’) in Cyprus. These amendments were passed on 22nd October 2009 with retroactive effect from 1 January 2009.

The Tax Laws have been amended chiefly on matters concerning open-ended and close-ended collective investment schemes (CISs) and undertakings for collective investments in transferable securities. The amendments provide new benefits for CISs and promote Cyprus further as an attractive location for establishing CISs.

The amendments have smoothened the process of registering and operating CISs as well as clarified the tax treatment on the disposal of securities, dividends, interest and deemed dividend distribution.

DISPOSAL OF SECURITIES
The amendments provide that the profits from the disposal of securities is exempt under the Income Tax Law as units in a CIS are now also considered as “securities” for tax purposes.

INTEREST INCOME
The amendments provide that interest income received by CISs is taxed at the standard rate of corporation tax of 10% after deducting the expenses and is exempt from Special Defence Contribution.
Interest earned by a Cypriot tax resident in the ordinary course of business or in close connection to its business is subject only to income tax. Before the amendments, other sources of interest income were subject to both SDC and income tax (with a 50percent exemption).
Interest earned by a Cypriot tax resident that does not satisfy the above condition is exempt from Income tax and is subject only to Special Defence Contribution at the rate of 10% at source. This means that Defence tax is applied on the full interest income with no deductions as opposed to income tax which is applied at the taxable profit (i.e. after any allowable deductions from interest income are made).

DIVIDEND INCOME

The Tax Laws have been amended by abolishing the minimum 1% shareholding requirement for the exemption of foreign dividends from taxation when received by a Cyprus tax resident. However in order to obtain full exemption, dividends received from foreign subsidiaries must qualify under both of the following:
● The foreign subsidiary (the company paying the dividend) must not be, directly or indirectly, engaged in activities providing passive income greater than 50%.
● Foreign tax burden must not be significant lower than the tax liability in Cyprus. It is speculated that an effective tax of 5% will satisfy this qualification.

DEEMED DIVIDEND DISTRIBUTION
Unit holder Cyprus Tax Residents will be considered to have received a dividend under the Special Contribution for the Defence (SDC) of the Republic Fund at the reduced rate of 3% while previously SDC was charged at the rate of 15% .
Similarly the dividend deemed distributions arising on liquidations shall be now taxed under SDC at the rate of 3%.
Finally redemption of units or other interest in closed-ended or open-ended CISs will not be considered capital reduction for Cyprus tax purposes. Consequently any amounts payable to the investors of CISs will not be considered as dividends and therefore will be exempt from SDC.

VAT changes from 1 January 2010

2009-10-20T08:53:00Z

The changes to the VAT (“VAT package”) adopted by the European Council are expected to come into force from 1 January 2010. These changes primarily involve change in the rules for the supply of services, the VAT refund procedure and additional VAT reporting in an effort to minimise the administrative burden and simplify the procedures for companies engaged in cross-border operations and prevent distortions of competition between member states operating different VAT rates.

Who will be affected?
1. Businesses supplying services to overseas businesses
2. Businesses receiving services from overseas businesses
3. Businesses supplying goods to other EU countries
4. Businesses wishing to reclaim VAT incurred in another EU country

Change in the supply of services rules
The basic rule relating to the supply of services being that services are subject to VAT in the country of residence of the supplier is now changing. As from 1 January 2010, when services are provided by business to business within EU the place of supply is considered to be the place of residence of the recipient (customer). Consequently the customer will have to account VAT in his country of residence via the “reverse charge” mechanism. Whereas business-to-consumer (individual) supplies of services (where the customer is the end user) will, in principle, continue to be taxed where the supplier is located.
Exception to the new rule is made for certain services (such as restaurant services, services linked to cultural, sports, scientific and educational events, short term hire of means of transport) which will in all cases be taxable in the country of consumption.
Additionally due to the above changes; a business that receives both VAT taxable and VAT exempt services will have to account for VAT via the reverse charge even if the service received is in connection with its non-taxable activity.

Altered VAT refund procedure
As from 2010 it will be possible for companies to reclaim foreign VAT electronically in their own member state. A company will no longer be obliged to file a VAT refund claim in each member state where it incurred VAT. The resident member state will forward the VAT refund claims electronically to the member states concerned.

Additional reporting
As a consequence of the new rules relating to the change of place of supply of services, business providing services to other member states will be required to register to the VAT and submit the VIES (VAT Information Exchange System). The VIES will have to be submitted electronically on a monthly basis on the 10th day of the month following the month to which it relates while previously the VIES was submitted quarterly only by businesses supplying goods.

Cyprus tax planning

2009-08-11T07:34:00Z

In recent years Cyprus has become a favoured location for international commerce as well as a legitimate tax efficient jurisdiction utilised by reputable multinationals, therefore raising Cyprus to a new level of international business.

With the lowest corporate tax rate (10%) in the European Union, Cyprus tax legislation and regulations predictable and straight forward in nature; relations between the business community and authorities are excellent and ensure the efficient administration and taxation of the commercial and financial sector.

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Wealth Management in Cyprus

2009-04-30T14:55:00Z

Over the years Cyprus has developed at an astounding rate and earned a reputation as a reliable international financial centre. This buoyant and dynamic business environment is underpinned by a sophisticated infrastructure, a highly-educated workforce, a favourable tax system, and a modern banking and insurance network, not to mention a strategic geographical location at the crossroads of three continents, with easy access to international markets.

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Cyprus-Russia sign protocol amending DTT

2009-04-28T07:02:00Z

On 16 April 2009 the Republic of Cyprus and the Russian Federation signed a Protocol to the Double Tax Treaty (DTT) between the two countries. Formal ratification is expected by both countries during 2009 so that the protocol could become effective as from 1 January 2010.

As a result, Russian authorities have agreed to remove Cyprus from its “black list” and consequently dividends received by Russian companies from Cypriot subsidiaries can qualify for the Russian dividend participation exemption.

The major changes of the new DTT involve the following:

a. Withholding tax rate on dividends (Article 10 of the Treaty)
There is no change on the withholding tax rate on dividends. However there is a maximum withholding tax on dividends received from Russian subsidiaries of 10% which is reduced to 5% in the case where the minimum investment amount in the direct investment in Russian entity is €100.000 (the 10% withholding tax still applies where the investment amount is less than €100.000).

The definition of the dividends has also been expanded to include payments on shares of mutual investment funds or similar collective investment vehicles so that such distributions would have a maximum withholding tax of 10% withheld by the paying company.

b. Change in the taxation of capital gains on the disposal of shares in real estate property companies the effective date of which is 1st January 2014 (Article 13 of the Treaty)
The treaty has been amended so that the capital gains derived by a resident of one country from the disposal of shares in a company deriving more than 50% of the value of its shares from immovable property situated in that other country, are taxed in the country where the immovable property is situated. This change is in line with the OECD Model Tax Convention on Income and Capital.
Capital gains from disposal of shares remain under the taxing right of the country of residence of the selling party if: - The disposal qualifies as a corporate reorganization or - The gains are from the disposal of shares listed on a recognized stock exchange or - The seller is a pension fund, a provident fund, the government of Cyprus or the Russian Federation

c. Resident (Article 4 of the Treaty)
Currently, the place of residence of a party is determined by the entity’s place of “effective management” (where the management and control of that entity is exercised). The protocol has introduced a provision where in cases where the “effective management” cannot be precisely determined, then the authorities of the two countries will resolve the issue by mutual agreement.

d. Permanent establishment (Article 5 of the Treaty)
The definition of permanent establishment is extended to allow for the taxation of profits from services performed in one country by an entity of the other country through an individual or individuals present in the other country for more than 183 days in a 12-month period and more than 50% of the gross revenues of the enterprise attributable to its active business activities during this twelve month period are derived from the services performed in that other country through that individual.
The new paragraph follows the wording circumscribed by the OECD Model Treaty Committee in the Commentary to the latest Model Treaty for countries which wish to include such a provision.

e. Definition of Interest (Article 11 of the Treaty)
The definition of interest has been amended to align with the wording of the latest OCED Model Treaty definitions. This definition was expanded to include debt-claims of any kind which may or may not be secured by mortgage and may or may not be profit participating loans. However, penalty charges for late payment or interest are not considered as interest but as dividends.

f. Exchange of Information (Article 26 of the Treaty)
The article on exchange of information has been amended in order to be in line with the latest OECD Model Treaty. More clarity has been introduced in relation to the powers and obligations of the tax authorities of the two countries which are generally aiming at improving the administration procedures through which information can be collected and exchanged between the tax authorities in Russia and Cyprus, subject to certain conditions and procedures.

The inquiring jurisdiction may request a confirmation of identity of a person under investigation as a beneficial owner of a company but may not inquire as to the identity of a beneficial owner of a particular company without having submitted identification. This means that while a confirmation may be obtained, an inquiring jurisdiction is not permitted to commence a fishing expedition on an individual.

This position has been also established in Cyprus’ domestic legislation, Law 72(I)/2008 (the ‘Law’). In accordance with the Law the inquiring country must provide the Commissioner of the Inland Revenue of Cyprus (the ‘Commissioner’) with (among identification of the individual under investigation and other stipulated matters) the tax reasons and evidence why this information is required. A declaration from the inquiring country must be provided to the Commissioner demonstrating that the request for information is in accordance with its domestic legislation and administrative practice. The Commissioner will not release the requested information unless it has been satisfied that the respective disclosure is also permitted under the laws of the inquiring jurisdiction.
Furthermore the Commissioner shall not by Law, provide the requested information unless the written consent of the Attorney General of Cyprus has been provided.

g. Limitation of treaty benefits (Article 29 of the Treaty)
A new limitation of treaty benefits has been introduced that seeks to disallow benefits of the treaty to an entity that was established with the main purpose of obtaining such benefits of the treaty that would not otherwise be available and the entity is not registered in Cyprus or in Russia. This limitation will not impact companies incorporated in Cyprus or in Russia. However this limitation will affect a company registered in a country other than Cyprus and Russia but which is managed and controlled in Cyprus and thus considered tax resident of Cyprus.

h. Other changes
- The income from International Traffic (ie shipping and aircraft) will be taxable in the country where the effective place of management of the person deriving such income is situated (under the existing treaty the taxing right belong to the country in which the person deriving the income is resident. - It has been clarified that income of Mutual Funds investing only in immovable property would be treated as income from immovable property and such income will be taxable in the country where the property is located.

OECD declares Cyprus on white list

2009-04-06T11:59:00Z

Cyprus is in full compliance with the international tax standard developed by the OECD and endorsed by G20 Finance Ministers. Cyprus has been included in OECD’s “white” report under the jurisdictions which have substantially implemented the international agreed standard.

Following the G-20 summit on 2nd April 2009, the Organization for Economic Co-Operation and Development (OECD) provided a detailed report on progress by financial centres around the world towards implementation of an internationally agreed standard on the issues of transparency and exchange of information relating to tax matters. OCED blacklisted tax heavens and other jurisdictions (45 jurisdictions in total, amongst them being British Virgin Island, Switzerland, Belgium, Cayman Islands etc) that have committed to the internationally agreed tax standard but have not yet substantially implemented it. Such jurisdictions which refused to sign the anti-secrecy agreements face sanctions. The report is available here.

Among the sanctions being considered by the G20 for the blacklisted jurisdictions are the scrapping of tax treaty arrangements, imposing additional taxes on companies that operate in non-compliant countries and tougher disclosure requirements for individuals and businesses that use shelters.

Most of the blacklisted countries had signed up to the OECD’s standards by 2002 but never met their commitment. The six sanctions being considered are:

Increased disclosure requirements by companies and individuals using tax havens,
Withholding taxes on transactions with tax havens,
A ban on the use of interest paid in a blacklisted country to offset tax,
Reviewing tax treaty policy,
Putting political pressure on global companies to withhold investment to a haven,
A reduction in aid.

Cyprus: An ideal jurisdiction for aircraft leasing

2008-02-12T12:16:00Z

A major tax reform , the legal system (common law) the membership in the European Union are certainly considerable factors that boost Cyprus companies in placing their name on the map of the most favourable jurisdictions for structuring aircraft leasing transactions.

Cypriot legal system in brief

In 1960 Cyprus became an independent and recognised state. Until that time, Cyprus was a colony of the U.K. The legal system has been influenced by the U.K. and therefore the system followed is the common law system. The Cyprus Companies Law Chapter 113 (the “Companies Law”) has adopted the provisions of the U.K. companies law of 1948.

Cyprus case has been developed greatly since 1960 however, in the absence of Cypriot case law on particular legal issues matters the court will look into U.K. case law which may not be of binding authority but it is of persuasive authority.

Cypriot companies may be private or public and their shareholders may have limited or unlimited liability and the companies may issue shares or may be limited with the guarantee of their members. For the purposes of this Article we shall consider the private limited liability company by shares as that is the type of company used in the vast majority of transactions. We shall further assume that such a company is a resident of Cyprus for tax purposes (see below).

A private limited liability company by shares (“CyCo”) has a minimum authorised capital of five thousand Cyprus pounds and may have as issued share capital as little as one share. CyCo’s capital may be denominated in a currency other than CYP and having in mind that Cyprus currency will be Euro as of 1 January 2008 it is wiser that the currency to be used be Euro.

CyCo may issue shares following a cash contribution or following a contribution in kind. Further, a CyCo may issue shares at a premium as well as issue shares of different classes, with preference and redemption rights.

A CyCo would be managed and controlled by its directors in accordance with the provisions set out in its Articles of Association (the “Articles”). Interference by shareholders of a CyCo to the way the directors manage a company would be illegal since the directors should manage the affairs of a CyCo independently and in its best interest.

Management and control of a Cypriot company is of importance due to the fact that a company will be treated as a tax resident of Cyprus for tax purposes if it is managed and controlled in Cyprus. In specific, Section 2 of the Cyprus Income Tax Law 118(I) / 2002 (as amended from time to time (“Income Tax”) provides that a company shall be treated as a resident of Cyprus for tax purposes if its management and control is exercised in Cyprus. A tax resident company will be taxed on its worldwide income (subject to exemptions) and may take advantage of the double tax treaties Cyprus has entered into and those of the EU Directives.

Aircraft Leasing Companies in Cyprus

The scope of this article is the analysis of the tax opportunities in structuring aircraft leasing transactions through Cyprus from a practitioner’s perspective in two different scenarios.

In the first scenario, the group benefits from the profit derived from lease rental income after deducting the interest on the loan as well as the profit on disposal of the aircraft at a later stage. In the second scenario, the Cyprus Company benefits simply from having the market rate lease margin taxed in Cyprus.

Corporation tax

In the first scenario where the Cyprus company is the aircraft owner, as shown in Table 1 below, corporation tax of 10% will be payable on the taxable profits which will be calculated as the difference between the leasing income and the capital allowances (tax depreciation) on the acquisition cost of the aircraft and any interest on the loan for the acquisition of the aircraft. In the calculation, all tax deductible expenses will also be taken into consideration in calculating the taxable income.

In the second scenario, where the Cyprus Company is a lessee who then subleases the aircraft to another company, income tax of 10% will be chargeable on the market rate lease margin. Although the Cyprus tax legislation does not contain any transfer pricing rules or transfer pricing documentation requirements, under the “arms length principles” contained in the Cyprus Income Tax Law, the Commissioner has the authority to deem that transactions between related parties are executed, for tax purposes, at fair market values and on normal commercial terms and tax the resulting profits / gains accordingly. Table 1 under the column for Scenario 2 illustrates the corporation tax liability on the assumption that the market rate interest margin is 5%.

Table 1

Taxable losses

Taxable losses may be carried forward indefinitely and set off against future taxable profits. Taxable profits incurred from claiming capital allowances may also be carried forward and set off against balancing charges arising from the disposal of an aircraft.

Under Group relief, tax losses may also be surrendered to group companies and be offset against their taxable profits.

Capital gains tax

Capital gains tax is payable in Cyprus where immovable property situated in Cyprus is disposed off and therefore does not apply in the aircraft owning industry. The definition of immovable property for capital gains tax purposes also includes shares in a non-listed company which owns immovable property situated in Cyprus.

Taxable profits from the disposal of an aircraft are only applicable in our first scenario above, where the Cyprus Company is the aircraft owner. In this case, there are two options for the shareholders owning the company. The first option is to dispose the aircraft itself and the second option is disposing of the shares of the company owning the aircraft (usually after stripping the company from any retained profits by means of a dividend distribution).

Under the first disposal option, the profit on disposal of the aircraft will not be subject to corporation tax. However, the difference (if any) between the sale proceeds and the tax written down value of the asset, restricted to the amount of capital allowances previously claimed on the cost of acquisition of the aircraft (this is known as balancing addition), will be added to the taxable income and taxed at the standard corporate tax rate of 10%. Any tax losses carried forward from previous years, or surrendered by other group companies under the group relief provisions may be set off against any balancing addition arising on the disposal of an aircraft.

Disposal of shares in an aircraft leasing company

The second option of disposing the shares in the aircraft owning company is, despite the fact that this is not the norm in the aircraft industry, by far the most tax advantageous. Profit from the disposal of securities is tax exempt from Capital gains tax and Income tax. Therefore, the shares of the Cyprus company may be sold with no tax implications irrespective of the profits arising on the disposal.

Capital allowances

A fixed rate for capital allowances (tax depreciation) is not specified in the Income tax law for aircrafts. In practice a rate of 10% (i.e. a 10 year useful economic life) has been deemed reasonable by the tax authorities although this is not binding on them or the Cyprus courts .

Tax credit on foreign withholding taxes

A tax credit for any taxes withheld abroad on the lease payments to the Cyprus Company and on other payments (such as interest, royalties, etc) will be credited against any Cyprus tax liability corresponding to those sources of income. This is irrespective of the existence of any double tax treaty between Cyprus and the source state where the tax was withheld (i.e. unilateral tax relief is provided in the Cyprus tax legislation)..

Special contribution for defence

Special contribution for defence (‘defence tax’) is applicable on dividends, interest and rental income.

Dividend income is always exempt from corporation tax but may be subject to defence tax at the rate of 15%. If dividends are received from a non Cyprus tax resident these are exempt subject to the following conditions:

The Cyprus resident company owns at least 1% of the share capital of the dividend paying company, and:
- either the dividend paying company does not derive, directly or indirectly, its income from more than 50% investment activities which give rise to investment income,
- or the tax burden of the dividend paying company in its resident country is not significantly lower than the Cyprus tax burden.

Interest income which is not derived in the ordinary carrying on of a business and is not closely related with the ordinary carrying on of a business is subject to defence tax at the rate of 10% applied on the gross amount.

Examples of such interest income are:

interest income derived from the provision of loan facilities by a company to third parties, and
interest income derived from deposit accounts.

Interest income which is derived in the ordinary carrying on of a business or is closely related with the ordinary carrying on of a business is exempt from defence tax and is only taxed under Income tax at 10%

The gross rental income reduced by 25% is subject to 3% defence tax. Aircraft lease income should not be considered as “rental income” for special contribution for defence purposes and as such it should be exempt from defence tax.

Value Added Tax

Where the Cyprus Company acquires the aircraft from a foreign company (resident outside Cyprus) no VAT implications will arise in Cyprus subject to the aircraft not coming to Cyprus. However, in the case where VAT is charged by the selling company to the Cyprus Company this might be recovered subject to the Cyprus Company being registered to the VAT authorities in Cyprus in advance of the acquisition.

The Cyprus VAT Law states that “the supply, modification, repair, maintenance, chartering and hiring of aircraft of a weight not less than 8.000 kilogrammes, used by airlines operating for reward mainly on international routes” is taxable with zero rate of VAT. Thus, where the Cyprus company leases the aircraft under an operating lease the company is obligated to register with VAT authorities in Cyprus as the chartering and hiring of aircraft is treated as a zero rated supply of service. This provides the opportunity for the company to claim all input VAT incurred in Cyprus (i.e. VAT paid on fees from accounting and legal firms).

Dividends and interest payments

Dividends payable by the Cyprus company to its non-Cyprus tax resident shareholders will suffer no withholding taxes or any other type of taxes irrespective of the country of residence of the shareholders and the existence or not of a double tax treaty.

Therefore, where the Cyprus company receives dividends from foreign subsidiaries these should not give rise to any taxes in Cyprus and also these dividends may be distributed to the shareholders of the Cyprus company with no taxes deducted (illustrated below in Figure 1). In case where the Cyprus Company is the company leasing the aircraft to the client, any profits derived from the lease rental income may also be distributed to the shareholders with no tax implications arising (illustrated in Figure 2 below).

Interest paid by a Cyprus aircraft owning company to a financing (group) company or to a bank, e.g. on the loan to acquire the aircraft, will incur no withholding taxes irrespective of the existence of a double tax treaty with the resident country of the financing company receiving this interest.

Figure 1 & 2 (left click while holding down shift should open link in new window)

Management & Control

A tax resident company is a company which is considered to be managed and controlled in Cyprus. Cypriot residence for tax purposes when referring to a corporation is determined on the basis of where the management and control is exercised.

Please see further details at Cyprus tax in a nutshell

Double tax treaties of Cyprus

Please follow the link for a list of all Cyprus tax treaties

EU Directives

Cyprus has implemented the provisions of the EU Parent – Subsidiary, Interest & Royalties and Merger Directives.

Disclaimer

Cyprus Insolvency Law

2008-01-12T12:33:00Z

Insolvency refers to the inability of a company to repay debts which it has incurred. Bankruptcy has the same connotations in Cyprus law as far as individuals are concerned. Insolvency in Cyprus is subject to the provisions of the Companies Law, Chapter 113 of the Cyprus Laws sections 203 through to 344. Insolvencies fall into two categories:
• Compulsory Liquidation by the court;
• Voluntary Liquidation by the Company or its Creditors.
A compulsory liquidation results from a compulsory winding up order obtained pursuant to a creditor filing an insolvency petition with the competent court (which according to section 209 is the court in the district in which the company to be liquidated has its registered office). A compulsory liquidation is conducted by an official receiver or an insolvency practitioner.
A voluntary liquidation, meanwhile, results from a resolution passed by members or directors, subject to the approval of creditors, to wind up a company.

Compulsory Liquidation
A company, in accordance with section 211 may be liquidated by the court if:
(i) The members of the company resolve by special resolution that the company be wound up by the court;
(ii) There is a default in delivering the statutory report to the Registrar of Companies or in holding the statutory meeting;
(iii) The company does not commence business within a year from the date of its incorporation or suspends its business for one whole year;
(iv) The number of members of the company is reduced, in the case of a public company, below seven;
(v) The company is unable to pay its debts;
(vi) The court decides that it is just and equitable for the company to be wound up.

After the liquidation has commenced any legal action against the company is stayed except with the permission of the court. Likewise no new legal proceedings may be initiated except with the permission of the court (section 220). The court appoints the liquidator of the company in accordance with section 226.

According to section 233, the liquidator in a winding up by the court has the power, (with the sanction of the court):
(i) to bring or defend any action or other legal proceeding in the name and on behalf of the company;
(ii) to carry on the business of the company so far as may be necessary for the beneficial winding up thereof;
(iii) to appoint an advocate to assist him in the performance of his duties;
(iv) to pay any classes of creditors in full;
(v) to make any compromise or arrangement with creditors or persons claiming to be creditors, or having or alleging themselves to have any claim, present or future, certain or contingent, ascertained or sounding only in damages against the company, or whereby the company may be rendered liable;
(vi) to compromise all calls and liabilities to calls, debts and liabilities capable of resulting in debts, and all claims, present or future, certain or contingent, ascertained or sounding only in damages, subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the assets or the winding up of the company, on such terms as may be agreed, and take any security for the discharge of any such call, debt, liability or claim and give a complete discharge in respect thereof.
(vii) to sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company or to sell the same in parcels;
(viii) to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose to use, when necessary, the company’s seal;
(ix) to prove, rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against his estate, and to receive dividends in the bankruptcy, insolvency or sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent, and rateably with the other separate creditors;
(x) to draw, accept, make and indorse any bill of exchange or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if the bill or note had been drawn, accepted, made or indorsed by or on behalf of the company in the course of its business;
(xi) to raise on the security of the assets of the company any money requisite;
(xii) to take out in his official name letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company, and in all such cases the money due shall, for the purpose of enabling the liquidator to take out the letters of administration or recover the money, be deemed to be due to the liquidator himself;
(xiii) to appoint an agent to do any business which the liquidator is unable to do himself;
(xiv) to do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.

When the affairs of a company have been completely wound up, the court, upon application of the liquidator, shall make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly (section 260).

Voluntary Liquidation
According to section 261, a company may be wound up voluntarily

(i) when the period, if any, fixed for the duration of the company by the articles expires, or the event, if any, occurs, on the occurrence of which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily;
(ii) if the company resolves by special resolution that the company be wound up voluntarily; (in such a case the company must publish such resolution in the Official Gazette of the Republic of Cyprus within 14 days; note however that the insolvency procedure begins on the date of approval of the resolution).
(iii) if the company resolves by extraordinary resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up.

There are two kinds of voluntary liquidation: (i) members' voluntary liquidation which means that the directors have made a statutory declaration of solvency;
(ii) creditors' voluntary liquidation which means that the directors have not made such a declaration.

A statutory declaration of solvency is made by affidavit of the directors of the company or, in the case of a company having more than two directors, the majority of the directors, to the effect that they have made a full inquiry into the affairs of the company, and that, having so done, they have formed the opinion that the company will be able to pay its debts in full within such period not exceeding twelve months from the commencement of the winding up as may be specified in the declaration. Such a declaration must be made within the five weeks immediately preceding the date of the passing of the resolution for winding up the company and be delivered to the registrar of companies for registration before that date. It must further incorporate a statement of the company’s assets and liabilities as at the latest practicable date before the making of the declaration.

The company in general meeting appoints one or more liquidators for the purpose of winding up the affairs and distributing the assets of the company, and fixes their remuneration. On the appointment of a liquidator all the powers of the directors cease, except so far as the company in general meeting or the liquidator sanctions the continuance thereof.

From the commencement of the winding up, the company must cease to carry on its business, except so far as may be required for the beneficial winding up thereof. Any change in the membership of the company or transfer of the company’s shares without the sanction of the liquidator is invalid. The liquidator under a voluntary liquidation has the same powers as the liquidator under a compulsory liquidation.

As soon as the affairs of the company are fully completed, the liquidator draws up an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and calls a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meetings and giving any explanation requested. Such a meeting must be published in the Official Gazette of the Republic of Cyprus specifying the time, place and object thereof, and published one month at least before the meeting.

Within one week after the date of the meeting the liquidator files the account with the registrar of companies. The registrar on receiving the account registers same and three months after such registration the company shall be deemed to be dissolved.

Order of Priority of Claims
Sections 298 to 333 are concerned with the identification of claims and their ranking for insolvency purposes whether in the case of a compulsory or a voluntary liquidation.

Generally speaking the order of priority of debts is as follows:

(a) the costs of winding up including disbursements, fees of the liquidator(s) and of persons appointed by the liquidator(s) such as auditors;
(b) the preferential debts, which are: (i) all local taxes due within twelve months before the commencement of the insolvency; (ii) all Government taxes and duties due within twelve months before the commencement of the insolvency and, in the case of assessed taxes, not exceeding in the whole one year’s assessment; (iii) due wages of employees and any amount from the wages of employees withheld by the employer for the payment of liabilities of the employee or otherwise, which the employer has not paid; and (iv) any other amount or benefit of employees which derives from a contract or employment relation including any amount due to a recognized union deriving from the industrial relation of employer-employee or otherwise which the employer has not paid.
(c) the secured creditors, i.e. those who have a registered interest or security such as a mortgage or a pledge;
(d) the unsecured ordinary creditors;
(e) the deferred debts, such as dividends declared but unpaid.

Directors’ Liability
A director may be held liable upon the liquidation of a company and the main types of liability that arise concern fraudulent acts, including fraudulent trading, falsification of books or keeping insufficient accounting records. During the winding up of a company if it appears either to the Court (where the liquidation is by or under the supervision of the Court) or the Liquidator (in the case of voluntary winding up) that any past of present officer or member of the company has been guilty of any offence in relation to company for which he is criminally liable the Court or the Liquidator may report the matter to the Attorney-General who may at his or her discretion commence proceedings against such director or member.

Strike off
A Cyprus company may apply to the Registrar to be struck off the register if the company is not trading, has no assets or liabilities and no creditors (or the creditors have been notified and do not object to the strike-off) , and an affidavit to this effect is sworn before the Cyprus courts by the directors. Any shareholder, creditor or liquidator can apply to restore the company to the register for up to 20 years after its strike-off. The reasons a party may seek restoration vary and include existence of creditors to whom notice was not given correctly or sufficiently, the possibility that the company might have been trading during the strike-off, or some fraud, misfeasance or other unjust action was committed by the company or the directors before or during the strike-off process.

Timeframe
The timeframe of a liquidation may vary drastically depending on the time it takes to wind up the affairs of a company, the existence of creditors or litigation procedures etc. On average, a compulsory liquidation may take a year in order to be completed whereas a voluntary liquidation will usually take approximately six months. A strike-off will usually take four months (one month notification and three months publication in the Official Gazette) but as noted above, its effects are not that the company is liquidated as it may be restored by an interested party within twenty years of its strike-off.