Audit, accounting and tax requirements for Cyprus companies
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
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
