Cyprus: New Legal Measures

Legal measures that further reduce the administrative burden of businesses, extend tax investment policy and attract businesses and talents. Legal changes to transfer pricing rules

On 24/6/2022 the Assessment and Collection of Taxes Law was amended to relieve businesses from preparing audited accounts, in accordance with acceptable audit principles, by a person that per Law can be appointed as auditor.

Prior to 24/6/2022, all businesses with turnover over 70,000 Euro needed to prepare audited accounts.

With the above amendment, businesses with a turnover between 70,001-200,000 Euro AND assets without deducting liabilities of 50,0000 Euro at the balance sheet date, for 2 consecutive accounting periods, are not obliged to prepare audited accounts but accounts that have been reviewed in accordance with the International Standard of Review Engagements (ISRE 2400) issued by the International Auditing and Assurance Standard Board.

Per Standard the <review of historical financial statements is a limited assurance
engagement, as described in the International Framework for Assurance Engagements (the Assurance Framework), (Ref: Para. A6–A7). The practitioner performs primarily inquiry and analytical procedures to obtain sufficient appropriate evidence as the basis for a conclusion on the financial statements as a whole expressed in accordance with the requirements of this ISRE.>

As the review is a limited assurance engagement it means hours will be saved and consequently administrative costs by the businesses. In addition to the administrative costs, businesses will save on fees paid.

As the Law is effective as from 24/06/2022, it means that from this date businesses can assign the review of accounts of any accounting period not audited or for any accounting period for which the tax return has not been submitted.

The provision of commencement of amending law may differentiate between taxpayers, between those that complied with the date of submission of tax returns and those that did not comply. The differentiation relates to an obligation of a taxpayer and not to the amount paid.

Amending Law 31(I)/2022 extended deduction from taxable income by an individual, when investing in small and medium innovative companies, subject to criteria, until 31.12.2024. This is 3 years more. But with a different amending law, as from 14/2/2022-31/12/2023 a deduction up to 30% is given to legal persons as well subject to criteria. With the same amending law and for the same period the definition of small and medium innovative companies has been expanded.

As from 20/07/2022, costs incurring in years 2022-2024, relating to research and development, can be deducted or capitalised at an increased amount of 120 per cent.

On 26/07/2022 an amending Income Tax Law on the attraction of businesses and talents was published in the official gazette. The Law applies for first employments within the Republic as from 1.1.2022. The Law provides exemption of 50% of income from employment provided the yearly salary is over 55,000 euro with a proviso the first or second year of employment the salary to be over 55,000 Euro. This exemption is provided for 17 years from the month of commencement of employment and is given to individuals that prior their commencement of employment were for 10 consecutive years non-resident in the Republic.

This provision also applies as from 1.1.2022 in cases where first employment commenced between 2016-2021 and the yearly employment income was over 55,000 Euro and to cases where their yearly employment income was less than 55,000 Euro but within six months of the publishment of Law their yearly salary increased to over 55,000 Euro.

Individuals employed prior the year 2022 that benefited from the 50% exemption of employment income with the previous provision in Law, as from 1.1.2022 can benefit from the provision passed on 26/7/2022 provided their employment in the Republic was continuous until the year 2021.

The exemption can be given irrespective of nationality or domicile. This means that it can be given to Cypriots that repatriate. The exemption is given once in a lifetime.

Furthermore, the provision relating to 20% exemption from employment income has been amended to relate to first employment and exemption has been extended to 7 years from 5 years. Furthermore, an individual to be entitled to the exemption, for 3 continuous years’ prior his employment in the Republic must have been employed abroad to a non-resident employer. This provision applies for employments in the Republic from 26/07/2022 until the year 2027 and can benefit people earning from employment less than 55,000 euro per year.

On 8th of July an amending Law passed with effect as from 01/01/2022 amending the rules in relation to connected persons for the application of arm’s length pricing. Prior to the amendment connectivity of persons was based on control. As from 1.1.2022 connectivity is based on participation of at least 25%. Furthermore, the use of OECD Transfer Pricing Guidelines are given a legal status within the domestic legislation.

Under the amending law connected persons that are resident in Cyprus or have a permanent establishment, are obliged to maintain a file justifying arm’s length price of controlled transactions and a summarised table of information of control transactions. Subject to criteria the file will consist of the master file and the Cyprus file. Details of obligations of taxpayers as regards the file are included in Regulations issued on 08/07/2022.

The summarised table of control transactions is submitted electronically yearly with the tax return.

The Commissioner can request to see the file and must be submitted within 60 days. Otherwise per amending assessment and collection of taxes law administrative penalties are paid depending on delay.

A provision has also been added to authorise the request by a taxpayer of an advanced pricing agreements (APA). What must be submitted by the taxpayer is included in the Regulations issued on 08/07/2022. The regulations also specify timings in relation to APA, amendment and cancellation of decision of Commissioner etc

The amending law gives the power to the Commissioner to issue regulations in relation to the procedure of application of an APA and regulations relating to particular matters in relation to the procedure e.g. content of the application of an APA etc.