Following the austerity measures presented by the government in August 2011 toward the increase of State revenue and reduction of State expenditure, on 14th of December 2011 the House of Representatives voted a number of amendments to the tax Laws as follows:

• Law Amending the Income Tax Law
• Law Amending the Special Contribution for the Defence Law
• Law Providing for Special Contributions by the Employees, Self-Employed and Pensioners of the private sector
• Law Amending the Value Added Tax Law

Law Amending the Income Tax Law

•  Where a company director, or an individual shareholder, or his/her spouse, or any relative up to second degree, receives an amount as a loan or financial support from the company, then that person is deemed to have obtained a monthly benefit in kind equal to 9% per annum on the above amount. This benefit in kind will be included in the individual's personal taxable income and suffer tax in accordance with Income Tax Law. The particular tax must be deducted from the individual’s monthly salary and paid to the Inland Revenue on a monthly basis according to the PAYE scheme.
•  In the case where contributions to Social Insurance Fund, Redundancy Fund, Human Resource Development Fund, Social Cohesion Fund, Pension Fund and Provident Fund have not been paid within the tax year due, then these expenses and the related salaries will not be tax allowable for the calculation of the Company’s taxable income. If and only if, the abovementioned contributions (including any penalties and interest) are paid in full within two years from the last due date, the previously disallowed expenses will be tax deductible in the tax year during which they were paid.
•  Article 39 (Loans to directors) which provides for 9% interest to be applied on loans or any financial assistance provided by a company controlled by not more than five persons, to its directors, or its individual shareholders, or relatives up to second degree of relative is abolished.

Commencement

The above changes are effective as from 1 January 2012.

Law Amending the Special Contribution for the Defence Law

•  The rate of the Special Defence Contribution imposed on dividends is increased from 17% to 20% for the tax years 2012 and 2013.
•  Special Defence contribution will be imposed on dividends paid by a Cyprus resident Company to another Cyprus resident Company, after four years from the end of the year in which the profits were created.

Related to the above, note that any dividends derived directly or indirectly from dividends on which Special Defence Contribution has already been paid, are exempted from Special Defence Contribution in any future distribution.

Commencement

The above amendments are effective as from 1 January 2012. The amended rate of Special Defence Contributions will be applied on income derived or deemed to have been derived or accrued in the period from 1 January 2012 until 31 December 2013.

Law Providing for Special Contributions by the Employees, Self-Employed and Pensioners of the private sector

Employees of the private sector, self-employed individuals and/or private sector pensioners with gross monthly earnings higher than €2.500 need to pay special contribution based on the rates shown below with no restrictions or maximum thresholds.

The following categories of income are exempted from this special contribution:

• Bonus on retirement
•  Provident fund contributions
•  Remuneration of a foreigner who is employed by a foreign government or by an international organization
•  Remuneration of foreign diplomats and consular representatives who are not citizens of the Republic
•  Remuneration of Cypriot ship's crew
•  Allowances paid to employees covering business expenses on behalf of an employer

Employees or pensioners, who pay the Special Contribution under the Officers, Employees and Pensioners of the State and Public Sector Law on their salaries or pensions, are exempt from the above levy.

The special contribution is suffered equally by the employer and the employee and is deductible from the taxable income of the employee/employer accordingly.

Imposition and payment of special contribution

The imposition and payment of the special contribution will be as follows:

•  In terms of an employed person and/or pensioners, the contribution must be deducted from the gross salary/pension and paid to the Inland Revenue on a monthly basis.
•  In terms of a self-employed, the amount of the contribution will be declared on a form approved by the Director of Inland Revenue and paid in three installments following the same procedure and dates provided for the provisional income tax (I.e. August 1, September 30 and December 31).

Commencement date

The above amendment is effective for the period from 1 January 2012 until 31 December 2013.

Law amending the Value Added Tax Law

The basic VAT rate will be increased from 15% to 17% as from 1st of March 2012. The reduced VAT rates of 5% and 8% are not affected.

By changing Schedule 10 of the Law, all taxable persons making taxable supplies of goods or providing services to non-taxable persons must issue and deliver "legal receipts".

The legal receipts must include the following essential information:

1. Issue Date
2. ID number
3. Name, address and registration number of the taxable person
4. Detailed enough description of the goods offered or services provided
5. Total amount payable including of VAT
6. For each rate of VAT, the total amount payable (including VAT) and the applicable VAT rate.
7. Indication of whether the transaction involves deposit payment, part consideration, cash payment or otherwise.

It should be noted that if an invoice is paid in cash, the issue of a legal receipt is not required as the cash invoice may also be used as a receipt.

If any person fails to comply with the abovementioned regulations will be subject to a penalty of 20% of the value of the transaction. On the other hand, if any person fails to issue and deliver the designated receipt at the time of the transaction will be subject to a fine up to €1.700 or imprisonment up to 3 years or both.

The Establishment and Operation of Independent Financial Stability Fund Law of 2011

The ultimate objective of the particular legislation is to set up a Financial Stability Fund in order to improve the existing structure in terms of managing and resolving financial crisis, promote financial stability along with ensured recoverability of financial institutions affected.

For the establishment of the abovementioned fund, a basic levy will be imposed on all credit institutions operating in Cyprus along with outside of the Republic operations.

The basic levy contribution is equal to 0.03% of the relevant liabilities of the institution affected by this law compared to the special contribution currently paid by financial institutions equal to 0.095% of their deposits, which will be abolished.

Commencement date

The law will be effective from 1 January 2013.