TAX FRAMEWORK

AEF130

CONTENTS

TAX RATE TABLES AND ALLOWANCES

RPI FOR CAPITAL GAINS TAX
INCOME TAX COMPUTATION RESIDENT INDIVIDUALS
INCOME TAX INTRODUCTION AND PROBLEMS
BADGES OF TRADE – SELF EMPLOYED AND PROBLEMS
EMPLOYMENT INCOME – EMPLOYED AND PROBLEMS
PARTNERSHIPS AND PROBLEMS
VAT AND PROBLEMS
CAPITAL GAINS TAX AND PROBLEMS
SOCIAL INSURANCE AND PAYE (PAY AS YOU EARN SYSTEM)
CORPORATION TAX AND PROBLEMS
TAX RATES AND ALLOWANCES

The following rates and allowances for the year 2020

Income tax
0 – 19,500 0%
19,501 – 28,000 20%
28,001 – 36,300 25%
36,301 – 60,000 30%
Over 60,000 35%

Corporation tax
All companies resident in Cyprus 12·5%

Special modes of taxation of certain kinds of income

Pensions of residents from services rendered outside the Republic exceed 3,420 - 5%
Gross amount of royalties, premiums, compensation, etc of non-residents - 10%
Films rental, etc of non-residents - 5%
Profits of non-resident professionals, artists, etc - 10%
Widow’s pension (in excess of €19,500) - 20%

Capital allowances Annual (wear and tear) allowances

Tractors, trenchers, excavators, bulldozers, transcavators,self-propelled shovels and loaders,

drums, oil tanks 25%

Motor vehicles other than saloon cars 20%

Computer hardware and operating software 20%

Application software
(a) under €1,709 100%
(b) €1,709 and above 33·3%

Agricultural machinery and tools

– acquired in the years 2012 to 2018 20%
– otherwise 15%

Other plant and machinery

– acquired in the years 2012 to 2018 20%
– otherwise 10%

Hotel, industrial and agricultural buildings

– acquired in the years 2012 to 2018 7%
– otherwise (maximum 25 years) 4%
Commercial and other buildings (maximum 33 years) 3%

Glass houses, metallic skeleton 10%

Glass houses, wooden skeleton 33·3%

Amortisation allowance – Intangible Assets

On the cost of purchase or development of intellectual property rights

(from 1 January 2012 to 2 June 2016) – transitional provisions apply
to 31 December 2016 20%

Interest and surcharge on unpaid tax

Interest on income and corporation tax assessments 2% p.a.

(Interest is calculated on the basis of completed months.
The same rate applies to overpayments of tax.)

Additional tax 5% of tax due

PAYE assessments 2% interest p.a. plus a surcharge of 1% per month

Special defence contribution

On dividends received (where applicable) 17%

On interest received
– standard rate 30%
– reduced rate (applicable under specific circumstances) 3%

On rental income (on 75% of the gross rental income) 3%

Value added tax (VAT)

Registration limit €15,600

Deregistration limit €13,669

Standard rate 19%
Reduced rates 5%, 9%

Social insurance

Self-employed 15·6%

Employer 8·3%
Employee 8·3%
Maximum annual insurable income for employees €54,648

Other contributions by employers

Social cohesion fund 2%
Redundancy fund 1·2%
Industrial training fund 0·5%
Central holiday fund (if not exempt) 8%

General health scheme contributions (GESY)

Employer’s 2.9%%
Employee’s/pensioners/income earners 2.65%
Self-employed individual 4%

Maximum income on which contributions are payable €180,000.

Capital gains tax

Rate 20%

Life-time exemptions (maximum €85,430)

– General €17,086
– Farmer in respect of farm land €25,629
– Residential dwelling €85,430

Stamp duty
0·00 for amounts up to 5,000
1·50 for every 1,000 or part of 1,000 for amounts from 5,001 up to 170,000
2·00 for every 1,000 or part of 1,000 for amounts exceeding 170,000 with a maximum
amount of stamp duty of 20,000

Land transfer fees

1 to 85,000 3%
85,001 to 170,000 5%
Over 170,000 8%

Note:
No transfer fees will be payable when the immovable property to be transferred is subject to
value added tax (VAT).

If the immovable property to be transferred is not subject to VAT the transfer fee will be
reduced by 50%.
 Income Tax Computation – Cyprus Tax Resident Individual
A. Source of income (world wide income)

A.1 Business or professional income (self employed) X TAXABLE BUSINESS PROFITS

A.2 Employment Income (employee) X SALARY GROSS
A.3 Pensions i.e old age pension X
A.4 Rents, Royalties and other income from prop. X RENTAL INCOME
A.5 Other income X
A.6 Total gross income X
B. Less Deductions from Gross income
B.1 20% on gross rents from a building(not land) (X )actual expenses land
B.2 Interest relating to rents on above rented property. (X) loan interest
B.3 Capital Allowances 3% p.a cost rented building. (X) 33years on cost
B.4 Losses brought forward (X)
B.5 Subscriptions to professional bodies (X)
B.6 Donations to approved charities/trade unions (X)
B.7 Total deductions (X)
C.1. Net income (A.6 less B.7) X
D. Less Personal allowances
D.1 Social Insurance contributions8.3%/15.6% (X) (8.3% salary employee)(self
empl.15.6%) (max €54,650)
D.2 Pension fund /Provident Fund Contributions (X)(private pension 12m)( prov fund months
worked)
D.3 Medical fund (restr1.5%total inc)/all GESY(2.65%/4%) contr(X)private medical – 12m
D.4 Life insurance contributions (restr 7% capital) (X) private life ins- 12m
D.5 Total Personal allowances (X)
E. Chargeable income (C.1 less D.5) X taxable income
F. Tax Calculation
F.1 Tax on charge income at the rates applicable X Tax Lability
F.2 Less temporary tax paid on business income (X) paid by self employed
F.3 Less tax deducted at source, such as PAYE (X) paid by employed
F.4 Balance Tax Payable(F1 less F2, less F3) X

F.5 Add Additional tax by reason of low temporary assessment X

F.6 Balance of tax payable/(repayable) X
‘

Chargeable income – Taxable Income

is the income after deducting all allowable exemptions, deductions and
allowances.
Payables is the balance of the liability still to be paid.
«Tax liability»

means the amount of income tax liability on the chargeable income

before the deduction of any tax paid by deduction or any credits of tax
paid such as temporary tax payments made during the year of
assessment or before deducting any overseas tax.

«Tax payable»:

This is the tax liability after deducting any tax paid by deduction or any
credits of tax paid such as temporary tax payments made during the year
of assessment or before deducting any overseas tax.

Income Tax Rate Bands

First €19.500 0% -------

Next €8.500 20% €1.700
Next €8.300 25% €2.075
Next €23,699 30% €7,110
over €60,000 35% -------

0 to €19500 0%
€19501 to €28,000 20%
€28,001 to €36,300 25%
€36,301 to €60,000 30%
Over €60,000 35%

Tax Rate Bands

The first €19.500 (the first starting rate band) is taxed at zero rate
(0%) (otherwise described as the exempt income),
next €8.500 is taxed at the rate of 20%,

the next €8.300 is taxed at the rate of 25%

the next €23,700 is taxed at the rate of 30%

and the balance at the top rate of 35%.

Sources of income

The Various sources of income are:

(a) Income from employment
(b) Income from self-employment
(c) Income from pension(s) –old age and widow/er
(d) Income from property, (rents and other income from property,
royalties).
.
Savings income include dividends and interest. Dividends and
interest are out of the scope of income tax and are taxed under the
special defence contribution law by deduction at source, such
contribution being a final tax, explained in a later chapter.

Tax exempt income

- interest received (taxed under special defence contribution)

- dividends received (taxed under special defence contribution)

-capital sums accruing from any payments to approved funds (e.g.

provident funds) not occupational pension funds.

- profits from the sale of securities/bonds/ shares

-social grants (unemployment, sickness, student, maternity benefit)

- lump sum disability (monthly is taxable)
Personal allowances and income tax rates

An employee is entitled to the following personal allowances

-life insurance relief,

-social insurance payments
-contributions to approved provident, pension health and other
approved funds.

Life insurance premiums on the life of the taxable person

! Allowance for life insurance premiums paid on the life of the spouse or
child NOT ALLOWED.
(policy of spouse in existence before 2003 allowed)

! Life Insurance premiums are restricted to 7% of the capital sum

assured.

Life Insurance paid to foreign insurance companies not having a licence

to exercise insurance business in Cyprus are not allowed. However, as
from 1.5.2004, insurance premiums are allowed if paid to insurance
companies having their principal place of business in a Member State of
the European Union or in a country of the European Economic Area,
exercising insurance business in Cyprus under a free establishment
regime or under a regime of free supply of services.

Deductions from income

Deductions from income include

- professional subscriptions i.e ACCA,ICAEW

- charitable gifts or donations to approved charities

- expenditure incurred, irrespective of whether it had been incurred

for the acquisition of income, for the maintenance of a preserved
building

-other deductions such as business deductions (including interest)

Examples of tax rate bands & Taxation

First €19,500 @ 0%

Next €8,500 @20%

Next €8,300 @ 25%

Next €23,700 @30%

More €60,000 @35%

Exercise: Calculate Income Tax

a. Chargeable Income a. €19,000

b. €20,000
c. €28,000
d. €29,000
e. 36,000
f. €40,000
g. €42,000
h. €65,000

ANSWERS:

INCOME TAX QUESTIONS

Question 1 - Calculate the income tax payable and the Special Contribution Defence

Mrs. Pericleous is employed (employee) part time as a qualified nurse. From her
income return you ascertain the following:

Items €

Gross salary 49,000

Dividends received net 1.000
Interest received on bank deposits net 170
Monthly rental income buildings from 1st October (C.As -3months) 300
Professional fees /subscriptions 60
Housing loan interest for the family house 750
PAYE deducted at source- income tax deducted by employer monthly 1,800

Mrs P has taken out life insurance policy on her life on a capital sum of €20,000 with an
annual premium of €1,000.
(cost rented building €40,000)

Question 2
Mrs. Jones. From her income return you ascertain the following:
Calculate the income tax payable. the Special Contribution Defence payable.
Items €
Gross salary 40,000
Rent of Buildings 5,000
Dividends received -net 1.000
Interest received on bank deposits in Cyprus net 170
Professional fees /subscriptions 160
Housing loan interest for the family house 750
PAYE deducted at source 2,000
Pension received from Social Security Old Age Pension 1,500

She has taken out the life insurance policy on a capital sum of €5,000 with an
annual premium of €300

Question 3

Mr Pains is employed, from his income return you ascertain the following:

Items €
Business Profits( adjusted) 12,500
Gross salary 10,000
Widowers Pension 2,000
Dividends received 1.000
PAYE deducted at source 1,500
Subscriptions to professional bodies 500
Mr P has taken out the life insurance policy on a capital sum of €2,000 with an
annual premium of €100

Calculate the income tax payable the Special Contribution Defence.

Question 4
Mr Ben is employed. From his income return you ascertain the following:
Items €
Rental Income – buildings 20,000
Business Profits( adjusted) 250,000
Gross salary 10,000
Subscriptions to professional bodies 500
Interest Cyprus bank deposits 1.000
Provident Fund contributions 3,000
PAYE deducted at source 1500
Medical Fund Contribution 300
Calculate the Income tax payable the Special Contribution Defence.

Question 5
Mr Solomon Cyprus resident From his income return ascertain the following:
Items €
Business profits 10,000
Rental income - (buildings cost €150,000) 10,000
Gross salary Cyprus salary 60,000
Interest from a Cyprus bank 1,000
Overtime Income Cyprus 10,000
Provident Fund contributions 3,000
PAYE deducted at source 1500
Donations 800
Medical fund contributions 500

Mr B has taken out the life insurance policy in the Cyprus on a capital sum of €30,000
with an monthly premium of €150.
Calculate the income tax payable and the Special Contribution Defence.

KATE INCOME TAX QUESTION

Mrs Kate is a nurse, she started working for AA Hospital on 1st May 2021 she earned a salary of $3,200 every
month. She also has her own business visiting patients at home and delivers their medicines. This business
makes a profit of $100,000 . The hospital has a work based approved medical fund that she contributes $150
per 2 months from her salary. She also contributes into the Hospital provident fund $200 per month. Income
tax paid per month $288 (PAYE).

She received the following income in 2021:

Overtime from the hospital $17,000
Interest on Bank Deposits received $1,200
Rent of land (cost $270,000) $19,000
Dividends $6,500
Rent of flat rented on 01.02.21(cost of $180,000) $1100
Widows Pension $10,000

During 2021 she paid for the following:

Charity – approved $150
Loan interest on rented flat $12,000
Interest paidon her own personal bank account $2,000
Subscription Gym per month $200
Subscription to Nursing Association $1,000
She pays life insurance on her life $110 per month with a capital sum of $20,000.

Required:
a. Calculate Income Tax payable for 2021.
b. Calculate Special Contribution for Defence payable for 2021.

SELF EMPLOYED/BADGES OF TRADE /TRADING INCOME/BUSINESS

PROFITS

Badges of Trade

Introduction

In this chapter we consider the badges of trade. These are criteria of trading
established over the years by case law. They are used to determine whether
an isolated transaction (usually in land) should be treated as a trading
transaction or a capital transaction. These criteria (or ‘badges’) of trading
apply also to similar transactions made by companies..

The word «income» is not defined in the Income Tax Law. According to the
charging section of the IT Law, however,
any profits or other benefits from any business, for whatever period of
time such business may have been carried on or exercised, are subject to
income tax.

Isolated profits therefore are subject to tax, if they are trading profits.

The word «business» means commercial or manuf. business, profession

or vocation and includes any other business of a trading nature.

BADGES OF TRADE

used to decide the issue whether a transaction is a trading one.

1. The subject matter of the transaction.(capital – investment)

(sale of stock - trading)
2. The length of ownership.

3. Frequency of similar transactions.

4. Supplementary work.(additional work to enhance product for sale is

trading)

5. Circumstances responsible for the sale. Sale due to unforeseen

circumstances)
6. Motive.

7. Method of financing of the cost.

8. Knowledge of the owner.

9. Method of acquisition; (gifted/inheritance no IT)

10. What happens with the sale proceeds.

TAX ADJUSTED TRADING/BUSINESS PROFITS SELF EMPLOYED

Introduction

This Chapter deals with the computation of the figure of the business profit
as self employment business.

Recognise the basis of assessment for self employment income

Recognise the expenditure that is allowable in calculating the tax adjusted

trading profit (level

Basis of assessment

The basis of an assessment is the income arising or accruing in the year of

assessment.
The year of assessment is the period of twelve months starting
1st January and ending 31 December (same as the fiscal year).

Each person is assessed every year in respect of his income arising or

accruing during the year of assessment.
Accounts of a self employment business, or of a company, should close on the
last day of the year of assessment, i.e. on the 31 December of each year.
If the accounts of a business close on a date different from the last date of the
year, the trading income as adjusted for tax purposes (see below) should be
apportioned in the year of assessment concerned.

Adjusting the accounting profits

The business profits of a self-employed individual as shown by his P & L is

adjusted on the tax computation in order to arrive at the chargeable profit or
allowable loss for income tax purposes. So the profit and loss account net
result (profit or loss) is the starting point of the income tax computation.

4 types of adjust. that can be made.

(a) Add to the profits in a/cs expenditure that has been charged to P & L
which is not allowable under the IT law.

(b) Deduct from the profits income that has been included in the P & L
which is not subject to income tax.

(c) Deduct from the profits expenses. not charged in P & L

but allowable for tax purposes.

(d) Add to the profit, any income which is taxable but not been recorded in
the. P & L
The following is a specimen format of a tax computation:

Net profit/loss (before tax) per Stat P/L x

Add:
Expenditure not allowed for tax purposes x
Income omitted from the profit and loss a/c x
Depreciation of fixed assets x

Less:
Income incl. in the profit IS a/c not subject tax x
Expend. not charged in a/cs but allowable for taxx
Capital allowances (see later Chapter) x

Adjusted chargeable profit x

 Deductible Expenditure

For the purpose of ascertaining the chargeable income of a self-employed

individual, expenses wholly and exclusively incurred in the production of
the income are allowable except where they are specifically disallowed.

Private element of an expense, such as rent, heat, light, telephone expenses

of a proprietor is not allowable.

Dual purpose payments an apportionment should be made.

Where the payments are made to or for the benefit or on behalf of employees,
the full amounts are deductible but the employees are taxed under the benefits
in kind rules

Allowable expenses include specifically-

1. Repairs
Repairs of premises, plant, machinery and motor vehicles (except private
saloon) for the renewal, repair or alteration of any implement, utensil or
article, employed in acquiring the income.

2. Ordinary annual contributions

Ordinary annual contributions paid by employers to funds approved under

section 14, e.g. provident funds, pension funds etc; extraordinary
contributions made into a fund are not therefore allowable.

3. Bad debts

Bad debts of any business actually written off during the year, and also the
amount of any specific provision for doubtful trading debts which will
eventually become irrecoverable are allowable deductions.
Recoveries are treated as receipts of the business in the year of recovery; also-
? general provisions for doubtful debts are not allowed;
? a bad debt incurred by a professional accountant in respect of a loan made to
his family company carrying on a hotel business is not an allowable
deduction.

ONLY SPECIFIC PROVISIONS ARE DEDUCTIBLE/ALLOWED

Non-business bad debts are not allowable. Thus, loans to employees

written off are not deductible, unless the business is that of making loans.

4. Donations or contributions

Donations or contributions made for-

? educational
? cultural or
? charitable purposes to the
? Republic of Cyprus or
? Local Authority or
? charitable institution in Cyprus

Donations to football clubs are not allowable.

In the event of a loss incurred in the year in which such donation or
contribution was made, any part of the loss up to the amount of the donation
or contribution is not carried forward.

Donations to political parties up to €50,000 allowed only after specific

requirements

Example
A self-employed individual, carrying on a business, has made a donation of
€2.000 to an approved charitable institution in the year 2008. Its adjusted loss
for the year amounts to €10.000.

Solution: €
Adjusted loss 10.000
Less loss created by the charitable contribution 2.000
Loss carried forward 8.000

5. Expenditure on “preserved” buildings

6. Interest
Interest on loans in relation to the acquisition of business assets used in the
business; however see below under «deductions not allowed» in respect of
private motor cars.

7. Contributions to approved funds for educational purposes

Sums paid into a Fund approved under Regulations for educational purposes
and maintenance of an individual attending any university, college, school or
other educational institution.

8. Interest to acquire shares in a company or partnership

Interest on a loan to acquire shares in a private company or a partnership,
provided that the company or the partnership uses the funds for business
purposes and the lender has no benefit, in other words, the lender obtains a
loan on which he pays interest and passes such loan to the company or the
partnership thus interest received is reduced by interest paid, leaving no
balance.

9. Subscriptions
Trade subscriptions, such as to a professional or trade association, are
allowable. Political subscriptions are allowed up to €50,000 but
restrictions are applicable..

Non-deductible expenditure

1. Private expenses
Domestic or private expenses including the cost of travelling between the
place of residence(home) and the place of work.

2. Rent of premises owned

Rent of any premises owned and used in connection with the carrying on by
him of a business.

3. Interest on capital
Any remuneration or interest on capital paid or credited to himself.

4. Private consumption of goods

Cost of goods added back taken out of the business for the use of the
proprietor or any partner or the family of such proprietor or partner. In the
case of a company, goods taken out of the company’s business by a director
or shareholder are valued at selling prices.
5. Expenses not incurred wholly and exclusively for the production of the
income

Any disbursements or expenses not being money wholly and exclusively laid
out or expended for the purpose of acquiring the income;

6. Sums employed as capital

Any capital withdrawn drawings not allowed or any sum employed or intended
to be employed as capital; Capital expenditure is not allowed as an expense,
so any depreciation of fixed assets, or loss on sale of fixed assets or
amortization or depreciation of a lease is not allowed. If the capital expenditure
is made on fixed assets used in the business, such as plant and machinery or
buildings, such expenditure is eligible to capital allowances (allowed)

The distinction between revenue expenditure, which is allowable, and capital

expenditure, which is not allowable, is not always easy. This is especially the
case when deciding, for example, whether an expense is a repair to an asset
(revenue) or whether it is an improvement (capital).

7. Improvements etc
Expenditure of any improvements, alterations or additions;

8. Recoverable sums
Any sum recoverable under an insurance or contract of indemnity;

Example
A self-employed individual’s trading stock costing €50.000 is destroyed by
fire. The stock is insured in the sum of €40.000. On a claim to the insurance
company, an amount of €40.000 is received under the insurance policy. The
cost of the stock in the sum of €10.000 is an allowable deduction, but the cost
which has been recovered is not.
9. Rent etc not for the purpose of producing income
Rent of, or cost of repairs to, any premises or part of premises not paid or
incurred for the purposes of producing the income;

10. Income tax and interest thereon

Payment of income tax or interest thereon is not an allowable deduction; not
allowable are also other government taxes unless specifically provided under
a law. The non-deductibility of taxes
generally, is based on the general rule that such taxes are not incurred in the
production of the income.
If, however, a tax is paid as a condition of trading, such tax is an allowable
deduction.

11. Payments of a voluntary nature

Any payments of a voluntary nature except such payments as are allowed

under section 14;
Gifts to employees or customers are not allowable unless consisting of an
article incorporating a conspicuous ad for the donor business; (food not
allowed)
Gifts to employees can be allowed if they are added to their salaries and
taxed on the employee.

12. Business entertainment restricted (allowed up to certain amount)

including hospitality of any kind,(food accommodation) even though made in
the production of the income.
Business entertainment covers entertainment of customers suppliers or friends
or of any other person.
Note: Entertainment is all allowed for employees when it is available to
all staff (i.e Christmas staff party) and not restricted.
The term «entertainment» does not include gifts (to employees or
customers),in respect of which, you may refer to the previous sub-paragraph.

Entertainment of customers, suppliers etc is allowed up to a certain amount

The amount which is not allowable is:
Amount in excess of
1% of the gross income of the business or
€17.086
whichever is the lower;

Example
Business entertaining expense is €1.800.
Calculate the maximum amount that can be allowed, indicating the amount to
be adjusted on the tax computation.
(turnover €100,000)

Solution:
Entertaining expenses allowed:
Law:
Compare and select the lower of :
1% x turnover, 1% of €100.000 = €1,000
and
€17,086
The lower of the two is €1,000.

maximum allowed is €1,000 not €1,800

The adjustment to be made on the tax computation is as follows:
Amount of expense €1.800- 1,000=800
Therefore add back €800 adjustment to be made.

13. Private motor vehicle expenses

Expenses in respect of a private motor vehicle (saloon car); such expenses
include cost of petrol, insurance, licence, repairs, service, spare parts renewal,
car wash, car wax, and other expenses relating to the use the car;

14. Interest
Interest applicable or which is deemed to be applicable to the cost of
purchase of a private motor vehicle, irrespective of whether it is used in the
business or not, and to the cost of purchasing of any other asset not used in
the business.
This restriction applies during the first seven years from the date of purchase
of the motor car.
In effect, interest is an allowable deduction if the asset is used in the business,
except in the case of a private motor car during the first 7 years of its
acquisition.

Example 1

A self-employed individual, carrying on a business, shows in his balance

sheet on 31.12 2020 a private motor car used by its managing director in
the business. The cost of the motor car, as shown in his accounts, €50.000. In
his profit and loss account the total amount of interest payable is €20.000.
Assume that the business is charged interest on its bank overdrafts at 8%.
You are required to compute the amount of interest disallowable.

Solution:

The amount of interest not allowable is computed as follows:

Cost of the motor car €50.000 at 8% = €4.000. The amount of disall. interest
is €4.000 amount should be added back on tax computation.
Example 2

Assume the same facts as in example 4 but the interest payable for the year is
€3.000 (and not €20.000). You are required to compute the amount of interest
disallowable (if any).
Solution:
Cost of the motor car €50.000 at 8% = €4.000. The amount of disallowable
interest is €4.000 but it is restricted to the actual amount charged in the
accounts, i.e.€3.000. The amount should be added back on the tax
computation is therefore €3.000.

15. Legal and professional charges

Legal and professional charges are allowable expenses provided they are
made in connection with the business and not related to capital items.
Following types of professional charges are allowable:

=legal fees to collect business debts

= legal or other prof. fees in defending the title of fixed assets.

On the contrary, the following expenses are not deductible:

Legal/ other fees in conn. with the acquisition of fixed assets

Fees in connection with obtaining loan finance relating to the purchase of an

investment (legal expenses, commission, guarantee fees, valuation of property
to be used as a security for the loan).

Normal charges for preparing accounts /assisting with the self assessments of
owners
16. Mortgage fees irrespective purpose loan are not allowable.

17. Appropriations of profit.

Appropriations of profits are not allowable, such as salary or interest on

capital paid to a proprietor (self employed).
The private element of expenses of the proprietor or of the members of his
family are not allowable.
Payments of the proprietor’s income tax and social insurance are not
allowable.

18. Valuations of stock in trade

The method of valuing trading stocks is cost price or net realized value
whichever is the lower (according to accepted accounting standards). So,
when the net realizable value is lower than historical cost, the difference may
be allowed as a deduction. On a discontinuance of trading the price of stock
sold to a person who carries on or intends to carry on a business is equal to
the amount realized on the sale, and in any other case, the amount which the
stock would have realized if sold in the open market. However, in case of
death of the proprietor, the business is not deemed to be discontinued
provided that the heirs undertake in writing to carry on the business.

19. Value Added Tax

Where a self-employed individual carrying on a business is wholly exempt
from VAT, either because of his type of output or because the taxable output
is below the registration limit, any VAT suffered on business expenditure is
deductible in computing profits for income tax purposes. If the exp.is not
deductible for income tax purposes, for example entertainment expenditure,
the VAT on such expenses is similarly disallowed in computing the profit for
income tax purposes.

Where the output of the business consists of taxable or zero rated supplies, so
that it is taxable for VAT purposes, in computing the taxpayer’s income for
income tax purposes, the amount of expenditure and income should be
exclusive of any VAT input or output respectively. Where under the VAT
law, VAT input tax is not allowed, such VAT is part of the expense, and in
the case of a capital asset, it is part of the cost of the asset.

20. Excessive salary to wife or children of a self-employed

Self-employed individuals carrying on a business often employ their spouses
or members of their families in their business. The salaries paid to such
relatives should be at the commercial rates. If they are excessive, any amount
in excess of the commercial rate should be disallowed.

21. Immovable property tax paid to local authorities

The immovable property tax paid or payable is a deductible expense for the
purposes of income tax.

Other adjustments

1. Income taxable but not included in the profit and loss account

This may happen -result of faulty accounting, such as omitted income. In may
also happen when proprietor gifts business goods to his family, he is treated
as having made a sale to himself . This rule does not apply to services but the
cost of such free services is not deductible.

2. Deductible expenditure not included in the profit and loss account

-capital allowances-

3. Income included in the profit and loss account but not taxable-
Income under this heading may fall into the following categories:

Capital receipts (such as capital gains) not subject to IT.

Profit for the sale of fixed assets (subject to a balancing allowance or

deduction where capital allowances were claimed).

Dividends and interest received (exempt from income tax).(subject SCD)

4. Rents received
Rents received in respect of buildings, if shown in the accounts, should be taken
out of profits shown & form part of a separate calc of rental income.
Such computation, will show-
Gross rents x
Less: Statutory deduction of 20% on gross rents (x)
Less:Interest payable on loans on the rented property (x)
Less: Capital Allowances 3% p.a (wear and tear) on cost of property rented
(x)
Net Rent taxable x
Pre-trading expenditure

As for companies, any revenue expenditure incurred in the period before the
commencement of business, is deemed to be incurred on the first day of
commencement of trading, provided that such expenditure would have been
allowable had the trade started.

the main deductible expenditure include:

- repairs of premises, plant, machinery and motor vehicles (except saloon cars)
employed in producing income,not capital expenditure

- actual bad debts written off, as well as specific provisions subject to certain
restrictions,

- donations/ contributions made for educational, cultural or charitable

purposes to the Rep. of Cyprus, a local authority or an approved charity,

- certain exp. on preserved buildings or ancient monuments,

- interest on business assets (excluding int. on motor vehicles),

Non - deductible expenditure

this expenditure is the most common form of adj. made on the tax comp., and
includes costs not wholly and exclusively allowable for tax purposes, incl.:
- travelling expenses between place of residence and place of work,
- cost of goods taken out of business for private use (not sold),
- any expenditure of a capital nature,
- government taxes unless provided for by law.
- business entertainment over a certain limit (lower of €17.086 or 1% of gross
income),
- expenses of a private motor vehicle,
- excessive salary to wife or children of a self-employed.

ARE THE FOLLOWING DEDUCTIBLE/ ALLOWABLE AND INCLUDED IN

THE BUSINESS EXPENSES:

- FINES - SPEEDING PARKING LATE PAYMENTS

- VOLUNTARY PAYMENTS

- PRIVATE CONSUMPTION OF BUSINESS GOODS

- ALTERATIONS TO BUILDINGS CAPITAL EXP

- BUSINESS ENTERTAINMENT OF CUSTOMERS/SUPPLIERS

LAWYERS FEES TO PURCHASE LAND/OFFICE

- EXCESSIVE SALARY TO WIFE

- VOLUNTARY PAYMENT TO TRADE ASSOCIATION

- RENT OF OWNED BUILDING USED BY THE BUSINESS-

- IMPROVEMENTS TO BROKEN MACHINERY –CAP EXP NOT DED

- DEPN/AMORTISATION OF LEASE

- CAPITAL WITHDRAWN –DRAWINGS

- LOSS ON SALE OF SHARES

- SOCIAL COHESION FUND 2% PAYROLL– PART OF SIC OF

EMPLOYER

- INCOME TAX PAYMENTS- TAXES TO GOVT

- GIFTS TO EMPLOYEES

- GENERAL PROVISION FOR BAD DEBTS

- ENTERTAINMENT OF EMPLOYEES – ALL EMPLOYEES

- INTEREST / COST OF PRIVATE MOTOR CAR

- LEGAL FEES TO COLLECT BUSINESS DEBTS

- ACCOUNTING & AUDIT FEES FOR THE BUSINESS

- PROPRIETORS/OWNERS SALARY & SOCIAL INSURANCE

- REDUNDANCY PAYMENTS TO EMPLOYEES

- FRAUD/THEFT BY EMPLOYEES

- /FRAUD/THEFT BY EMPLOYER

- EDUCATIONAL COURSES/TRAINING

- GOVERNMENT TAXES

PRE TRADING EXPENDITURE

 REVENUE EXPENDITURE – EXPS OF TRADING

BANK/LOAN CHARGES PURCHASE MACHINE FOR BUSINESS

WRITE OFF LOAN OF AN EMPLOYEE

TAXABLE OR NOT TAXABLE INCOME

- CAPITAL RECEIPTS/GAINS –SALE LAND/BUILDINGS

- PROFIT ON SALE OF ASSETS
- DIVIDENDS RECEIVED
- INTEREST RECEIVED
- RENTS RECEIVED

EXERCISE: LINDA
Lindas Income Statement for the Year ended 31 December is as follows:
€ €

Sales/Revenues 82,500

Less: Cost of sales (37,200)

Gross Profit 45,300

Add: Rents Received 1,200

Bank Interest Receivable 80
Profit on sale of assets 310 1,590
Total Income 46,890

Less: expenses:

Wages & Salaries (a) 22,620

Business Taxes & Insurance 1,750
Heat & Light 2,170
Repairs & Renewals(b) 4,280
Telephone (c) 880
Motor Expenses c) 3,250
Sundry Expenses (d) 1,650
Bad & Doubtful debts(e) 640
Credit card interest 120
Loss on sale of fixed assets 70
Depreciation 2,500 39,930

Net profit for the year 6,960

Notes:

a. Linda draws a salary of €200 per week from the business. This is
included in wages and salaries figure.
b. Repairs and Renewals are as follows:

Decoration of business premises €400

Installation of new improved heating system €3,800
Minor repairs €80
c. It has been agreed with the Inland Revenue that one quarter of
telephone costs and one fifth of motor expenses relate to private use.
d. Sundry exps include business entertaining €520.
e. Trade debts written off in the year amount to €440 and €200 has been
set aside as a general provision for bad and doubtful debts.

Calculate the adjusted profit for the above year .

EX. IMRAN COMPUTE THE ADJUSTED PROFIT FOR IMRAN

Imran owns a wholesaling business which operates from rented premises. It

has a 10 year lease on the premises and paid a premium of €7,000 in order to
obtain the lease. His Income Statement for the year is as follows:
€ €

Gross Profit for the year 52,618

Add: Interest Receivable 212

Surplus on sale of office equipment 300

Less:

Wages (N1) 19,280

Rent, land taxes & Insurance (N2) 6,915
Electricity 4,328
Telephone (N3) 1,650
Repairs (N4) 2,286
Printing & Advertising 1,250
Motor Expenses (N5) 5,712
Legal & professional fees (N6) 3,000
Sundry exps (N7) 4,777
Bad & Doubtful Debts N8 860
Bank charges & interest 2,765
Lease premium amortization 700
Depreciation 8,749 62,272
Net loss for the year (9,142)

Notes:

1. Wages include €5,800 for Imran’s wife( who works full time for the
business) €1,000 for his son (a student that does not work for the business at
all) Also included is Imran’s personal tax of €3,187 and personal Social
Insurance Contributions €328.]

2. Rent, rates & Insurance include Imran’s private medical insurance

premium of €414.

3. It has been agreed that one sixth of telephone costs relate to private use.

4. Repairs include €750 for the cost of essential repairs to newly acquired
second hand truck which could not be used until the repairs have been carried
out.

5. Motor expenses are as follows:

Vehicle servicing & repairs €1,165

Fuel & oil €2,815
Loss on sale of motor vehicle €422
Road licenses and insurance €610
Fine for speeding by Imran €700
5,712
It has been agreed that one tenth of motor expenses relate to private
expenses
6. Legal & Professional expenses consist of:

Fees relating to renewal of lease €500

Debt collection €1,500
Accountancy fees €1,000
3,000

7. Sundry expenses are:

Entertaining customers 630

Entertaining overseas customers 150
Staff Christmas dinner 312
Gift to employee for exam success 100
Patent royalties 2,540
Subscription to trade association 250
Donation to political party 200
Other small items ( all allowable) 595
4,777

8.Trade costs of €500 were written off during the year. The general
provision for bad debts was €100 and the specific provision €400.

9. During the year Imran took goods costing €220 from stock for personal
use paying €220 of his own money into the business.

.
QUESTION SELF EMPLOYMENT
Mr Patrick is a self employed plumber in 2019 his turnover was $115,500 his net loss
was $52,000. His expenses were quite high. He produced the following list of expenses
and income for tax purposes.

The expenses included in his income for 2019 to produce that loss were as follows:

- A loss on sale of tools $200

- A general provision of $1,000
- Repairs to rented office $150
- Bad debts $500
- Depreciation of van $560
- Depreciation personal computer $1,200
- Legal fees to buy piece of land $800
The following were excluded from his expenses for 2019;

- His medical fees $1,000

- Professional advice on his business $560
- Wife salary $16,000 who works there full time
- Specific provision bad debts $1,050
- Capital allowances $1,250
The following were excluded from his income statement:

- Profit on sale of a salon car $1,000

- $2,000 compensation received from insurance for damaged stock of $5,000.
- Dividends received $200
The following were included in income:

- Profit on sale business furniture $2,000.

- Interest income $500.
QUESTION EMPLOYMENT INCOME EMOLUMENTS

Mrs Jenny works for Jelly Co. as a salesperson. In 2019 she worked there until
November 1st , when she was asked to leave. Her salary was contracted at $1,200 per
month. Her contract included 13th salary and compensation if she was asked to leave, of
$2,500.

She received unemployment income from the Social Insurance office a total of $2,000
for 2019 and she also received a training grant of $500 to train as a health visitor.

In 2019 she had use of her employers saloon car, she visited clients at a cost of $1,500
with the car and also travelled home at a cost of $2,000. Her employer reimbursed the
whole total amount.

She also took clients out for dinner in 2019 with a $500 cost. She received a theater
ticket cost of $60 from one of her clients as a gift.

She borrowed $2,200 from the bank to buy a computer for work with 10% interest.

In 2019 she paid subscriptions to the following;

- Political party $200

- Union of salespersons $100
- Professional body salespersons $100
 Basis of assessment for Employment Income (employee)
Outline of the employment income

Employment income includes income arising from an office under a

contract of service and the income of office holders, such as directors of
companies. i.e. both employees and directors. The income from
employment is otherwise described as emoluments.

The term «EMOLUMENTS> includes payments in the form :

(cash or benefits in kind).

-salary/wages/overtime/bonuses

- allowances

- share of profits

- fees (like directors fees)

- commissions

- estimated annual value of any quarters or board /residence or of any

other allowance granted in respect of an office or employment
Benefits include:
- those provided to any member of the employee’s family.

- Payments from a person who is not the employer by reason of an office or

employment is an emolument
e.g tips by a taxi driver/waiter from customers
e.g long service awards in recognition of past services.
(less than 100 once a year as long as employer does not claim it in their expenses)

- Termination payments may also be treated as emoluments if paid under a

contract of employment like redundancy payments, or in respect of services
rendered in the past.

- Payments made by reason of the employment may be taxable even though

they may be paid without any contractual obligation on the part of the
employer

i.e personal gifts are not part of emoluments,

no taxable benefit arises if: the gift does not exceed the amount of €300, and the employee only received one gift per
year, and the employer does not claim the cost of the gift as an allowable deduction in his tax computation

i.e payments made to employees from the Annual Leave Fund

i.e payments in respect of increases in salaries paid on a later date

- Car Benefit -Private use of employers car is taxable

 (pool car used for work purposes and not taken home not taxable)

Accomodation Benefit (owned or rented by employer)offered to employees – taxable

(if job related not taxable)

- Food benefit taxable - (unless the food is provided to all staff or its part
of an event then not taxable)
 .
When does employment income arise

The emoluments normally arise on the earnings basis or on the date the
employee receives payment if earlier.
For directors, emoluments from the company arise on the earlier of the date of
payment or the date of credit in the company’s accounting records.
Taxable benefits (see later) are generally treated as received when provided to
the employee.

Net taxable emoluments

Total taxable emoluments less total allowable deductions (see below) are the
net taxable emoluments for the tax year. Deductions can never turn the
taxable emoluments to loss. In case of more than one employment
emoluments from each employment are added together.

Exemptions of employment income

 - the special allowance for service abroad granted to civil servants, or to an
employee of a public corporate body;

- any lump sum received by way of retiring gratuity, commutation of

pension, death gratuity or as lump sum compensation for death or bodily
injury;

- Compensation for abrogation of a contract of employment is not part of

emoluments and therefore not taxable.

- Unemployment benefits paid by the Social Insurance Fund are not subject
to tax

- Scholarships and education programmes that relate to duties of

employees not personal benefit are not taxable these include fees books
related materials;

Business travel – includes tickets accommodation meals not taxable

Emoluments of foreign officers of an institution exercising in Cyprus an

educational, cultural or scientific function for the public interest;

Emoluments foreign diplomatic and consular representatives

Deductible expenses
For the purpose of ascertaining the chargeable income of an employee,
expenses wholly and exclusively incurred in the production of the income
are allowable.

- expenses incurred in performing the duties of employment, not including

expenses reimbursed by the employer;

- donations or contributions made for educational, cultural or charitable

purposes to the Republic
of Cyprus or Local Authority or approved charitable institution in Cyprus are
allowed without
any limitation; the donation must be supported by a valid receipt.

- subscriptions to professional bodies, if relevant to the duties

- purchase of professional books relevant to the employment

- travelling in the performance of duties, if not reimbursed by the

employer. If the employer pays for such expenses no taxable benefit arises

- cost of attending seminars relevant to the employment

-
Capital allowances on computer equipment

used by the employee may be allowed if the Director is satisfied that the
computer is used for the purposes of the duties of employment Where the
computer is used for private purposes also, the allowances are given on the
part of the cost relating to the employment.

- Any other expenses incurred in the performance of duties of

employment

Non-deductible expenses

- domestic expenses- house

- private expenses
- travelling expenses between the place of residence and the place of work;
travelling between two or more places where duties are performed is allowed
but travelling between two separate employments is not allowable;

Motor Saloon Car Expenses; (If the employee uses his own private motor car in travelling during the performance
of his/her duties, such motor car expenses are not deductible because of the specific provision of non-deductibility of private motor car
expenses)

Entertainment expenses – meals during work or meals with clients

Interest in connection with a loan made for the construction of residence

ordinarily used by an individual or his children for the purpose of residence

Interest for any other purpose

Personal allowances and income tax rates

An employee is entitled to the following personal allowances

-life insurance relief,

-social insurance payments
-contributions to approved provident, pension health and other funds.

Life insurance premiums paid to foreign insurance companies not having a

licence to exercise insurance business in Cyprus are not allowed. However, as
from 1.5.2004, insurance premiums are allowed if paid to insurance
companies having their principal place of business in a Member State of the
European Union or in a country of the European Economic Area, exercising
insurance business in Cyprus under a free establishment regime or under a
regime of free supply of services.

Benefits in kind

The main benefits in kind which may be given to employees are the following:
Private use of an EMPLOYERS car. The amount of the benefit depends on the extent of use
for private purposes. If the mileage of the car for one year is for example 6.000 km and the
private use is 2.000 km, the use is 2/3rds business and 1/3rd private use.

If EMPLOYER OWNS SALOON CAR – need formula to calculate benefit from private use

If EMPLOYER OWNS A VAN – 500 taxable for private use ( home journey not taxable)

Travelling allowances.

Where an employer pays a travelling allow. to an employee to cover the employee’s travel
exp. in the perf. of his/her duties, the allowance is a benefit that should be added to
taxable emoluments of the employee.

The employee, however, may claim a deduction of the same amount as being wholly and
exclusively incurred in the performance of his/her duties – subject to conditions!!

Travelling Allowance for Private Car Use of employee

<€3,000 = 50% taxable

>€3,000 = ded €1,500 only

Subject to conditions

Representation allowances. (amounts paid to employees to represent their employer)

Any representation allowances paid to an employee to cover expenses constitute taxable

emoluments irrespective of the amount. The employee may deduct from his taxable
emoluments any amount incurred in the performance of his duties which is not re-imbursed.

Loans or credit facilities to employees.

Where an employee receives interest free credit facilities.no taxable benefit

or loans from the employer, no taxable benefit in kind arises. The Directors of companies
(controlled by not more than five persons) or their relatives (children, grandchildren, parents
and grandparents) the company is chargeable on a notional profit which equals 9% per annum
on the amount of such facility or loan

In the case of bank employees receiving loans at interest rates below the ruling rates offered
to customers, such reduced rates do not give rise to benefits in kind (compare an
employee who buys goods from his employer at a discount).
EMPLOYMENT INCOME

ARE THE FOLLOWING BENEFITS TAXABLE ON EMPLOYEES

a. tips to taxi drivers-

b. unemployment/maternity/disability/sickness
c. increase in salary
d. amounts received from Annual Leave Fund
e. Termination received on termination of employment –
f. Free cinema tickets to employees family from the employer- .
g. Accommodation provided
h. Long service awards for past services -
i. Compensation for loss of office lump sum–
j. Income from scholarship –
k. Food provided by employer –
l. Accommodation provided not job related -
m.Personal gifts < 300 (cannot claimed by employer)-
n. Interest free loans-
o. Training courses offered –
p. Personal gifts >300
q. Representation Allowance –
r. Mileage Allowance –
s. Sport/Recreation facilities –Use business van for personal use - €500 p.a
taxable (going home is not private)
t. Cash payment for use of your own private car – if under €3000 only
50% taxable if stated on contract of employment. (if over €3000 just
deduct €1500 )
ARE THE FOLLOWING DEDUCTIBLE IN ASCERTAINING THE TAXABLE
INCOME OF AN EMPLOYEE WORKING IN CYPRUS

a. subscriptions to professional bodies related to the job -

b. traveling from home to work –
c. interest on loan of his private residence –
d. donations to charities –
e. traveling expenses for business with private car not reimbursed by
employer
f. capital allowances on personal computer used for work –
g. meals at restaurants with family-
h. motor car expenses (private) –
i. traveling for work reimbursed by employer –
j. meals with clients not reimbursed by employer-
k. representation expenses-
l. contribution to educational seminar held by local authority

Employment Income Questions

For the following 4 Questions calculate the taxable emoluments

QUESTION 1
Mr Z works for Zaros Co. and earns a salary of €50,000 per annum, the company supplies him with a
flat to live in, not job related the benefit calculated at €8,000 other expenses related to the flat cost
the employer €1,600. Mr Z travels to work in his own private saloon car, it costs him €2,000 per
annum, he also uses the car for business purposes at a cost of €4,000 and 50% of the €4,000 is
reimbursed by employer. Received from the employer an interest free loan €2,000 and a personal
gift of €1,000.
Mr Z received €500 from the Annual Leave Fund and a scholarship of €500 for a business
course he is going on.

QUESTION 2

Mr W works for Baros Co. and earns a salary of €100,000 per annum, the company rents a
house for him to live in, job related the benefit calculated €5,000 per annum. Other expenses
related to the house cost the employer €3,000. Mr W drives a company pool car calculated
benefit for personal use €5,000. Mr W received a bonus from the employer €20,000 and a
personal gift of €5,000 from the employer.
Mr W received €500 commission for sales he had made and a bonus of €500 for a business
success. He paid a subscription to the tennis club of €300 and €3,000 interest on a personal
loan. He spent €250 on a dinner with clients not reimbursed by employer.

QUESTION 3 Calculate Emoluments

Mr C works for Ziva Co. and earns a salary of €6,000 per month, company rents a house for him
to live in not job related rent €12,000 other expenses related to the house cost the employer
€3,000 per annum.
Mr C uses his personal saloon car ¼ for business purposes ¾ for private purposes at a cost of
€50,000 all reimbursed by the employer. Mr C received €1,000 from the employer for
entertaining customers and a personal gift of €5,000 from a happy customer.
Mr C received €500 commission for sales he had made and a bonus of €500 for a business
success. He paid a dog charity approved €300 and €3,000 for interest on his house.

Taxable emoluments 141,000

Less deductions Charitable donations (300)

Net Income 140,700

QUESTION 4 Calculate Emoluments

Mr P works for PP Accountants as an accountant and earns a salary of €100,000 per annum, He
worked overtime and earned €5,000. He also made 10% interest on bank deposits.(SCD). He
received €1,000 from he’s insurance co as compensation for breaking he’s leg and made €3,000
from the sale of some shares.
He paid a subscription to the professional accounting association of €500 and bought some
professional books for €200 and paid €1,000 interest on a personal loan. Received from the
employer an interest free loan €2,000.

He also received €3,000 from employer for business travel on buses and taxis. He paid €200 for
entertaining customers of the firm.

Mr P travels from home to work in his own private car, it costs him €2,000 per annum, he also
uses the car for business purposes at a cost of €5,000

PARTNERSHIPS
A partnership is not a company for income tax purposes. A partnership is not a taxable
entity under the Income Tax Law, but only a trading entity, whose taxable profits or
losses are allocated to its members (partners) according to their profit sharing ratios
(PSR).

A partnership is defined as the relationship which subsists between persons carrying on a

business in common with a view of profit. The Partnership Law lays down the rules for
determining existence of a partnership. A limited partnership is one consisting of one or
more general partners, who are liable for all debts and obligations of the partnership, and
one or more persons, called limited partners, who contribute, when entering into
partnership, sums as capital and who are not liable for the partnership debts or
obligations beyond their contribution of capital. A limited liability company may be a
limited partner.

The computation of the profits and losses of a partnership

The principles of computations of profits and losses of a sole trader also apply for a
partnership.
Partners’ salaries and interest on capital are not deductible in computing the
chargeable profit.

Allocation of the profits and losses

The allocation of the chargeable profit or allowable loss of a partnership to the individual
partners is made according to the profit sharing ratio (PSR) applicable under the partnership
agreement and if no agreement exists, in equal shares (under the law).

Any salaries or interest on capital to which partners are entitled are first allocated to them
and the balance is allocated according to the PSR.

The total amount of tax adjusted profit allocated to each partner, whether as salary,
interest on capital or profit, is the amount of profit which each partner includes in his
chargeable profit for IT purposes.

Change in the PSR

If PSR of a partnership changes (by reason of withdrawal or admission of one or more

partners) during a period of account, the profit or loss of the partnership needs to be
apportioned before allocation.

Example
Mr. D and Mr. T carry on a business in partnership, sharing profit and losses equally. On
30th June2019, the partnership admits a new partner, Mr. A. The new profit sharing ratio
is 4:4:2. The profits
of the partnership as computed for income tax purposes were €30.000 up to 30.6.2019,
after paying partners’ salaries of €6.000 each. From 1 July 2019 to 31 December the tax
adjusted profits were €60.000, after paying partners’ salaries of €6.000 each.

Show the allocation of profits for the year .

Solution
Total D T A
€ € € €
1.1.2008 to 30.6.
Profit (€30.000+€12.000=€42.000)
Salaries 12.000 6.000 6.000
Profit (balance 1:1) 30.000 15.000 15.000
42.000 21.000 21.000

1.7.2008 to 31.12. € € € €
Profit (€60.000+€18.000=€78.000)
Salaries 18.000 6.000 6.000 6.000
Profit (balance 4:4:2) 60.000 24.000 24.000 12.000
78.000 30.000 30.000 18.000
Total allocation for the year 120.000 51.000 51.000 18.000

Partnership tax returns

The partners declare their share of chargeable profit (after capital allowances) in their
own income tax returns. Partnerships are not required to submit income tax return in
respect of the partnership income,although they are required to keep books and records,
prepare financial statements in accordance with accepted accounting standards and have
them audited by independent auditors each partnership is required to submit its own
partnership return (I.R.3). From the year of income 2006 and after, the partnership
audited financial statements should be submitted by each partner with his own income
tax return ( Income Tax Circular 2006/16, 20.11.2006).

Partnership losses
Losses are allocated between partners in the same way as profits.

Limited Liability Partnership

A limited liability partnership is treated in the same way as other partnerships.

EXERCISE 1 Show the allocation of profits for each partner for the year

Mr. A and Mr. B carry on a business in partnership, sharing profit and losses 60:40. On 30th
June, the partnership admits a new partner, Mr. C. The new profit sharing ratio is 4:4:2.

The profits of the partnership as computed for income tax purposes were €40.000 up to
30.6.2008, after paying partners’ salaries of €2.000 each. From 1 July 2008 to 31 December
the tax adjusted profits were €60.000, after paying partners’ salaries of €2.000 each.
Mr C is also entitled to €3.000 interest on capital.
.

EXERCISE 2 Show the allocation of profits for each partner for the year
Mr. X and Mr. Y carry on a business in partnership, sharing profit and losses 60:40. On 30th
August the partnership admits a new partner, Mr. Z. The new profit sharing ratio is 4:4:2. The
profits of the partnership as computed for income tax purposes were €80.000 up to 30.8., after
paying partners’ salaries of €2.000 each.
From 1.09 to 31.12. the tax adjusted profits were €60.000, after paying partners’ salaries of
€2.000 each. Mr X uses his own assets in the partnership with CAs of €2.000 .
.

EXERCISE 3
Anna, Linda commenced in partnership on 1 January 2016.
Fara joined as a partner on 1 July 2017, and Linda resigned as a partner on 31 December
2017.
Profits & losses have always been shared equally.

The partnership’s trading profits and losses are:

€
Year ended 31 December 2016 Profit 100.000
Year ended 31 December 2017 Profit 190.000
Year ended 31 December 2018 Loss (80.000)

The above profits are before deducting partnership capital allowances of €10,000 per annum.
All of the partners were in employment prior to becoming partners, and each of them has
investment income. None of the partners has any Capital Gains.
(a) Briefly explain the basis on which partners are assessed in respect of trading
profits when they join a partnership.

(b) Calculate the trading profits assessable on PARTNERS for 2016 and 2017.

c) Explain loss relief available in respect of their share of the trading loss for 2018. Your
answer should include calculation of the amount of loss relief available to each partner.

EXERCISE 4
Show the allocation of the profits for the year.
In 2019 Mr FF, XX and YY carry on partnership sharing profits equally. In 2019 profits were
€90,000.
On 1st March 2020 YY resigned and on 1st September 2020 ZZ was admitted sharing profit of
€90,000 equally..
In 2021 ZZ resigned on 1st April 2021 and they made losses of (€120,000)

VAT - VALUE ADDED TAX- INDIRECT TAXATION

VAT is charged on supply of goods and services in Cyprus on acquisitions

from other EU countries and imports from non EU countries.

Principle VAT it should be charged on consumption of goods and services by

the final consumer tax collected at all intermediary stages of business.
Businesses are taxable persons registered for VAT , who charge VAT to their
customers and pay it to the VAT office. VAT received by businesses is
reduced by VAT paid, the difference paid over to the VAT office.

Businesses pay VAT collected – VAT paid therefore their profits for IT and CT
are based on sales and purchases net of VAT.

2. Taxable persons

A taxable person is a person who carries on a business, and

is either registered or is required to be registered.
A taxable person may be an incorporated business (a company), or an
unincorporated business (a sole trader or a partnership).

Examples of taxable persons:

- self-employed persons
- companies
- informal bodies of persons, such as joint ventures, deemed partnerships,
associations
- partnerships (general or limited).
- clubs, charities, institutions, societies, trade unions.

EX: Cloth Manufacturing

VAT PAID VAT RECEIVED

COST INPUT TAX NET SALE OUTPUT PAYABLE

19% TAX 19% VAT

Cloth Manuf. 0 0 100 19 19

Dress 100 19 150 28.50 9.50
Shop 150 28.50 300 57 28.50
 VAT PAYABLE 57.00

A cloth manufacturer sells cloth to a dress maker for €100 plus VAT . The dress
maker makes dresses which are sold to shops for €150 each plus VAT. The shop
sells the dress to customers at €300 each plus VAT.

Businesses pay VAT collected – VAT paid therefore their profits for IT and CT
are based on sales and purchases net of VAT.

A person who is not a taxable person or not registered cannot charge

output tax on his supplies of goods and services, neither can he recover
input tax paid on purchases of goods or services received.

A taxable person has only one registration in respect of all his businesses.

CYPRUS VAT - Value Added Tax Registration Limits

Registration limit €15,600 turnover for last 12 months

Deregistration limit €13,669 turnover last 12 months

Standard rate 19%
Reduced rates 5%, 9%

Taxable supplies

Low Rate Supplies – 5% (certain foods – bottled water, juices, cinema, sports events)
-9%(restaurants/hotels/catering, inland transport)

Standard Rate Supplies 19% (nearly everything)

Exempt supplies - financial, medical, postal services, education, lottery

Outside Scope VAT – wages, taxes, fines, loan repayments

Zero Rated Supplies (0%) -exports, international transport goods/ services

-certain food, certain medicines
!!!Zero-rated supplies taxable at 0%.

A taxable supplier whose outputs zero-rated but whose inputs are standard-rated will
obtain repayments of the VAT paid on purchases.

Example: standard-rated, zero-rated and exempt supplies

Three traders, the first with standard-rated outputs, the second with zero-rated outputs and the
third with exempt outputs. All their inputs are standard-rated.
Standard-rated Zero-rated Exempt
€ € €
Inputs(purch+exps) 30.000 30.000 30.000
VAT(19%) paid 5,700 5,700 5,700
35.700 35.700 35.700

Outputs (sales) 40.000 40.000 40.000

VAT (19%) received7,600 0 0
47.600 40.000 40.000
Pay/(reclaim) 1.900 (5,700) 0

Net profit 10.000 10.000 4.300

Standard rate Zero rated
supplies
VAT recd – VAT paid VAT paid is cannot
(7,600-5,700=1,900) claimed for claim
repayment 5,700 VAT paid ….

VAT PROBLEMS
VAT PROBLEM TO DETERMINE REGISTRATION DATE
Yiannis commenced trading as a wholesaler on 1 January . His recorded monthly sales/turnover for the
year have been as follows: € Cumulative

January 800 800

February 800 1,600
March 1.800 3,400
April 2.500 5,900
May 1.400 7,300
June (Note 1) 3.500 -1,700=1,800 9,100
July 2.500 – 1,700=800 9,900
August 5.000-1,700=3,300 13,200
September (Note 2) 6.000-1,700-2,500=1,800 15,000
October 3.500 -1,700=1,800 16,800 *
November 2.500 -1,700=800
December (estimated) 3.500-1,700=1,800

In the month that you pass €15,600 they give until the end of the next month to go and register the
business at the VAT office.

Notes

Note 1: From June onwards the sales proceeds include monthly rental income of €1.700.
Note 2: The sale proceeds for September also include proceeds from the sale of some machinery of
€2.500.

Required:

(a) State the circumstances in which a trader must register for VAT.
(b) State from what date Yiannis will be required to compulsorily register for VAT, and
the action he must then take.
(c) Explain the conditions which must be met for input VAT to be deductible.
(d) List the types of goods and/or services for which input VAT is not deductible.

a. A trader must register for VAT when sales/turnover (goods and services) for the last 12 months exceeds
€15,600 compulsory to register,(excl non taxable supplies and capital assets)
Also where the trader expects to exceed taxable supplies more than €15,600 in the next 30 days.
The trader can volunteer to register when believe taxable supplies will exceed €15,600 in the next 30
days.
b. Yiannis above exceeded the registration limit in October therefore has until the end of the following
month to register with the VAT office i.e 30 Nov. The VAT office will register him 1st Dec and he will
receive a VAT certificate to display in his premises.

c. Input VAT will be deductible the claimant must be a taxable person (reg for VAT) making
std//reduced/zero rated supplies when they claimed the input VAT. The claimant must be claimimg
VAT for business goods and an original invoice exists.

d. Types of goods and services VAT is not deductible – private goods, goods used other than for
business,saloon cars,goods/invoice not on name of business, if exempt supplier.

VAT PROBLEM TO CALCULATE VAT PAYABLE/REFUNDABLE

Olga is a value added tax (VAT) registered person and has the following VAT periods:
(1 September to 30 November); (1 December to 28 February); (1 March to 31 May); and (1 June to 31 August.)
Olga made the following supplies on credit to Giannis sales who is also a VAT registered person.

Date of supply SALES INVOICES VAT VAT VAT

Exclusive collect inclusive
€ € € x100/119 to calc excl)
12 April 20… 12.000 exempt ----
10 June 20.. 15.000 ---- ----
24 October 20.. 28.000 ----- ----
5 December 20.. 22.000 ---- -----
53.000

Olga made the following purchases from various Suppliers:

Date PURCH OR EXPS INVOICES VAT VAT VAT

Exclusive paid inclusive
€ € €(x100/119 to calc excl)
20 March 20.. 16000 --- ----(19/119 calc VAT)
11 October 20.. 7.000 zero-rated -----
1 November 20.. 9.000 ---- -----

You are also provided with the following information:

- On 10 October 20.. Olga collected €10.000 from Gina.DONT USE RECEIPTS
- On 10 December 20.. she collected another €49.540 from Gina in full and final settlement of
her accounts, since Gina had gone bankrupt. DONT USE RECEIPTS

Required:

(a) Calculate the VAT payable/refundable for each of the VAT periods:
- 1 March to 31 May 20..
- 1 June to 31 August 20..
- 1 September to 30 November 20..
- 1 December 2007 to 29 February 20..

(b) State the circumstance in which a trader may be deregistered from VAT.turnover <€13,669,plan to stop trading

(c) State the circumstance in which voluntary deregistration may not be approved by the VAT commissioner. Does not
believe sales will fall below €13,669 or that trading will cease.
SOLUTION

1 MARCH – 31 MAY (MARCH APRIL MAY)

VAT EXCL VAT 19% VAT INCL

SALES VAT COLLECTED 12,000 0 12,000

PURCH/EXPS VAT PAID 16,000 3,040 19,040 (X19/119) find VAT

VAT REFUND (3,040)

1 JUNE – 31 AUGUST (JUNE JULY AUGUST)

VAT EXCL VAT 19% INCL VAT

SALES VAT COLLECTED 15,000 2,850 17,850

PURCH/EXPS VAT PAID ------

VAT PAYABLE 2,850 10TH OCT (40DAYS END 3M)

1 SEPT – 30 NOV (SEPT OCT NOV)

VAT EXCL VAT 19% INCL VAT

SALES VAT COLLECTED 28,000 5,320 33,320

PURCH/EXPS VAT PAID 7,000 0 7,000
PURCH/EXPS VAT PAID 9,000 (1,710) 10,710

VAT PAYABLE 3,610 10TH JAN PAY

1 DEC – 28 FEBR (DEC JAN FEBR)

VAT EXCL VAT 19% INCL VAT

SALES VAT COLLECTED 22,000 4,180 26,180

PURCH/EXPS VAT PAID -------

VAT PAYABLE 4,180 10 APRIL PAY

EXERCISE 3

VAT REG TRADER

SALES INCL VAT€ PURCH/EXPS INCL VAT€
Jan 10,000 5,000
Feb 32,000 10,000
Mar 15,000 12,000
57,000 27,000

SALES EXCL VAT€ PURCH/EXPS EXCL VAT€

April 10,000 3,000

May 12,000 10,000
June 13,000 8,000
35,000 21,000

SOLUTION 3

1 JAN – 31 MAR (JAN FEBR MAR)

VAT EXCL VAT 19% INCL VAT

SALES VAT COLLECTED 47,900 9,100 57,000x19/119

PURCH/EXPS VAT PAID 22,689 (4,311) 27,000 X19/119

VAT PAYABLE 4,789 10TH MAY TO PAY

1 APRIL – 30 JUNE (APR, MAY JUNE)

SALES 35,000 x19% 6,650 41,650

PURCHASES 21,000 x19% 3,990 24,990

VAT PAYABLE 2,660 10TH AUG TO PAY

Capital Gains Tax

Capital gains tax applies to gains arising from the sale of immovable property situated in
Cyprus and shares in companies represented by immovable property situated in Cyprus.

Such gains are not added to other income but are taxed separately at 20%.

- The gain is made on the date of disposal & is chargeable on such date. Capital gains are
not chargeable on a yearly basis such as income tax.

Chargeable assets
- immovable property,
- shares in companies the property whereof consists also of immovable property,
situated in Cyprus.

Immovable property includes -

-land;

- buildings and other erections, structures or fixtures affixed to the land or to any
buildings or other erections or structures;

- trees, vines & any other thing whatsoever planted/ growing upon land;
- springs, wells, bores, water and water rights held together with, or independently of,
any land;

-privileges, liberties and easements and any other rights and advantages whatsoever
appertaining or reputed to appertain to any land or to any building or other erection or
structure;

-an undivided share in any property above set out.

CHARGEABLE GAINS

The gains that are subject to capital gains tax are gains of any person
(individual or company) accruing on a disposal of property, which are not
gains falling within the provisions of the Income Tax Laws. This means that if
a disposition of property is of a trading nature, the profit there from will be
subject to income tax, and therefore such gain will not be subject to CGT.

. The gain made from a chargeable disposal of property is subject to

capital gains tax at the rate of 20%.

EXPENSES NOT ALLOWED

- expenses, such as interest on loans to acquire the immovable, that have been
allowed under the Income Tax Law, including capital allowances relating to
periods after 1.1.1980, are not allowed for capital gains tax purpose

- expenses made after the disposal

e.g legal fees
accountants fees
 preparation of sale agreement

- other expenses: - accounting fees, immovable property tax, immovable

property tax charges and fees and charges and fees of Sewage Boards

CAPITAL GAINS TAX COMPUTATION

SALE PROCEEDS OF SALE (SALE CONSIDERATION) X
LESS:

- COST OF PROPERTY
- IF ACQUIRED BEFORE 01.01.80
USE 01.01.80 VALUE INDEXED
- IF ACQUIRED AFTER 01.01.80
USE COST OF ACQUISITION INDEXED (X) indexed cannot be less than
cost
Use original cost
LESS:
Capital expenses incurred only after 01.01.80 (indexed):
- enhancement exps- central heating,pool,stairs)(x)
-planning & permission fees (x)
- architect fees (x)
- water installation fees (x)
- leveling of land costs, (x) (x)

LESS: Land registry transfer fees ded only after 1980 not indexed (x) if prop purch before 1980
cannot be ded
LESS:
Expenses of sale not indexed

- Commission to licensed estate agent (X) (not co’s)

- Legal fees of sale (X)
- Professional charges – valuer’s fees (X)
- Advertising costs to find a purchaser (X)
(X)
CAPITAL GAIN X
LESS CA

PITAL LOSSES B/F (X)

NET CAPITAL GAIN X

CAPITAL GAINS TAX = CAPITAL GAIN x 20% X

Indexation Allowance Factor is:

Base cost x Retail Price Index (RPI)

( in month preceding the month of disposal/sale)

RPI in month of expenditure.

Example:

Mr A bought a piece of land in 1976 for €500

( use €10,000 is its value on 01.01.80 )

He sold it in November 2006 for €20.000.

Index:
RPI 01.01.80 67.15
RPI OCT 2006 199.45
RPI NOV 2006 199.87

Solution: Index the Cost

€10,000(1980) x 199.45 (index before month sold) =29700

67.15 (1980 since purch. before 1980)
If land was purchased in Feb 1986 for €10,000:

€10,000 x 199.45 (index before month sold)

100.12 ( purchase date 02/86)

CAPITAL LOSSES

Capital losses are computed in the same way as gains. They are set off against chargeable
gains made on the same date. If there are no gains on the same date or if the gains are not
enough to absorb the capital losses, any unrelieved loss is carried forward and is set off
against a chargeable gain or gains made at a future disposal until the loss is relieved.

No loss, may be allowed to be carried back and set off against a gain of a previous
disposal.

SALE PROCEEDS

The sales proceeds is the amount of the selling price declared by the contracting parties were
there is no sale, the sales proceeds consist of the open market value of the property. For
example, where a property is donated to a person and such donation is chargeable, not being
one falling within the exempt disposals, the sale proceeds is deemed to be the market value of
the property on the date of the disposal.
Example 1 Calculate the capital gains tax to be paid

A Limited bought building site 1978 for €15.000. Its valuation 1.1.1980 €20.000. COST
The site was sold 15.6.2014 for the sum of €100.000. The company paid loan interest in
respect of this building plot in the sum of €5.000,(already claimed not allowed)
advertising expenses to find a purchaser €500, valuation fee of €300 and commission to
an estate agent of 3% on the sale price. The property tax €300 and (not allowed)
RPI 1.1.1980 – 67.15 31.5.2014 - 226.70

Solution

C Limited- Disposal of building site-15.6.2014

Calculation of capital gains tax € €

Sale price (sale consideration) 15.06.14 100.000

Less Deductions:
General valuation 1.1.1980 5/14 1980
Indexing Cost [20.000 x 226.70/ 67.15] (67,520)

Less Expenses for the sale : not indexed

Advertising expenses to find a purchaser (500)

Valuation fee (300)
Commission to the estate agent- 3%x €100.000 (3.000)
Property tax ---
(3,800)
Capital gain 28.680

Capital gains tax ( 20% x €28,680) €5,736

Example 2

A. Papas Ltd bought its office on 18 April 2000 at €70.000 COSTstarted using it
business purposes in January 2001. The office building was sold on 15 September 2014
for €170.000 SALE PRICE. (Valuation of 1.1.1980 has been fixed at €35.000) and the
value of land included in the figure of €70.000 is €10.000. Other information:
a) A. Papas Ltd spent €5.000 in extensions and renovations CAPITAL EXP of the office
during December 2006.
b) The land transfer fees paid on 18 April 2000 amounted to €5.000.

c) commission to a licensed estate agent €8.500

d) The RPI April 2000=167.40 month purch December 2006= 199.75 renovations August
2014=224.86 month before sale September 2008=214.37

Solution:

A. Papas Ltd - Disposal of office building -15.09.2014

€ €
Sale price/consideration 15.9.14 170.000

Less Deductions:
Cost of acquisition 04/2000 as adjusted for inflation
€70.000 x 224.86/ 167.40 (94,027) indexed
Cost of extension 12/2006 and renovation adj. for inflation
€5.000 x 224.86/199.75 (5.628) indexed
Land transfer fees paid 04.2000 without inflation/index (5.000)
Expenses of sale including commission est agent (8.500)
Total deductions (113.155)
Capital gain 56,845

Capital gains tax at 20% (€56,845 x 20%) 11,369

CAPITAL GAINS TAX QUESTIONS

Exercise 1 Prepare Capital Gains Tax Computation. Calculate Capital Gains Tax.
Door Ltd bought building in 1979 for €15.000. Its valuation 1.1.1980
€25.000.cost
The site was sold 31.5.2008 for the sum of €110.000 selling price. The
company paid loan interest already claimed in respect of this building plot in
the sum of €3,000 advertising expenses for purchaser €400, and commission
to an estate agent of 1% on the sale price.

Exercise 2

Handle Ltd bought house 1979 for €15.000. Its valuation 1.1.1980 €20.000 cost
The site was sold 31.5.2008 for the sum of €150.000. The company paid loan
interest in respect of this building plot €5.000already claimed, advertising
expenses for purchaser €1,000, valuation fee of €420 and commission to a
licensed estate agent of 2% on the sale price. Property tax €220.

Exercise 3
Faros Ltd bought building site 1976 for €22.000. Its valuation 1.1.1980
€55.000.COST
The building was sold 15.6.2008 for the sum of €122.000. The company paid
loan interest in respect of this building plot in the sum of €5.000already
claimed, leveling of land expenses €500, paid when site was purchased -1976
(not claimed before 1980), planning permission fee paid on purchase-1976
(not claimed before 1980), of €100. Commission to an estate agent 2% on the
sale price. Property tax €300

Exercise 4 Prepare Capital Gains Tax Computation. Calculate Capital Gains Tax
Michael Ltd bought its office on 18 April 2000 (167.40)at €82.000 cost. Building was sold on 22 September
2008 for €182.000. Valuation 1.1.1980 fixed at €35.000 value of land included in figure of €82.000 is €10.000.
a) spent €4.500 in extending of the office during December 2006. 199.75
b) The land transfer fees paid on 18 April 2000 amounted to €4.000.
c) commission to a licensed estate agent €5.500 & for the sale- legal fees €3,000

Exercise 5

Solonas Ltd bought its office on 18 April 2000 at €102.000 cost started using it business purposes in
January 2001. The office building was sold on October 2008 for €182.000. Valuation of 1.1.1980 has
been fixed at €32.000 and the value of land included in the figure of €102,000 is €11.000.

a) spent €4.500 in extending of the office during December 2006.

b) The land transfer fees paid on 18 April 2000 amounted to €4.000.

c) commission to a licensed estate agent €5.500 on date of sale.

SOCIAL INSURANCE AND PAYE SYSTEM

Introduction
The pensions schemes available to the self employed and the employees and their social
insurance contributions. It also deals with the social insurance and other contributions by
employers.

The main pension schemes available to employees are Occupational Pension Schemes
and Provident Funds operated by employers and the Social Insurance pensions paid to all
insured individuals, both employees and self-employed.
It should be noted that the term «employer» includes both self-employed and companies.

The scope of the social insurance contributions

Payments into a pension scheme provide an individual a pension at old age and at the same
time represent a tax efficient method for long-term investment, as the contributions to
approved pension funds are tax allowable.
On retirement, a pensioner may take a lump sum which is tax free ,though the pension itself
payable after retirement is taxable.

The Social Insurance Scheme (SIS) covers compulsorily all persons gainfully occupied in
Cyprus, either as employed or self-employed persons.

Contributions

SIS is financed by contributions paid by the employers, the insured persons and the State.
The insurable earnings of self-employed persons are fixed by regulations according to
occupational category.

For each category of self employed persons a compulsory minimum insurable income is
prescribed, but the individual self employed person has the right to opt for a higher income up
to the maximum insurable earnings.

If a self employed person proves that his actual income is lower than the minimum insurable
income of his occupational category, he is allowed to pay contributions on his actual income.

‘ Insurable earnings’ are earnings on which contributions and benefits are calculated and
include any remuneration derived from employment, excluding ex-gratia payments and
occasional bonus, but including the contributions payable Central Holiday Fund.

Law defines a maximum amount of insurable earnings for the purpose of contributions, which
is revised every year.
(Where earnings are higher than the maximum amount of insurable earnings, no contribution
is paid on that higher amount.)

Liability for the payment of Contributions

- Employed persons
Liability for the payment of contributions in respect of any employed person arises when he
receives remuneration from his employer of not less than €1,71 in the contribution week, or
not less than €6,83 in the calendar month if he is a salaried employee.

For unpaid apprentices and working prisoners there is liability for the payment of contributions
irrespective of the above rule.

- Self-employed persons

A self-employed person is liable to pay contributions for each contribution week in which he
has worked as a self-employed person.

- Persons with mixed employment

A person who works concurrently or successively as an employed person and as a self-
employed person in the same contribution week is liable to pay contributions for both
employments.

At the end of each contribution year any contributions paid by the insured person for his self-
employment in excess of the ceiling of insurable earnings is refunded to him.

- Employed persons who work for more than one employer

If an employed person works for more than one employer in the same contribution period
(week or month), every such employer is liable to pay contributions on the employed person's
wages/salary up to the ceiling of insurable earnings. At the end of each contribution year the
employee's personal contribution on wages/salary above the ceiling is refunded to him. No
refund of employer's contribution is allowed.

Payment of Contributions

Employers pay their contributions (including the employee’s share) monthly in arrear, within
one month from the end of each contribution month. For example the contributions for March
need to be paid by the end of April.

Self-employed persons pay their contributions quarterly in arrear within one month and ten
days from the end of each quarter. Persons wishing to pay monthly are allowed to do so. The
following table shows the dates by which payment should be made.

Quarter(3 months) Date that payment needs to be made

January to March 10th May

April to June 10th August
July to September 10th November
October to December 10th February

Cessation of liability to pay contributions

Liability for the payment of contributions ceases on the day the insured person attains
the pensionable age (65 years).
An insured person, however, who completes the pensionable age and does not satisfy the
contribution conditions for old age pension, must continue to pay contributions until
satisfaction of the contribution conditions. In no case contributions can be paid after the age of
68.

Social insurance contributions payable

In the case of employed persons, the contribution is 21.5% of their ‘insurable earnings’ and is
shared amongst the employer, the employee, the State in the proportion of 8.3%, 8.3% and
4.9%.

The maximum insurable are as stated below. In case payments of emoluments, such as
13th/14th salary or emoluments for the 53rd /54th week, exceed the total of the annual
amounts (calculated on the basis of the weekly or monthly insurable emoluments) the social
insurance and other contributions are restricted on the ceilings specified.

Social insurance contributions payable

The maximum insurable are as stated below. In case payments of emoluments, such as
13th/14th salary or emoluments for the 53rd /54th week, exceed the total of the annual
amounts (calculated on the basis of the weekly or monthly insurable emoluments) the social
insurance and other contributions are restricted on the ceilings specified.

2020
€
1. Weekly paid employees- per week 1,051
2. Weekly paid employees- for a year 54,652
3. Monthly paid employees- per month 4,554
4. Monthly paid employees- for a year 54,652

Contributions by employers

Each employer pays contributions, as a percentage on each employee’s prescribed insurable

emoluments, to the following funds at the rates stated:
1. Social Insurance Fund 8.3%
2. *Central Holiday Fund 8%
3. Redundancy Fund 1,2%
4. Human Resources Development Fund 0,5%
5. Social Cohesion Fund 2%
6. GESY 2.9%
*Central Holiday Fund depends on the number of days of annual vacation to which the
employee is entitled (the higher the number of vacation days the higher the contributions). The
in. number of vacation days is 20 days for an employee working 5 days a week and the
contribution is 8%.

Where an employer operates an annual vacation leave system which is better than the one
provided under the Central Holiday Fund, he may obtain permission from the Social Insurance
Office not to pay contributions to the Central Holiday Fund.

Example 1 :An employer employs an individual with €500/month entitled to the minimum
number of vacation leave 20 days (five day a week). Calculate the contributions payable.

Solution : Calculation of contributions payable by the employer in respect of an employee

earning €500 a month and who is entitled to the minimum number of vacation leave of 20 days
(five day a week).
€
a. Actual emoluments 500
b. Annual Leave Contribution 8% 40
540
Contributions €
1. Social Insurance Fund 8.3% x 540 44.82
2. Central Holiday Fund 8% x 500 40,00
3. Redundancy Fund 1,2% x 540 6,48
4. Human Resources Dev. Fund 0,5% x 540 2,70
5. Social Cohesion Fund 2% x 540 10,80
6. GESY 2.90% x 540 15.66

In case an employer has obtained exemption from contributing to the CHF, in addition to the non -
payment of the contributions to this fund, the emoluments on which the calculation of the
contributions to the other funds are not increased by the CHF contribution which would otherwise
be payable.

Example 2
The data as in example 1 but no Central Holiday Fund contributions are payable. Calculate the
contributions
payable.

Solution 2
Calculation of contributions payable by the employer in respect of an employee earning €500
a month and who is entitled to the minimum number of vacation leave of 20 days (five day a
week),without paying any central holiday fund contributions.

€
.Actual emoluments 500
Annual Leave Contribution 8% ---
500

Contributions €

1. Social Insurance Fund 8.3% x 500 41.50

2. Central Holiday Fund -
3. Redundancy Fund 1,2% x 500 6,00
4. Human Resources Development Fund 0,5% x 500 2,50
5. Social Cohesion Fund 2% x 500 10,00
6. GESY 2.9% x 500 14.50
74.50

Self employed persons, the contribution is 20.5% of the insurable income of the person
concerned. Of the 20.5%, 15,6% is paid by the self-employed himself and 4.9% by the State.

The contributions of the self-employed persons

The weekly insurable incomes are prescribed for each occupational category for the self
employed for example shopkeepers pay on different incomes to drivers.

GESY
Contributions relating to the implementation of the General Health System (GHS)
commenced on 1 March 2019, and will increase as from 1 March 2020 as per the table
below:
 Up to 1st March 2019 Up to 1st March 2020

(i) Employees Own emoluments 1.70% 2.65%

(ii) Employers Employees’ emoluments 1.85% 2.90%
(iii) Self-employed Own income 2.55% 4.00%
(iv) Pensioners Pension 1.70% 2.65%
(v) Persons holding office* Officers’ remuneration 1.70% 2.65%
(vi) Republic of Cyprus or natural/ legal person responsible for the remuneration of
persons holding an office
Officers’ remuneration 1.85% 2.90%
(vii) Persons earning rental, interest, dividend, and other income Rental, interest,
dividend income, etc. 1.70% 2.65%
(viii) Republic’s Consolidated Fund
Emoluments/pensions of persons (i), (iii), (iv), and (v)
1.65% 4.70%
* Relates to holders of public or local authority office or other office, the income out of
which does not come within the scope of (i) or (iii) or (iv) or (vii).

GHS contributions are capped at €180,000 annual income.

Provident Funds

Introduction
The provident funds are established and operated by employers on behalf of employees. It is
not compulsory by law on any employer to provide a provident fund scheme to employees.
However, their establishment and operation is governed by the Provident Fund Law of 1981,
law 44/81 as amended
and the regulations enacted under such law.

Rules
The provident fund scheme is operated according to its rules which provide mainly for the
following:

Name of the Fund, e.g. «Provident Fund of the Employees of XYZ Limited».

Place of establishment: Nicosia, Limassol etc.

Objects, such as the provision of benefits to employees on retirement or other benefits to

members and their families.

Members: who can be a member and when a member ceases to be a member.

Monetary Sources of the Fund: contributions by employee members and by employer and
investments of the fund.

Administrative Committee: Number of members, meetings, elections, chairman, secretary,

Treasurer, term of office, etc.
Keeping of books and records.

Investments of funds.
Withdrawals of money from the fund etc.

Income tax relief

An individual taxpayer may claim income tax relief in respect of his contributions to the social
insurance fund or to any pension or other approved fund. As from 1.1.2003 the fund should
comply with Regulations made under the Income Tax Law. So, any contributions made to
such funds, get tax relief, subject to conditions
Benefits paid out of the Social Insurance Fund are exempt from income tax, except old age
and disability pensions. Employers are entitled to tax deductions in respect of contributions to
the various funds

Note: if the Social Insurance Contributions on salaries is not paid within 2 years to the Social
Insurance Office the salaries and the corresponding social insurance are not tax deductible
PAYE SYSTEM (PAY AS YOU EARN )

PAYE is a system of withholding of tax on incomes from employment, offices and pensions.
All payments to employees, or office holders or pensioners are subject to deduction of tax
under the PAYE regulations.

Each employer is required to apply the PAYE regulations and make PAYE deductions of tax
by reference to the Claim of Allowances form completed by each employee at the beginning of
each year or on commencement of employment, in case of new employees.
The estimated tax for the year is divided by 12 (for monthly paid employees) or by 52 (for
weekly paid employees) and the monthly or weekly PAYE is withheld from each employee’s
emoluments.

1. Procedure to claim allowances

Each employee completes and hands over to the employer at the beginning of the year, or on
commencement of employment if later, Form TD 59. The employee declares his salary
including benefits in kind and his personal allowances (interest for residence, subscriptions,
life insurance premiums, contrib.to the SIF and to pension or provident funds). An employee
may (at the employee’s option) also declare other income such as rents receivable, so as to
allow the employer to deduct tax under the PAYE system.: life insurance premiums,
contributions to the social insurance fund and to pension or provident funds.

Calculation of PAYE

The employer completes the form by calculating the PAYE deduction (monthly or weekly), if
any.

Certificate of emoluments (TD.63)

After the end of the year the employer issues certificates of emoluments on I.R. 63 and hands
the original to the employee, who, in turn, will use to complete the employment page of his
income tax return and attach to it with his income tax return. Similar certificates are issued on
cessation of the employment.

Employer’s Return of Employees (TD.7/7Analysis)

The employer will complete and submit to the Director a return of employees with full details of
employees particulars including the names, addresses, Tax Identification Number, amount of
emoluments and benefits in kind or allowances and deductions made in respect of PAYE,
social insurance, provident or pension fund contributions and monthly payments of PAYE as
well as details of PAYE lodgments during the year
EXERCISES

1. Calculate the monthly Social Insurance Contributions payable by employees, and also
by employer on the following income amounts (no annual leave):
€ 500 weekly
€ 1,000 monthly
€ 5,000 monthly

2. Calculate the Social Insurance Contributions payable quarterly by the self employed on
the following weekly income amounts :
 € 374.92
€ 383.64
3. Calculate the monthly Social Insurance Contributions payable by an employer for Mr A
on the following income amounts :

€ 1,000
€ 3,000
With the minimum number of vacation days (Central Holiday Fund)

PAGE 83 CYPRUS CORPORATION TAX TAXATION OF COMPANIES

INCOME TAX OF COMPANIES – CT 12.5%

The tax laws under which corporation tax is imposed and collected on companies is the
Income Tax Law of 2002, Law 118(I)/2002, as amended, and the Assessment and
Collection of Taxes Law of1978, Law 4/78 as amended (the same laws also apply for
individuals).
Companies pay corporation tax, whilst individuals pay income tax, at rates of tax
provided specifically for each category (individuals & companies).
A company is usually a company incorporated under the Companies Law. However
for tax purposes the term includes other specified bodies, including an association of
persons such as a provident fund
and any comparable company incorporated or registered outside the Republic and a
company recognized as such in the other European Union member states. It does not
include a partnership. However,
a partnership falls within the term person for the purposes of the legal requirements for
keeping books and records by businesses.

Year of assessment is the period of twelve months starting 1st January and
ending 31 December (Same as the fiscal year). Each company is assessed every year in
respect of its income arising or accruing during the year of assessment.

Accounting period (or financial year) of a company is the period in respect of which its
financial statements are prepared. Normally the accounting period (or financial year) of a
company is the same
as the year of assessment. The accounting period of a company should start when the
company starts trading or when it starts having income liable to corporation tax and close
on the last day of the year
of assessment.
However, the Commissioner of Income Tax may permit that the accounting period (or
financial year) of a business closes on a date different from the last day of the year of
assessment.

When this is permitted, the chargeable income based on the income of the accounting
period (or financial year) should be apportioned in the year of assessment concerned.
The first or final accounting period (or financial year) of a company. may be shorter or
longer than12 months. According to the Company Law, a newly incorporated company’s 1st
accounts must be for period of not less than six months, nor more than 18 months after the
date of incorporation.
Thereafter they must be prepared for each calendar year. If for example a company starts
trading operations on 1 April, its first financial year may be for a period of 9 months from 1
April to 31 December.

On the other hand if a company starts operations on 1 October, its first financial year
may be either three months or fifteen months. The chargeable income of this company
for the 1st year of ops will be the income as shown by its accounts & computations for
the same year.
In case the company makes accounts to 31 March, its first accounts will be for the year
ending 31 March of the following year and its chargeable income to be declared in
respect of the first year of assessment will be 9/12ths of the 12 months ending 31 March.

Example
Drone Ltd’s financial year ends 31 March and its chargeable income for the years ended
31 March 2018 & 2019 have been as follows:
€
Year ended 31 March 2018 30.000
Year ended 31 March 2019 40.000

Required: Compute the chargeable income in respect of the year of assessment 2018.

Solution: €

Year ended 31 March 2018: 3/12 x €30.000 7.500

Year ended 31 March 2019: 9/12 x €40.000 30.000
Chargeable income for the year of assessment 2018 37.500

COMPANY RESIDENCE

Tax liability of a company is based either on residence (world wide income) or in the
case of a non resident company on income from permanent establishment in Cyprus (see
below). In the case of a shipping or aircraft company taxability arises in respect of
business profit even though such company has no permanent establishment. The term
«resident in the Republic» when applied to a company, means a company whose
management and control is exercised in the Republic. A resident company may be one
that is incorporated. in Cyprus, whose management and control is exercised in Cyprus or
a company incorporated outside Cyprus (called an overseas company) and whose
management and control is also exercised in Cyprus. In practice it may (in simple
terms) be taken to mean that management and control is where the majority of the
directors reside, where the board meetings of the company are held & where general
policy of the company is formulated. The co-existence of all three criteria is essential. It
is therefore necessary to ensure that a company satisfies the residence test to be able to
be taxed under the Cyprus tax law and at the same time enjoy the treaty benefits. If a
company does not satisfy the management and control test, there is no residence and
therefore no taxation in respect of such co can be imposed.

Example 1
Effer Co is incorporated in Cyprus. Its board of directors regularly meet in Cyprus,
where they are located, and take decisions in connection with the management and
control of the business of the company.
Is Effer Co Cyprus tax resident?

Solution 1
Effer Co is incorporated in Cyprus. It is deemed to be resident in Cyprus, unless it is
shown that its management and control are exercised outside Cyprus. As it appears that
board meetings are held in Cyprus, Effer Co is resident here and therefore is liable to
corporation tax in respect of its income arising both in Cyprus and overseas.

Example 2
Eden Co is incorporated outside Cyprus. Its board of directors regularly meet in Cyprus,
where they are located, and take decisions in connection with the management and
control of the business of the company. Is Eden Co Cyprus tax resident?

Solution 2
Eden Co is incorporated overseas. It appears that its management and control are
exercised in Cyprus.
Eden Co is therefore resident here and is liable to corporation tax in respect of its income
arising both in Cyprus and overseas.

Example 3
Klaw Co is incorporated outside Cyprus but opens an office in Cyprus. The majority of
its directors hold their meetings overseas. Occasionally meetings are held in Cyprus
where the non-executive directors reside. How is Klaw Co taxed in respect of its income?

Solution 3
Klaw Co is a non-resident company but its office in Cyprus constitutes a permanent
establishment and therefore any income arising from it is liable to Cyprus corporation
tax.

Dividends
Dividends received form part of the chargeable income but they are specifically fully
exempted from corporation tax. As from the year 2003, dividends are exempted from
income tax in respect of all persons, individuals and companies. Dividends are therefore
subject to special defence contribution in all cases

Interest
Interest income is not subject to tax . However, interest accruing to any company from
the ordinary carrying on of any business, including any interest closely connected with
the ordinary carrying on of any business, is deemed not to be interest for the purposes of
corporation tax, but profit from business (trading interest).

Examples of interest income deemed not to be interest (but profit from a business): SCD
- Interest derived by banks
- Interest derived by financial institutions
- Interest derived by hire purchase companies
- Interest derived by companies within a group of companies whose business is to obtain loans
and distribute such loans to other group co.

Examples of interest income closely connected with the ordinary carrying on of a

business, deemed not to be interest (but profit from business): Interest derived by -
- companies whose ordinary business is the dev. and sale of land & buildings,
- motor car dealers
- insurance companies
- trading businesses charging int. on overdue accounts (trade debtors a/cs)
- bank interest arising from bank current account as opposed to deposit a/c.

Rents, Royalties and other income from property

Property means immovable property and movable property. It also includes intellectual
property (patents, royalties)

Trading goodwill
Sums received in respect of trading goodwill are subject to corporation tax. Any sum
received in respect of trading goodwill is reduced by any amount expended in acquiring
trading goodwill.

Example: layout of profits chargeable to corporation tax.

A Co’s profits chargeable to CT are arrived at by aggregating its various sources of

income. Here is an example of a layout.
€ €
Trade Profits (as tax adjusted- as adj for sole traders) X working
Rents Received (net of actual expenses) X
Royalties, patents or licences income X
Interest Income on trading accounts X (trading income/interest)
Trading goodwill (net of trading goodwill paid) X
Ship management X
Permanent establishment overseas(subj to conditions) X
Any other income X

Total profits X

Less losses b/fwd

Group loss relief (X)
Permanent establishment overseas profit (X) (X)
Taxable income PCTCT X

CT liability (Taxable Income x 12 1/2%) X

Less: CT paid under temporary assessment (X)
Balance X
Add: 10% penalty on unpaid balance (*) X
CT payable X

Dividend Income not included as they are exempt.

Interest Income on investment accounts exempt (deposit accounts, debenture
interest)

EXERCISES

Y Ltd is a Cyprus resident company, which has been trading for many years. Its nominal share capital
consists of 10.000.000 shares of 10 cent each, 10% of which are held by non residents.The Company
had always made up accounts to 31 December. The company’s results for the year ended 31 December
2018 are as follows:
€
Trading profit per before tax and after losses brought forward and AFTER being debited or credited
accounts by the following: 1.326.300

Payment to a local anti-cancer association which is an approved charity 5.000

Cyprus Bank deposit interest received included (net) 9.000
Dividends from Subsidiary not resident company 25.500

Notes

1. On 1st January 2018 the following non current assets held by the company:
Cost Acc Wear & Tear- Depn
€ €
Machinery 2013(10%) 50.000 25.000
Factory building sold 2018(excl land cost €30,000) (4%) 400.000 160.000
Motor Van 1 sold (20%) 10.000 4.000
Motor Van 2014 (20%) 12.000 9.600
Computer Hardware 2013(20%) 10.000 10.000 full CAs

(make sure land is not included in cost buildings before CAs calculations)
No CAs for the assets sold.
Check for new assets N5

2. The Company’s factory was bought on 30.12.2007 for immediate use. On 30.12.2018 the building
was sold for €360.000,(incl in sale price land 60,000.)
3. On 1.1.2014 the company had tax losses brought forward of €200.000.

4. The dividend was received on 31.7.2018.

5. The motor van 1 was sold on 30.12.2018 for €7.000. A new motor van was bought for €14.000 on
1.1.18.

6. Temporary/provisional tax paid during 2018 €80.000

7. Assume Capital Allowances rates and depreciation rates are the same.

Required: Calculate the corporation tax liability for the year 2018.
X Ltd is a Cyprus resident company, which has been trading for many years. Its nominal share capital
consists of 10.000.000 shares of 10 cent each, 10% of which are held by non residents.The Company
had always made up accounts to 31 December. The company’s results for the year ended 31 December
2018 are as follows:
€
Trading profit per accounts before tax and before losses brought forward and
BEFORE being debited or credited by the following: 1.500,000

Payment to a local anti-cancer association which is an approved charity 10.000

Cyprus Bank deposit interest received included (net) SCD 11.000
Dividends from Subsidiary not resident company SCD 30,000

Notes

1. On 1st January 2018 the following non current assets held by the company:
Cost Acc.Wear & Tear (Depn)
€ €
Machinery 10%(10 years) 50.000 25.000 (5 years x 5,000)
Building-factory sold 4%(excl land cost €40,000) 400.000 160.000(10 years x 16,000)
Motor Van 1 20%(5 years) 10.000 4.000 ( 2 years x 2000)
Motor Van 2 sold 20%(5 years) 12.000 7,200 (3yrs x 2400)
Computers Hardware 20% (5 years) 10.000 6.000 (3 years x 2000)

2. The Company’s factory building was bought on 31.12.2007 for immediate use. On 30.12.2018 the
building was sold for €377.000, (incl. in sale price land 77,000).

3. On 1.1.2018 the company had tax losses brought forward of €120.000.

\\\\\\\\\\\\\op
4. The dividend was received on 31.7.2018.

5. The motor van 2 was sold on 30.12.2018 for €7.220. A new motor van was bought for €24.000 on
1.1.2018.

6. Temporary/Provisional tax paid during 2018 €22.000

7. Assume Capital Allowances rates and depreciation rates are the same

Required:

Calculate the corporation tax liability for the year ended 31.12.2018.

ACC211 TAXATION REVISION

REVISION QUESTION 1 PARTNERSHIP

2018 AGREEMENT

Mr P and Mr Q started trading as a partnership on 1st January 2018.

They agreed that P would get a salary of $25,000 per annum P SALARY

and they would introduce the following capital amounts into the partnership

P $200,000
Q……………$90,000

The agreed interest on capital was 10% .

(P 10% x 200,000)= 20,000 Q (10%x 90,000)=9,000

Their PSR WAS AGREED AT 70:30

The tax adjusted profit for 2018 was $150,000, before capital allowances of $20,000.

(150,000 -20,000)=130,000

2019 AGREEMENT

On 31 May 2019 they admitted S into the partnership. They agreed $5,000 annual (12M) salaries each
and a PSR OF 2:3:1.. Agreed interest on capital as before. (P= 20,000 Q= 9,000)

On 31 July 2019 P left the partnership and Q and S agreed to share profits equally. 1:1:1They agreed
their salaries at $5,000 per annum each and interest on capital as before.

The tax adjusted profit for 2019 was $130,000 after capital allowances.

2019
1 JAN – 31 MAY 5/12M PQ 70:30 existing agr 5m

1 JUNE – 31 JULY 2M P Q S 2:3:1

1 AUG – 31 DEC 5M Q S 1:1

SOLUTION REVISION QUESTION 1 2018

TOTAL P Q S

PROFIT 2018 (12m)

(150,000 -CA20,000 =130,000)

Interest on Capital 10% -12m 29.000 20,000 9,000

Salary 12m 25,000 25,000 …….

P:S:R 70:30 76,000 53,200 22,800

TOTAL 2018 130,000 98,200 31,800

2019 TOTAL P Q S

PROFIT 2019 €130,000

1.1.2019 -31.5.2019 (5m)

(5/12 x 130,000 =54,167)

Interest on Capital (5/12) 12,083 8,333 3,750

Salary (25,000x 5/12) 10,417 10,417

PSR 70:30 31,667 22,167 9,500

TOTAL 54,167 40,917 13,250

1.6.19 -31.7.19 (2M)

(130,000 X 2/12 =21,667)

Salaries (5,000 x 2/12) 2,499 833 833 833

Interest Capital (2/12) 4,833 3,333 1,500

PSR 2;3:1 14,335 4,778 7,168 2,389

TOTAL 21,667 8,944 9,501 3,222

1.8.19 -31.12.19
(Profit 130,000 x 5/12= 54,166)

Salaries (5,000 x 5/12) 4,166 left 2,083 2,083

Interest on Capital (5/12m) 3,750 left 3,750

PSR 1:1 46,250 left 23,125 23,125

Total 54,166 left 28,958 25,208

TOTAL 2019 12m Taxable Pship Profits130,000 49,861 51,709 28,430

REVISION QUESTION 2 VAT

C Ltd has the following monthly sales and expenses figures for 2020: VAT

paid
2020 Purchases & Expenses(exclusive VAT 19%) 2020 Sales(inclusive VAT19%)collected
X 19% x19/119

January €11,800 € 15,100

February € 2,200 € 23,450
March € 10,150 € 2,890
April € 1,900 €4,000
May €3,000 € 4,300
June € 1,700 € 2,900
July € 2,960 € 3,250
August €3,640 € 5,750
September €5,900 € 5,700
October €3,450 € 4,300
November € 2,100 € 4,600
December € 2,400 € 6,900

Required: Calculate VAT payable or refundable based on the following three monthly VAT periods:

1 Jan 2020 – 31 March 2020, 1 April 2020 - 30 June 2020,

1 July 2020 – 30 September 2020, 1 October 2020 - 31 December 2020

SOLUTION
1 JAN – 31 MARCH VAT€

VAT ON SALES (15,100 + 23,450 + 2,890) x 19/119 6,616 VATcollected

LESS VAT PURCH & EXPS (11,800 + 2,200 + 10,150) x 19% (4,589) VAT paid

VAT PAYABLE ON 10 MAY €2,027

1 APRIL – 30 JUNE

VAT ON SALES (4,000 + 4,300 + 2,900) x19/119 1,788 VAT collected

LESS VAT ON PURCH & EXPS (1,900 + 3,000 + 1,700) x19% (1,254) VAT paid

VAT PAYABLE ON 10 AUGUST 534

1 JULY – 30 SEPTEMBER

VAT ON SALES (3,250 + 5,750 + 5,700) x 19/119 2,347 VAT collected

LESS VAT PURCH & EXPS (2,960 + 3,640 + 5,900) x19% (2,375) VAT paid

VAT REFUNDABLE (CREDITED) (28)

1 OCT – 31 DEC

VAT ON SALES (4,300 + 4,600 + 6,900) x19/119 2,523 VAT collected

LESS VAT PURCH & EXPS (3,450 + 2,100 + 2,400) x19 % (1,510) VAT paid
VAT PAYABLE 10/02/21 1,013
REVISION QUESTION 3 CAPITAL GAINS TAX
Dec2019
Durmond Ltd. sold half its office space to Panna Co. on 12th January 2020 for €1,700,000. The whole
premises were purchased in January 2000 for €1,000,000/2 but was only used in January 2003.
Valuation of 1.1.1980 has been fixed at €92,000.

Other relevant information:

a) An amount of €470,000/2 was spent to renovate the office space during July 2009 they also added
full air conditioning on the building on January 2012 for €30,000/2.

b) The land transfer fees paid amounted to €15,220/2. Planning fees July 2009 for permission to
renovate €4,200/2. Architect fees July 2009 for renovation plans cost €1,200/2.

c) commission to a licensed estate agent was agreed at 5% of selling price and the legal fees for the sale
were €12,800.

d)The valuers invoice amounted to €4,830, advertising for the sale cost €2,900..

e) before and after the sale the accountants fee for the company €1,800 (not ded) to help with the sale, close
accounts and complete the company documents.

f) Immovable Property taxes for the year amounted to €2,600 not ded, sewage board fees for year €1,200not ded.

g) The company sold another property in the past and made a capital loss of €320,000.

h) Loan interest on the property amounted to €6,500 (co deducted loan int already from its profits)

CAPITAL GAINS TAX COMPUTATION

€

Sale Consideration – 12.1.2020 1,700,000

Less Indexed cost (Jan 2000) -1,000,000/2 x (12.2019/01.2000) 223.67/165.52 (675,658) dec19/jan2000

Less capital expenses

Renovation (July 2009)– 470,000/2 x (12.2019/07.2009) 223.67/209.30 (251,134)

Air Condition (Jan 2012) – 30,000/2 x (12.2019/01.2012) 223.67/224.82 (14,923)

Planning fees (July 2009) 4,200/2 x (12.2019/07.2009) x 223.67/209.30 (2,244)

Architect (July 2009) 1,200/2 x (12.2019/07.2009) x 223.67/209.30 (641)

Less transfer fees not indexed 15,220/2 (7,610)

Less expenses of sale:

Approved Estate Agent 5% x €1,700,000 (85,000)

Legal fees of sale (12,800)
Valuer fees (4,830)
Advertising for the sale (2,900)

Capital Gain from the sale 642,260

Less Capital Loss b/f (320,000)

Taxable Gain 322,260

Capital Gains tax 20% 64,452

REVISION QUESTION 4 CT

Funfair Co. is a Cyprus resident company which has been trading in Cyprus for many years.
The company results for the year 2019 were as follows:

Trading profit per the company accounts before tax and after losses is €1,000,000 and after being debited or credited with the
following:

Royalties received € 70,000 taxable

Rents Received (€1,000 actual exps not incl) € 45,000 taxable (45,000 -1000=44,000)
Gross deposit Interest investment € 33,000 SCD
Dividends received (net) € 12,000 SCD
Trading Interest Income € 15,000 trading income taxable
Expenses of saloon Car € 10,000 add them back not ded

On 1st January 2019 the company owned the following assets: Calculate
DEPN CAs
COST CAs
Building Factory 4% (not incl land) € 200,000 …….. ….. purchased 1//12015 8,000
Building Shop(incl. land €20,000) 3% € 100,000 ……. ….. Purchased 1/1/2013 SOLD
Furniture10% € 22,000 ........ ….. purchased 1/1/2014 2,200
Computer Hardware (20%) € 10,000 …….. ….. purchased 1/1/2015 2,000
Motor Vehicles (van)20% € 25,000 …….. ….. purchased 1/1/2016 5,000
Motor Vehicles (saloon) € 60,000 …….. ….. purchased 1/1/2017NOT ALLOWED

The shop was sold 31 12 2019 for € 260,000 (inclusive of land 60,000)

Capital Allowances Rates:

Factory building 4% 25 YEARS

Building -shop 3% 33 YEARS
Furniture 10% 10 YEARS
Computers 20% 5 YEARS
Vehicles -van 20% 5 YEARS

Company losses b/f €320,000

The dividend was received on 30.06.2019
Temporary tax paid € 95,000

Required:
Calculate the Corporation Tax Liability(Show calculation of Adjusted Profit) Prepare CT Computation of the company for the year
ended 31 December 2019
Assume depreciation and capital allowances are the same. Calculate CAs and depreciation for 2019.

CT COMPUTATION €
Profit as per accounts 1,000,000
Add back losses 320,000
Add Back saloon exps 10,000
Less actual exps rent (1,000)

Add back depn 19,600

Less CAs (17,200)

Less Interest on deposits (33,000)

Less dividends received (12,000)

Adjusted Profit 1,286,400

Less losses b/f (320,000)
PCTCT 966,400

CT 12.5% 120,800

Less temporary tax paid (95,000)

CT payable 25,800
There is no 10% penalty since more than 75% of tax was paid

On 1st January 2019 the company owned the following assets: Calculate
Depreciation
Acc Year Acc
COST 1.1.19 2019 31.12.19
Building factory(4%)(excl. land €20,000)€200,000(4yrs)32,0008000 40,000 Purchased 1/1/2015
Building shop (3%) €80,000 (6yrs) 14,400 2,400 16,800 sold 31.12.19 – 12m depn
Furniture (10%) € 22,000 (5yrs) 11,000 2,200 13,200 purchased 1/1/2014
Computer Hardware (20%) € 10,000 (4 yrs) 8,000 2,000 10,000 purchased 1/1/2015

Motor Vehicles (van) 20% € 25,000 (3 yrs) 15,000 5,000 20,000 purchased 1/1/2016

TOTAL DEPN 19,600

On 1st January 2019 the company owned the following assets: Calculate
Capital Allowances
Acc Year Acc
 COST 1.1.19 2019 31.12.19
Building factory(4%)(excl. land €20,000)€200,000(4yrs)32,000 8000 40,000 Purchased 1/1/2015
Building shop (3%) €80,000 (6yrs) 14,400 …… 14,400 sold 31.12.19 – no CA
Furniture (10%) € 22,000 (5yrs) 11,000 2,200 13,200 purchased 1/1/2014
Computer Hardware (20%) € 10,000 (4 yrs) 8,000 2,000 10,000 purchased 1/1/2015

Motor Vehicles (van) 20% € 25,000 (3 yrs) 15,000 5,000 20,000 purchased 1/1/2016

TOTAL CAs 17,200

REVISION QUESTION 5 CAPITAL ALLOWANCES

REVISION 5 CAPITAL ALLOWANCES 2021

On 1st January 2021 the company owned the following assets: Calculate

COST Depn CAs

Building office(excl. land €20,000) € 50,000 ……. ….. Purchased 1/1/2018
Motor Vehicles (van) € 30,000 …….. ….. purchased 1/1/2019
Computer Hardware (20%) € 5,000 …….. ….. purchased 1/1/2019
Furniture (10%) € 10,000 …….. …… purchased 1/1/2011

Purchased

New Van (20%) € 35,000 ……. ….. Purchased 1/1/2021

New Machinery (10%) € 20,000 ……. ….. Purchased 1/7/2021

Sold
Office Building €60,000 sold 30.06,21

SOLUTION REVISION Q 5

On 1st January 2021 the company owned the following assets: Calculate
Depreciation
Acc Year Acc
COST 1.1.21 2021 31.12.21
Building office(excl. land €20,000) € 50,000 (3yrs) 4,500 750(6m) 5,250 Purchased 1/1/2018 sold 30.06.21
Motor Vehicles (van) € 30,000 (2 yrs) 12,000 6,000 18,000 purchased 1/1/2019
Computer Hardware (20%) € 5,000 (2 yrs) 2,000 1,000 3,000 purchased 1/1/2019
Furniture (10%) € 10,000 (10yrs) 10,000 …… 10,000 purchased 1/1/2011

Purchased

New Van (20%) € 35,000 ….. 7,000(12m) 7,000 Purchased 1/1/2021

New Machinery (10%) € 20,000 ……. 1,000 (6m) 1,000 Purchased 1/7/2021

TOTAL DEPN 15,750

On 1st January 2021 the company owned the following assets: Calculate
Capital Allowances
Acc Year Acc
COST 1.1.21 2021 31.12.21
Building office(excl. land €20,000) € 50,000 (3yrs) 4,500 sold 4,500 Purchased 1/1/2018
Motor Vehicles (van) € 30,000 (2 yrs) 12,000 6,000 18,000 purchased 1/1/2019
Computer Hardware (20%) € 5,000 (2 yrs) 2,000 1,000 3,000 purchased 1/1/2019
Furniture (10%) € 10,000 (10yrs) 10,000 …… 10,000 purchased 1/1/2011
Purchased

New Van (20%) € 35,000 ….. 7,000(12m) 7,000 Purchased 1/1/2021

New Machinery (10%) € 20,000 ……. 2,000 (12m) Purchased 1/7/2021

Sold
Office Building €60,000 sold 30.06,21 – no CA

TOTAL CAPITAL ALLOWANCES 16,000