Answers
Professional Level – Options Module, Paper P6 (CYP)
Advanced Taxation (Cyprus)
1
December 2013 Answers
Bracken Investment Holdings Limited
MEMORANDUM
To: Toby, Tax Manager
From: A Tax Senior
Date: 10 April 2012
Re: Proposed business ventures of Bracken Investment Holdings Limited
Following our recent meeting with Daniel, CEO of Bracken Investments Holdings Limited (hereinafter ‘Bracken’), I detail below the
information relating to the matters discussed. Please let me know if you would like to discuss any of these matters further. I have
included relevant workings in the schedules contained in the Appendix to this memo.
(a)
Rate of interest on the loan from Arabella Fern to Bracken
If Arabella Fern provides the loan to Bracken, this will be considered a loan between related parties given that Arabella is a
beneficiary of the trust which owns the entire share capital of Bracken. As such, the loan should be made at arm’s length.
The Cyprus tax authorities will not accept an interest rate greater than that at which Bracken could borrow from the market.
If the rate is not at arm’s length, the Cyprus tax authorities may disallow an element of the interest if they believe the rate is
too high. Given that in Monaco there is no tax, the rate will not be of interest to the Monegasque authorities.
(b)
Lump sum gift from the trust to Arabella and Jane Fern (original proposal)
The trust beneficiaries are the persons liable for income tax purposes, and they are entitled to all the relevant tax deductions
and exemptions for that income, as if they had received the income directly. However, the tax assessments are raised in the
name of the trustees who are assessed on the income of the trust in a representative capacity, on behalf of the beneficiaries,
and are responsible for submitting the appropriate returns and for paying the amount of tax due on behalf of the beneficiaries.
The dividend distribution from Bracken to the discretionary Cyprus international trust would be free of withholding tax, as any
income of a Cyprus international trust is not taxable. Also, no taxing point arises unless or until there is a distribution of income
from the trust to a Cyprus tax-resident beneficiary.
When the income of €10 million is distributed to each of the beneficiaries in 2017, Arabella, who is tax resident in Monaco,
would receive her income gross as Cyprus applies no withholding tax on dividends paid to non-Cyprus tax-resident persons.
Given that there is no tax in Monaco, Arabella would have no further tax to pay on the distribution.
On the other hand, Jane is a Cyprus tax resident so will be subject to special defence contribution (‘SDC’) at the rate of 17%,
which will amount to €1.700.000.
Tutorial note: For the purposes of the examination, SDC of either 20% or 17% is acceptable because of the instructions to
candidates which state ‘You should assume that the tax rates and allowances for the year 2012 shown below will apply for
the foreseeable future unless you are instructed otherwise.’ In fact, the 20% SDC rate only applies until 31 December 2013;
thereafter the rate reverts to 17%.
(c)
Use of the interest on the loan to provide the birthday money
Any interest income on the loan from Arabella to Bracken will be tax free as there are no income taxes in Monaco. As such,
if Arabella charges interest at 5% on the €100 million loan, this will result in income of €5 million per year. At the end of
the investment period of four years, this will amount to a total income of €20 million. Arabella can then provide her sister
with her share of the income by way of gift, which is not taxable in Cyprus.
(d)
Methods of providing the investment in Roots Ltd (Roots)
(i)
Investment made directly
With regards to the equity, any interest payable on a loan used to invest in a subsidiary company which is not a 100%
subsidiary will be restricted in full. As such, no interest will be tax deductible if an equity investment is made in Roots
and only 90% of the share capital is acquired.
Over the period of the investment the expected profit as per the calculations given to us by Daniel is €17.160.000
(Schedule 1). If 90% of this is given as a dividend to Bracken, the relevant Antheridian withholding tax attributable to
Bracken will be €463.320.
In the hands of Bracken, this dividend income is exempt from corporation tax and will also be exempt from special
defence contribution tax (SDC), as more than 50% of the income of Roots is derived from trading activities, being the
mining of diamonds.
With regards to the debt, if Bracken provides any form of financing directly to Roots, such as the €50 million discussed,
Antheridia will charge withholding tax at 10% on the gross interest payable by Roots to Bracken. This will amount to
withholding tax of €300.000 per year (Schedule 2).
15
The Antheridian withholding tax will be partly offset by the Cyprus corporation tax on this interest income. For Cyprus
tax purposes, the loan from Bracken to Roots will constitute a back-to-back loan, and the actual profit margin proposed
of 1% (6% – 5%) will result in Cyprus corporation tax of €50.000 (Schedule 3), resulting in tax leakage of €250.000
(€300.000 – €50.000). It is worth noting that in Cyprus, the minimum acceptable profit margin on back-to-back loans
is 0,35%, whereas in the current scenario this margin is 1% (6% – 5%).
The total tax cost of Bracken investing directly in Roots is thus €1.663.320 (Schedule 4).
(ii)
Indirect investment
As per the terms of the new double tax treaty between Cyprus and Antheridia, the withholding tax on dividends from
Antheridia to Cyprus is only 3%. From a tax point of view it is more effective to remit dividends than interest to Cyprus
from Antheridia, given that the withholding tax on interest is 10% compared to 3% on dividends. Therefore, it would
be beneficial for Bracken to use the loan from Arabella and invest it in a new 100% subsidiary, NewCo, which will be
tax resident in Antheridia. This subsidiary can then invest €50 million into Roots as share capital and lend Roots the
remaining €50 million.
Where a company in Cyprus borrows in order to invest in the share capital of another company which is a 100%
subsidiary (either directly or indirectly), then any interest payable on such a loan is tax deductible in full only if the
subsidiary uses all its assets in the business. Therefore, the interest charged by Arabella will be only partly tax deductible
for Bracken even though the loan is used to invest in a 100% subsidiary company (NewCo) because €50 million of
the investment by NewCo in Roots is in equity. As such, only the interest relating to the remaining €50 million (the loan
from NewCo to Roots) will be tax deductible, resulting in a tax benefit of €1.000.000 over the period of the investment
(Schedule 5).
The loan from NewCo to Roots is to be provided at an interest rate of 6%. This will result in tax payable in Antheridia
by NewCo of €600.000 (Schedule 6), and after-tax profits of €11.400.000. As NewCo is financed 100% by equity,
the Antheridian back-to-back loan provisions will not apply.
There is no tax on dividends paid between Antheridian tax resident companies, so the dividends received by NewCo
from Roots of €15.444.000 (Schedule 1) will be received gross. The total dividends which NewCo can distribute to
Bracken will thus be €26.844.000 (€15.444.000 plus its after tax profits of €11,400.000 (Schedule 6)). Antheridian
withholding tax on this distribution will be at 3%, resulting in tax of €805.320.
Thus the overall tax on investing indirectly through NewCo will be €405.320 (Schedule 7).
Conclusion
For tax purposes, it is more beneficial to structure the loan to Roots by using a 100% Antheridian subsidiary (NewCo) rather
than lending directly from Bracken, as this will result in a tax saving of €1.258.000 (€1.663.320 – €405.320).
Tutorial note: For the purposes of the above model answer, the rate of 5% has been used on the loan from Arabella to
Bracken. Candidates may have discussed a different rate. This was acceptable so long as the minimum acceptable margins
were adhered to.
Appendix: Supporting calculations
Schedule 1: Profit and withholding tax (WHT) on dividends
€
Profit of project:
€13.580.000 + €13.580.000 – €4.000.000 – €6.000.000
Profit applicable to (i) Bracken or (ii) NewCo (90%)
Antheridian WHT at 3% (per 4 years)
17.160.000
–––––––––––
15.444.000
–––––––––––
463.320
–––––––––––
Schedule 2: WHT on interest
€
50.000.000
–––––––––––
3.000.000
–––––––––––
300.000
–––––––––––
Loan amount
Annual gross interest at 6%
Antheridian WHT at 10% (per year)
Schedule 3: Cyprus corporation tax on margin
€
50.000.000
–––––––––––
500.000
–––––––––––
50.000
–––––––––––
Loan amount
Margin on loan of 1% (6% – 5%)
Cyprus corporation tax at 10% (per year)
16
Schedule 4: Total tax cost of direct investment
€
463.320
1.200.000
200.000
(200.000)
––––––––––
1.663.320
––––––––––
WHT on dividends
WHT on interest (€300.000 x 4 years)
Cyprus tax on interest income (€50.000 x 4 years)
DTR on Cyprus tax
Total tax
Schedule 5: Tax deduction on loan
€
Interest on loan from Arabella to Bracken
€100 million x 5% x 4 years
Restriction of interest on assets not used in business
€50 million x 5% x 4 years
Deductible interest
20.000.000
(10.000.000)
10.000.000
–––––––––––
(1.000.000)
–––––––––––
Corporation tax benefit at 10%
Schedule 6: Tax payable by NewCo
€
Interest income
€50 million x 6% x 4 years
12.000.000
–––––––––––
600.000
–––––––––––
11.400.000
–––––––––––
Tax at 5%
Profits available for distribution
Schedule 7: Total tax of indirect investment
€
805.320
600.000
(1.000.000)
––––––––––
405.320
––––––––––
WHT on dividends (15,444,000 + 11,400,000) x 3%
NewCo tax on interest
Tax saving benefit in Cyprus
Total tax
2
Aristotle Public Company Ltd
(a)
Employee-related matters
(i)
The €15.000 redundancy payment is expressly provided for in their employment agreement, so the amount is taxable
for the employees. At the same time, the amount is tax deductible for the company.
(ii)
The five managers who will receive a bonus of 100 shares each will have a taxable benefit in kind equal to the market
value of the shares which is €530 (100 x €5,30) each. This amount will be added to their taxable emoluments for the
year.
(iii) The three managers who will be given the option to purchase shares will not have a taxable benefit in kind at the time
the option is granted. The benefit in kind will only arise if they choose to exercise their option. If they do, the benefit will
amount to the market value of the shares at the date of exercise, less the €4,00 per share they will have paid for them.
(iv) During 2013, Socrates will be in Cyprus only three months (1 January–31 March), given that on 1 April 2013 until
31 July 2014 he will be in Romania. During 2014, he will be in Cyprus only for one month (August 2014). For both
tax years, he will be in Cyprus for less than 184 days (the minimum requirement to be a Cyprus tax resident), so
Socrates will not be a Cyprus tax resident in 2013 or 2014 and will only be taxed on his Cyprus source income. This
will not include the income he earns for his work for Aristotle in Romania, but will include any income he derives in the
months he works for Aristotle in Cyprus.
(v)
The loan provided to Plato creates a debit balance in the books of Aristotle. Given that Plato is the managing director,
he will be deemed to have a benefit which is taxable income for him. The value of the benefit is calculated monthly,
and is equal to 4% of the value of the loan. The 4% is the difference between the statutory rate for the benefit of 9%
and the rate charged by Aristotle of 5%. This benefit should be added to Plato’s emoluments and the relevant tax
deducted every month through the pay as you earn (PAYE) system.
The loan provided to Zena is not considered to be a benefit because Zena is neither a director nor an officer of the
company. As such, there are no tax consequences for Zena.
Aristotle will be subject to special defence contribution (SDC) at the rate of 15% on the actual interest income received
at 5% from both Plato and Zena. This income is wholly exempt from corporation tax.
17
(b)
Disputed tax assessment for 2011
With regards to the tax assessment received on 10 January 2013, you have until the end of the month following the month
of assessment to file the objection, i.e. until 28 February 2013. Once the objection has been reviewed by the Department of
Inland Revenue (‘IRD’), if you still do not agree, the IRD will issue their final determination. You can file a hierarchical recourse
to the tax tribunal within 45 days from the date of receiving the final determination, or apply to the Supreme Court within
75 days.
(c)
Objection to tax assessment for 2004
With reference to the March 2007 objection to the tax assessment for 2004, by law the IRD has three years from the date
of the objection in which either to request further information or, failing this, to issue their final determination – this threeyear period ended in March 2010. Given that no information has been requested by the IRD subsequent to the objection in
March 2007, the IRD must accept the position of the company as stated in its objection. Consequently, we recommend that
you communicate with the income tax officer, preferably in writing, stating this fact and asking him to issue his final
determination which should agree with the objection Aristotle filed.
(d)
Energy park project
(i)
Regardless of where the agreement was executed, any agreement relating to immovable property in Cyprus is chargeable
to Cyprus stamp duty. Thus stamp duty will apply to the agreement for the purchase of the land.
(ii)
If the sale of the land is considered to be a capital transaction, it will be subject to capital gains tax at 20%. If it is
considered to be a trading transaction, it will be subject to corporation tax at 10%. The type of transaction would be
decided by applying the badges of trade. The most important badges which apply to Aristotle’s present case are:
(1) Length of ownership: If the licences are not granted and the land is sold, there will have been less than three
months between the date of purchase (in the memo dated 1 February, Sophocles states that the purchase was
completed one week ago), and the potential selling date (the beginning of April). Such a short time period would
indicate a trading transaction.
(2) Circumstances responsible for sale: Aristotle will only sell to the developer if it does not obtain the licences required
for the energy park. It could thus be argued that the company never intended to trade in land, and is only selling
it because the land could not be used as originally intended, i.e. for the energy park. This indicates that the
transaction is a capital one.
Potentially, the fact that Aristotle entered into discussions with the developer before the outcome of the application for
licences was known could be construed to be indicative of an intention to trade, but this argument would be tenuous
so is unlikely to be made.
From the above, it is not clear whether the transaction is trading or capital. Little information is provided within the memo
to enable an evaluation to be made against the other badges of trade. More information about the previous activities of
Aristotle with regards to immovable property should be requested in order to allow this evaluation to be made. Otherwise
a ruling would need to be requested from the IRD.
(iii) Any value added tax (VAT) due will be paid by Aristotle upon the importation of the panels from China into Cyprus, so
the self-supply (reverse charge) will not be applied. This is because Aristotle is responsible for importing the goods,
subsequent to purchasing them ‘at high seas’. The sale itself of the goods by the Swedish company to the Cyprus
company is outside the scope of Cyprus or EU VAT and as such the invoice from the Swedish supplier should not include
any VAT.
3
Barry and Elvira Limited (Elvira)
(a)
Value added tax (VAT) issues
(i)
The patent is licensed to the consortium for the purposes of its business, thus the transaction is a business-to-business
(B2B) transaction. The use of patent rights constitutes a B2B service. The place of supply follows the general B2B rule
which is where the recipient is located, i.e. Dubai. The transaction is thus outside the scope of Cyprus VAT, and no VAT
will be charged by Elvira on its invoices to the consortium.
(ii)
The patent will generate income which is outside the scope of Cyprus VAT (see (i) above). However, Elvira will have the
right to deduct any related input VAT because, if such a supply were to be made in Cyprus, the income would be subject
to the standard rate of VAT.
(iii) The commission paid to Leila as an intermediary for the agreement is a supply of a service from Leila to Elvira. The
service is received by Elvira for the purposes of its business and thus is a business-to-business (B2B) service. The place
of supply follows the general B2B rule which is where the recipient is based, i.e. Cyprus. As Elvira is VAT registered, it
will have to apply the reverse charge to the value of the invoice. This will involve debiting the input VAT account and at
the same time crediting the output VAT account with 17% of the value of the invoice, i.e. €17.000 (17% x €100.000).
The output VAT is always payable, but whether the input VAT can be reclaimed depends on the VAT status of the income
to which it relates. The commission cost relates to income from the use of a patent which is outside the scope of Cyprus
18
VAT but would be subject to the standard rate of VAT were the supply to take place in Cyprus. Therefore, Elvira will be
allowed to claim the full amount of the input VAT and no VAT cost will arise for Elvira as a result of applying the reverse
charge to the invoice from Leila.
(b)
Corporation tax payable by Elvira
(i)
Tax payable for the 2012 tax year
Annual income from use of patent
Annual allowable amortisation (20% x €750.000)
Tutorial note: A full year of allowable amortisation is given by law in 2012.
80% deemed expense by law
Taxable income
Corporation tax at 10%
(ii)
€
250.000
(150.000)
––––––––
100.000
(80.000)
––––––––
20.000
––––––––
2.000
––––––––
Tax payable on the disposal of the patent on 1 January 2016
Income from sale of patent
Cost of patent
Commission for the sale of the patent
Add back amortisation allowance claimed in previous years (20% x €750.000 x 4)*
80% deemed expense by law
Taxable income
Corporation tax at 10%
€
3.000.000
(750.000)
(100.000)
600.000
––––––––––
2.750.000
(2.200.000)
––––––––––
550.000
––––––––––
55.000
––––––––––
* Tutorial note: The Cyprus Income Tax Office has signalled that it will interpret the legislation so that the amortisation
allowance should reduce the cost (i.e. be added back) in arriving at the profit before the statutory deduction. This is
not widely accepted as being in accordance with the strict interpretation to the provisions of the legislation. We are
awaiting the ITO’s circular in order to understand their definitive position. In the meantime, candidates were expected
to follow the ITO’s interpretation in their computations, as shown in the answer above.
(c)
It would be more tax efficient for Ermijag to sell its shares in Elvira to the consortium rather than for Elvira to sell the
consortium the patent. In this case, there would be no tax payable on the disposal as gains on the sale of shares are
specifically exempt from corporation tax (except where the company holds immovable property in Cyprus, but this is not
relevant as Elvira has no assets other than the patent). The tax saved would be the €55.000 corporation tax which would
otherwise have been payable by Elvira on the sale of the patent (as calculated in (b)(ii) above).
(d)
There will be no effect on the status of Ermijag as a Cyprus international trust if Barry becomes a Cyprus tax resident. Although
he is both the settlor and a beneficiary of Ermijag, he need only be a non-Cyprus tax resident in the year preceding the year
in which the Cyprus international trust is established and Ermijag has clearly been established for a number of years.
However, once Barry becomes a Cyprus tax resident he will become liable to income tax and/or special defence contribution
on any distributions he receives from Ermijag, and the trustees will be responsible for paying/deducting this tax on his behalf.
4
Tselko Ltd (Tselko) and Emlond Ltd (Emlond)
(a)
Tselko and Emlond will not form a tax group for group relief purposes in 2012. This is because they will not be part of the
group for the entire tax year. The only instance where it is possible to have companies forming part of a tax group even though
they are not part of the group for the entire tax year is when a parent company incorporates a new subsidiary during the year.
(b)
The trading losses brought forward by Emlond, as well as the losses incurred before the change of ownership, will be lost
because, within a three year period, there will have been a change in the ownership of Emlond (Tselko’s purchase of its
shares) and a substantial change in the nature of its business (the termination of the shoe business), so the losses incurred
before the change in ownership of the shares cannot be carried forward to the years subsequent to the change.
Emlond’s current year losses will also be unavailable for group relief to Tselko because the two companies do not form part
of a tax group for group loss relief purposes in 2012 (as stated in (a) above).
The capital losses can be carried forward and will be relieved automatically against the first capital gains made by Emlond.
These losses are not available for group relief.
19
(c)
The loan provided by Emlond was one-off and relatively small in size, especially compared to the value of the transactions
relating to the purchase of immovable property or the cumulated tax deductible losses which have arisen. It will not be
considered to be interest received which is closely connected with the ordinary carrying on of the business. Consequently, the
interest income will be exempt from corporation tax and subject to special defence contribution (SDC) at 15%. The SDC is
payable via self-assessment every six months, i.e. by 30 June 2012 for the overseas interest income arising during the first
six months of the year, and by 31 December for that arising in the last six months of the year.
(d)
Tax payable on the disposal of the warehouse
In order to calculate the capital gains tax on the disposal of the warehouse, the base value must first be calculated, given that
rollover relief was claimed in April 2010, as follows:
Base cost of large warehouse after adjusting for rollover relief
€
Sale proceeds April 2010
Less indexed cost February 2008
Rollover relief
Readjusted value of larger warehouse
for future disposal
360.000 x 111,98/107,11
545.000 (490.000 + 55.000) –
376.368 = 168.632
restricted to
545.000 – 113.632
€
490.000
(376.368)
––––––––
113.632
113.632
––––––––
431.368
––––––––
Capital gains tax computation for disposal of warehouse in April 2012
€
Sale proceeds April 2012
Less indexed cost April 2010
431.368 (above) x 119,00/112,76
Less loss brought forward
Capital gain
Capital gains tax at 20%
(e)
€
660.000
(455.239)
––––––––
204.761
(124.000)
––––––––
80.761
––––––––
16.152
––––––––
The 2012 immovable property tax for Emlond is based on the 1 January 1980 values of the properties it owned on 1 January
2012, regardless of whether they were disposed of part way through the year.
The 2012 tax amounts to €1.078 (as calculated below), and is payable by 30 September 2012.
Property
Land
Warehouse
1 January 1980 value
€
265.000
73.000
––––––––
1 January 1980 value
€
First 120.000
120.001–170.000
170.001–300.000
300.001–338.000
Rate
‰
0
4
5
6
Total
(f)
€
338.000
––––––––
Tax
€
nil
200
650
228
––––––
1.078
––––––
By purchasing the shares in Emlond instead of the land itself, no land transfer fees would be paid. Whereas had Tselko
purchased the land from Emlond, then it would have had to pay land transfer fees of up to 8% in order to place the property
in its name.
20
5
Adamos and Emily
(a)
Adamos: Taxable income for the 2011 tax year
€
40.000
9.300
2.310
–––––––
51.610
–––––––
Income from employment
Income from breeding (W1)
Rental income (W2)
Taxable income
Tutorial note: As Adamos is a Cyprus tax resident he is taxed on his worldwide income, including the rent on the Ildorian
flat.
Working 1: Dog breeding business income
€
Sales: 64 x €500
Direct costs: 64 x €100
Overheads
Profit before tax
Attributable to Adamos 50%
Attributable to Emily 50%
€
32.000
(6.400)
(7.000)
–––––––
18.600
–––––––
9.300
9.300
Working 2: Rental income
€
Income from preserved house
Income from flat
Rent received (350 x 12)
Statutory deduction of 20%
Capital allowances 3% x 35.000
4.200
(840)
(1.050)
––––––
Taxable income from rents
(b)
€
exempt
2.310
––––––
2.310
––––––
Adamos: Expected special defence contribution (SDC) for 2012
€
9.600
4.200
––––––
Rental income of preserved house (800 x 12)
Rental income of flat (350 x 12)
€
13.800
Less 25%
(3.450)
–––––––
10.350
–––––––
SDC at 3%
311
–––––––
Adamos’s expected SDC liability for 2012 is €311.
The tenant, SPAD & Co LLC, will withhold the SDC for the house from the rent every month, and will pay it to the income
tax office through self-assessment by the end of the month following the month in which the SDC is withheld.
Adamos will pay the SDC relating to the overseas rent from the flat through self-assessment. The SDC for the first six months
of the year will be payable by 30 June 2012, and for the last six months by 31 December 2012.
(c)
Value added tax (VAT) registration is obligatory if the turnover of taxable supplies in the last 12 months exceeds the registration
threshold of €15.600. The test should be carried out at the end of every month.
The registration threshold would have been surpassed at some point during 2011, as the taxable supplies from the sale of
the puppies were €32.000 (64 x €500). Consequently, the business should already have been registered for VAT.
There is a penalty of €85 for every month for which registration is delayed. There is a penalty of €51 for every VAT return
which has not been submitted by its due date. Finally, there is a penalty of 10% additional tax on the amount of the unpaid
VAT which was payable as per a declaration, as well as interest at the prescribed rate.
(d)
In Cyprus, a partnership is considered to be transparent for tax purposes and the income is taxed in the names of the partners,
in the respective proportions. This is how Adamos and Emily are being taxed now, as an unofficial partnership. Consequently,
registering their business under an official partnership will have no effect on the couple’s tax position.
(e)
In 2011 Adamos has taxable income of €51.610 (as calculated in part (a) above) and so has a marginal tax rate of 30%.
Emily has no tax liability because her only income is the €9.300 attributed to her from the dog breeding business, which is
within the nil rate tax band of €19.500. Therefore, Adamos should look to reduce their collective tax liability by transferring
some of the income currently taxed on him to Emily, so as to benefit from her lower effective tax rate.
21
With regard to the dog breeding business, based on the projected sales for 2012 of 80 puppies, the expected business profits
will be €21.377 as follows:
€
427
(85)
342
––––
Sales price net of 17% VAT (500 x 100/117)
Variable cost net of VAT (100 x 100/117)
Gross profit per puppy
Expected profit for 2012 (80 x 342)
Less fixed costs net of VAT (7.000 x 100/117)
€
27.360
(5.983)
–––––––
21.377
–––––––
Expected profit from business in 2012
This entire amount could be taxed on Emily, utilising her nil rate tax band of €19.500 and leaving an amount of €1.877 to
be taxed within the 20% tax band, resulting in a total tax liability for Emily of €375 (€1.877 x 20%).
If Adamos were to continue to include 50% of the business profits, i.e. €10.688, in his taxable income, this would be taxed
at 30% resulting in a tax liability of €3.206 (€10.688 x 30%).
Consequently, this suggestion would save the couple tax of €2.831 (€3.206 – €375).
In addition, Adamos could transfer the flat in Ildoria into Emily’s name. If this is done, then the taxable income of €2.310
from the flat, currently being taxed in Adamos’s name at 30%, will be taxed in Emily’s name at the 20% rate. This will result
in a further tax saving for the couple of €231 (€2.310 x (30% – 20%)).
(f)
There is no benefit from incorporating the business as a company as Emily’s sole trader tax status will result in greater tax
savings at this stage in its development. As illustrated in part (e) above, at the rate of business profits expected for 2012,
Emily’s nil rate tax band of €19.500 can be used in its entirety leaving only a small amount of profit to be taxed at the next
band rate of 20%.
This is a significantly lower rate of tax than the minimum effective tax rate of 22,6% which would be paid under a company
(10% corporation tax and 20% special defence contribution on 70% of the after-tax accounting profit). As such, the costs of
incorporating and running a company are not justified. Also, even if Emily were to reduce the profit in the company by paying
herself a salary, the company would incur the additional cost of employer’s social insurance contributions.
22
Professional Level – Options Module, Paper P6 (CYP)
Advanced Taxation (Cyprus)
December 2013 Marking Scheme
Available
1
Maximum
Bracken Investment Holdings Limited
(a)
(b)
(c)
(d)
Arabella and Bracken are related parties
Loan should be made at arm’s length with implications
Explanation of how the income of a trust is taxed
No withholding tax on dividends to the trust
Income of CIT not taxable
No tax on beneficiaries until a distribution is made
Tax implications for Arabella
Tax implications for Jane with calculation
3
0,5
0,5
0,5
1
1,5
––––
7
––––
Interest income not taxable in hands of Arabella
Charging 5% interest will accumulate the €20 million required
Arabella can gift Jane’s share to her, thus tax free
(i)
(ii)
1
2
––––
3
––––
Direct investment
Direct equity results in no tax deduction for interest, with reason
Calculation of WHT on dividends
Dividend income of Bracken not taxable in Cyprus, with reason
Calculation of tax leakage if loan provided directly
Discussion of back-to-back loan margin rate
Total tax for direct investment
0,5
1
1
––––
2,5
––––
1
1,5
1,5
3
1
1
––––
9
––––
Indirect investment
As per DTT more tax efficient to remit dividends than interest
1
Conclusion that investment in NewCo should be as 100% equity
1
Discussion of tax deductibility in Bracken of interest on loan to NewCo, with calculations
3
Calculation of tax payable on interest received by NewCo
0,5
Back-to-back loan provisions not applicable
0,5
Explanation of tax treatment of dividend from Roots to NewCo
0,5
Calculation of distributable income and WHT on dividend from NewCo to Bracken
2
Total tax for indirect investment
1
Recommendation, with tax saving
1
––––
10,5
––––
Format and presentation of the memorandum
Appropriate use of the appendix
Effectiveness of communication
1
1
2
––––
4
––––
23
3
7
2
9
10
4
––––
35
––––
Available
2
Maximum
Aristotle Public Company Ltd
(a)
(i)
(ii)
(c)
(d)
1,5
0,5
––––
2
––––
2
1
––––
1
(iii) Explanation of how option on shares is taxed
2
––––
2
(iv) Explanation of tax residency of Socrates
Explanation of Cyprus tax position
1
1
––––
2
––––
(v)
(b)
Taxable for individual with reason
Tax deductible for company
Explanation bonus taxable as BIK with calculation
Explanation of benefit for Plato including how it will be calculated
Explanation of tax treatment for Zena
Explanation of how Aristotle will be taxed on interest income from both loans
Explanation with date for filing objection
Explanation with date for hierarchical recourse with tax tribunal
Explanation with date for applying to the Supreme Court
Explanation that IRD has three years to deal with objection
Discussion of dates between objection and now
Recommendation of course of action
(i)
Explanation that agreement is chargeable to stamp duty
(ii)
Tax rate depends on whether transaction is capital or trading
Determination based on application of badges of trade, including discussion of
two most relevant badges
Explanation of possible effect of ongoing discussions with developer
Recommendation to request more information on property transactions from
company or ITO ruling
(iii) No application of reverse charge, with reason
2,5
1
1,5
––––
5
––––
1
1
1
––––
3
––––
1
1
1
––––
3
––––
1
––––
5
3
3
1
1
2,5
1
1,5
––––
6
––––
1
––––
24
2
5
1
––––
25
––––
Available
3
(a)
(i)
(ii)
Explanation of B2B and place of supply
Explanation of VAT treatment
1,5
0,5
––––
2
––––
2
––––
Explanation of right of deduction
(iii) Explanation of B2B place of supply
Explanation of reverse charge with journal entries
Explanation of right to recover input VAT
(b)
4
Maximum
Barry and Elvira Limited
1,5
2
2
––––
5,5
––––
2
2
5
(i)
Calculation of tax payable
2
––––
2
(ii)
Calculation of tax payable
4
––––
4
2
(c)
Explanation of sale of shares as the better option
2
––––
(d)
Explanation of settlor and beneficiary rule for the status of a CIT
Consequences of Barry becoming liable to Cyprus tax
2
1
––––
3
––––
3
––––
20
––––
Tselko Ltd and Emlond Ltd
(a)
Both do not form part of tax group, with reasons
2
––––
(b)
Explanation of why losses will be lost
Non-use of current year losses
Use of capital gains tax losses
3,5
1
1
––––
5,5
––––
(c)
(d)
(e)
(f)
Taxed under SDC with reasons
Paid through self-assessment every six months
2,5
1,5
––––
4
––––
Calculation of base cost following rollover relief
Calculation of CGT payable 2012
2,5
2,5
––––
5
––––
Basis of calculation of immovable property tax, including property value for 2012
Calculation of immovable property tax
Due date of payment
1,5
1
0,5
––––
3
––––
1
––––
No land transfer fees payable if purchase shares
25
2
5
4
5
3
1
––––
20
––––
Available
5
Maximum
Adamos and Emily
(a)
(b)
(c)
Calculation of income from dog breeding business
Rental income from preserved house exempt
Calculation of rental income from flat
Calculation of total taxable income
1,5
1
1
0,5
––––
4
––––
Calculation of SDC
Explanation of payment of SDC for preserved house
Explanation of payment of SDC for flat
1,5
1,5
1,5
––––
4,5
––––
Explanation with calculation of why VAT registration is required
Explanation of penalties for late registration
(d)
Partnership transparent for tax and of no effect
(e)
Explanation of why Adamos should transfer joint income to Emily
Calculation of expected profit from the dog breeding business in 2012, with amounts
net of VAT
Potential saving if entire dog breeding business profit taxable on Emily, with tax saving
Potential saving if flat in Ildoria is transferred to Emily, with tax saving
(f)
2
2
––––
4
––––
1
––––
Explanation that Emily’s current effective tax rate less than for a company
Employer’s social insurance additional cost if draws salary
26
4
4
4
1
1,5
1,5
1,5
1
––––
5,5
––––
1,5
0,5
––––
2
––––
5
2
––––
20
––––