Introduction
As from 1 January 2012, according to the provisions of article 5 (2) of the Income Tax Law 118 (I) / 2002, whenever a company grants a loan or any other monetary facility including cash withdrawal (other than balances derived from trade transactions) to natural persons, being its directors or shareholders or their spouses or their relatives up to second degree, then that person is deemed to have a monthly benefit equal to nine percent (9%) per annum on the balance of the loan or of any other monthly cash benefit at the end of each month (including cash withdrawals during the month).
Monthly benefit
The tax on the monthly benefit is calculated based on the applicable income tax rates and is due in accordance with the Pay-As-You-Earn ‘PAYE’ regulations. This means that the benefit is included in the taxable income of that person in Cyprus.
It is noted that calculation of the benefit does not take into consideration the number of days spent in the Republic by the individual throughout the year (circular 14, dated 14 November 2017), as was the case up to the end of 2017.
Reporting
Considering the above, the individual will have an obligation to register with the Income Tax authorities in Cyprus and submit an annual tax declaration provided that the annual amount of the deemed benefit, including any income from other sources, exceeds the tax-free amount of €19.500. If his total income is less than €19.500 then the Company has no obligation to withhold any tax.
We note that in case the company charges interest to the individual’s debit balance, then that amount of interest reduces the value of the deemed benefit.
Examples
Example A – A Company’s shareholder is receiving an interest-free loan amounting to 1m:
- Estimated deemed benefit will be 90K (1m @ 9%)
- Amount of the benefit is more than the tax-free threshold of €19.500
Result: An obligation arises for the Company to withhold tax on behalf of the shareholder according to the applicable rates and pay the tax under the PAYE system.
Example B – A Company’s shareholder is receiving an interest-free loan amounting to 100K:
- Estimated deemed benefit will be 9K (100K @ 9%)
- Amount of the benefit is less than the tax-free threshold of €19.500
Result: No obligation arises for the Company to withhold tax on behalf of the shareholder.
Example C – A Company’s shareholder is receiving a loan amounting to 500K, with an interest of 6%:
- Estimated deemed benefit will be 45K (500K @ 9%)
- Interest charged is 30K (500K @ 6%)
- Amount of the benefit is 15K (45K – 30K)
- Amount of the benefit is less than the tax-free threshold of €19.500
Result: No obligation arises for the Company to withhold tax on behalf of the shareholder.
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The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article