Interpretative Circular 14, issued by the Cyprus Tax Department on 14 November 2017, clarifies the application of article 5(2)(g) of the Income Tax Law, which provides for a deemed benefit to be assessed on any drawings, loan or other financial facilities granted by a company to a non-resident director or shareholder or their spouses or close relatives. This provision, together with a corresponding provision for resident individuals, was introduced by the Income Tax Amendment Law 197(1) of 2011 and took effect from 1 December 2012.
The new circular resolves the issue of whether the full amount of the deemed benefit is taxable, or whether the taxable benefit should be determined on a time-apportioned basis by reference to the number of days the recipient was resident in Cyprus in the tax year concerned.
Previously, there was no formal guidance on the issue, but the practice of the tax authorities was to calculate the taxable amount on the basis of days spent in Cyprus in the tax year.
The new circular reverses the previous practice and makes clear that the deemed benefit is taxable in full, regardless of the period of residence in Cyprus of the individual in question. The benefit, like the corresponding benefit applicable to individuals who are tax-resident in Cyprus, is deemed to arise in Cyprus, and liability to tax in relation to the benefit arises automatically from the creation of the benefit, irrespective of the residence of the recipient.