By George Micouris
Manager, Tax Department
K. Treppides & Co Ltd
There are a number of commercial benefits that come with registering the property in the name of a legal entity rather than as an individual e.g. for asset protection purposes as it provides protection against personal insolvency since a property that is in the name of a legal entity should not be affected should the individual becomes personally insolvent.
To this end, it is worth revisiting the Informative Guide (the ‘guide’) issued by the Cyprus tax authorities (‘CTA’) back in October 2018 which explains the tax treatment of certain benefits offered by employers to employees and persons who hold or are deemed to hold an office, and specifically the section dealing with the accommodation related benefits.
By way of a background, the taxation of benefits is provided under Article 5 of the Income Tax Law, according to which benefits from any office or employment, provided to an employee/person who holds an office or to a member of his family either in cash or otherwise, are subject to tax. The said guide describes how the Tax Department is practically applying the specific section of the law.
It is important to note here that any company which is providing benefits to its officers (e.g. provision of free-of-charge accommodation of a property owned by the company, to its shareholder), is considered as an employer by the CTA and should register on the Employers’ Register which will enable the submission of the Employer's Return (T.D. 7). In addition, the company is required to declare the said benefit provided and deduct the applicable income tax thereon.
As mentioned above and based on the guide, the provision of free-of-charge accommodation of a property owned by the company to its shareholder and/or the members of his/her family, should constitute a benefit in kind. The annual value of the benefit in kind for the use of the house applies for as long as the asset is at the disposal of the individual and/or his/her family. In general terms, such value is calculated multiplying the fixed percentage of 4% with the higher of the market value or the initial cost of its construction. This annual value will be added to the other taxable income of the individual of the year and taxed at the applicable rates (which may be up to 35%).
The guide though provides an exception to the above general rule (i.e. no benefit in kind is considered to accrue on the company’s shareholder/officer), in cases where the company owning the property does not exercise any economic activity; however no definition of the economic activity is being provided within the legislation or the guide itself.
Relevant factors – amongst others - which may be examined by the CTA for the determination of whether an economic activity is being carried out are whether the company meets the definition of a dormant company as per a relevant circular issued by the CTA, the method of financing of the said property etc.
Given the materiality of any potential tax exposure which may arise from the above arrangement, it is strongly recommended for the affected individuals to proceed with a risk assessment exercise by examining in detail the specifics of each case.
In addition to the above, the following benefits provided to employees by their employers should also constitute benefits in kind subject to tax:
Reimbursement/Direct payment of the rental for the accommodation of employees and/or of members of their family;
Provision of cars to employees, which are either owned or leased by their employer;
Reimbursement/Direct payment of private medical schemes of the employees for their and/or their dependants’ benefit.
Finally, subject to certain conditions met, the relocation expenses of an employee and/or of the members of his/her family upon change of his/her working place as well as the reimbursement/direct payment of actual business mobile phone expenses, should not constitute benefits in kind in the hands of the employees.
It is important to note that in general exemptions apply only to the extent the payment or reimbursement to the employee is made against actual costs supported by payment receipts. Other specific exemptions (under conditions) mentioned in the guide include, amongst others:
(i) Computer equipment (ii) Childcare facilities (iii) Goods consumed in the workspace (iv) Newspapers (v) Awards for long-term service (vi) Christmas parties and events and (vii) Training Courses/scholarships to employees.
In any case, employers are required to keep records indicating how the value of the benefits in kind has been determined (if applicable) and such records should be available for inspection when requested by the CTA.
Considering the complexity of all of the above and the fact that each benefit has a different tax treatment, it is important to carry out a detailed assessment of all the benefits provided to the employees in order to ascertain which of these should be taxable and how their taxable value should be determined.
K. Treppides & Co Ltd is the largest independent consulting company in Cyprus with an established international presence and offices in Great Britain and Malta. Today the company employs approximately 200 professionals. It offers a full range of consulting, tax, accounting services to groups, companies and investors operating internationally in a variety of financial and business sectors. The Company, which started its operations in 1985, has 36 years of expertise and an elite team of experienced executives who can guide and assist investors and businesses during the establishment process and subsequent investment activity in Cyprus and internationally.
Nicosia: Treppides Tower, Kafkasou 9, Aglantzia, CY 2112, Nicosia, Cyprus
Limassol: Andrea Kariolou 38, Ayios Athanasios, CY 4102, Limassol Cyprus
London:7 Milner Street, London SW3 2QA
Malta: Level 1, Somnium, Tower Road, Swatar, Birkirkara BKR 4012