News: MEMO FOR AN OWNER OF CYPRUS COMPANY

Ladies and gentlemen!

You are the owners of a Cyprus company. Please, once again read mandatory procedures, necessary for compliance for company owners. If you do not comply with these requirements, then you will not be able to get a "good standing certificate" for your company.

We provide you with all the necessary information in order to maintain a company in good condition throughout the entire period of operation, as well as how to liquidate it correctly when you no longer need an existence of this company.

The Company Law&Trust International provides services for registration of a company in Cyprus, as well as its maintenance. Also, our company offers a management accounting service in Cyprus. Register a company in Cyprus using our services and we will save you from all unnecessary problems!

FINANCIAL STATEMENTS

According to the legislation of the Republic of Cyprus, owners of all companies registered in this country are required to maintain accounting records in accordance with international financial reporting standards. Financial reporting must be submitted in a timely manner to the state registration chamber, and tax return/declaration - to the tax authorities of the Republic of Cyprus.

According to legislation, financial reporting in Cyprus is subject to audit, if it does not correspond to the category of companies that are exempt from compulsory audit.

By categories, companies are divided into "dormant", "small" and "large".

Criteria for assigning a category:

"Dormant" one. This category may include companies in which, for some reason, economic activity was not started since registration. Owners of such companies are required to file zero financial statements and a zero declaration. However, the law does not exempt a company from appointing an auditor, even if a company does not start economic activities.

When submitting zero reporting and a zero income tax return, we mandatorily ask for a letter with a beneficiary's signature confirming the fact that a company did not conduct any economic activity during this reporting period.

ATTENTION! The term "absence of economic activity" means that a company did not conclude any commercial, investment or other contracts, did not make any commercial bank transfers, a company has no related parties (subsidiaries). At the same time, a company can open a settlement account, from which only the costs of maintaining and servicing a company are paid. In this case, before submitting a zero-reporting and a declaration, we ask that you provide bank statements as well. If a company does not have a settlement account, then only a guarantee letter with a Beneficiary's signature is sufficient.

ATTENTION! If false information is provided to us, all responsibility falls solely on a client (beneficiary of a company) in case the foregoing is revealed.

"Small" company or "Small sized company"

This category includes companies which activities correspond to any two of the following conditions:

1. Total amount of assets reflected in a balance sheet, without deduction of obligations, should not exceed € 34,172.029.
2. Gross income (turnover) should not exceed € 70,052.659.
3. Average number of employees should not exceed 50 people.

ATTENTION! According to the law, "dormant" and "small" companies are not subject to audit, but in spite of this, in practice, tax authorities require audit procedure to be conducted by all companies that may not prepare and submit unaudited accounts. Therefore, auditors do not distinguish between these groups of companies and conduct an audit of all companies.

AUDIT

If a company meets criteria of a "large" one, then financial reporting of such a company is subject to mandatory audit in accordance with the legislation of Cyprus.

ATTENTION! If a company refuses to prepare and file financial statements and, if necessary, be audited, director of a company may be sent a request from the Ministry of Finance regarding the fact that a company entrusted to him does not file financial statements. If there is no response from director of a company, he faces fines, criminal and judicial proceedings, up to and including imprisonment.

If the post of a director of your company is occupied by a representative of our partners, i.e. in fact, by a nominal director, then we can not allow any prosecution of a director. We earnestly ask you to take note that preparation of reports and passage of an audit are mandatory annual procedures, which you can not refuse at will.

Additional information on preparation of financial statements and audit

In the Republic of Cyprus, the fiscal and tax periods coincide. The first financial and tax period is a period from the moment of registration of a company to the end of a calendar year, i.е. if a company is registered on April 15, 2013, the first reporting period will be the period from 15.04.13 to 31.12.13. In this case, declaration must be submitted no later than March 31, 15, i.e. the government gives 15 months for preparation of reports and passage of audit of a company with operation starting in 2012.

ATTENTION! There is an opportunity to reduce the cost of preparation of reports and, if necessary, audit for the first financial year, if your company is registered in the second half of a year, i.е. after 30 June. In this case, you can simultaneously prepare financial statements and be audited for incomplete first fiscal year and the following year. At the same time, financial balance of a company will be shown for a period from the moment of registration of a company until the end of the second fiscal year, and two declarations will be submitted - for the first part-year and for the second. * For example, a company was registered on September 30, 2011, then balance will be shown for the period from 30/09/11 to 31/12/12, and two declarations will be submitted for the periods: from 30/09/11 to 31/12/11 and from 01/01/12 to 31/12/12.

* Note: if a profit was received for the first part-time fiscal year, a non-zero tax return will be filed, and the Cyprus tax department will issue a fine of 200 euros for the late filing of tax return for the first part of the reporting period.

If there was no profit for the first incomplete fiscal year, then a zero tax return will be filed, in which case a fine is not imposed.

In any case, in general, due to combination of incomplete first and second financial periods, there is a saving of money resources for preparation of reports.

If a company did conduct business, then during current tax (financial) period, taxpayers are required to calculate an amount of tax based on expected profit, file tax returns and make an advance payment of tax. For this, there are two interim reporting dates: July 31 and December 31, in which conducting this procedure is necessary.

For example:

Estimated profit of a company in 2013 is 300 000 Euro, then amount of advance tax payments is 37 500 EUR (300 000 * 12.5%) within a year. This amount must be calculated, a taxpayer must file tax returns twice and pay taxes on two reporting dates:

• until July 31, 2013 - 18,750 EUR;
• until 31 December 2013 - 18,750 EUR.

It is important to note that the moment of fulfillment of obligations on the dates indicated is payment of tax.

In the event that owners of a company do not provide a Cypriot auditor with information on expected amount of profit, an auditor, submitting the requirements of local legislation on reporting to the tax authorities, will file a declaration on these accounting dates, based on assumption of a lack of profit. That is, zero declarations will be submitted.

Final declaration with calculation of actual profit received is submitted at the end of current financial year. The latest date for submitting final tax return for 2013 is March 31, 2015. If final declaration is not filed within the specified period, a fine of 200 euros is imposed on a company.

ATTENTION! Despite the fact that declaration must be submitted by March 31, 2015, tax must be paid before August 1, 2014. If a company fails to do so, then late tax payment penalty is calculated as follows: at any one time, 5% of an amount of tax payable + a penalty in the amount of 4.5% per annum of tax payable (calculated on the basis of a number of months of late payment tax).

Overpayment of tax

In the event that actual profit of a company is less than an amount claimed during a year, that is, a taxpayer has overpaid tax, an amount of overpayment will be returned by the tax authorities after submission of final declaration and return application. Cyprus law does not set a time limit for return of overpayment amount.

Based on the practice of Cypriot accountants / auditors, this process can take about 6 months. During repayment period, interest is charged on an amount of overpayment. Thus, a taxpayer will receive an amount of overpaid tax + penalty.

According to a special application of a taxpayer, amount of overpayment can be offset against future tax payments.

Underpayment of tax

In the event that actually received profit of a company is more than 25% higher than the amount claimed during a year, a taxpayer will be obliged to pay 10% of fine from an amount of tax paid.

From practice of our work, in 90% of cases, Cypriot companies pay taxes ex post with a small fine.

This mechanism is more simple and convenient in connection with the following factors:

• it is often difficult to determine an amount of expected profits of a company;
• a company's funds remain in circulation during a financial year;
• there is no need to implement the procedure for return of funds in case of overpayment of tax in an advance system;
• there is no need to pay for work of Cypriot accountants and tax specialists  three times during preparation and submission of documentation to the tax authorities.

Preparation of financial statements and passage of an audit takes two to four months, depending on the volume and complexity of operations and documentation. With a large volume of operations and several activities, it can take more time - up to six months. We welcome when clients provide documents for preparation of financial statements after three months from the end of a reporting period, and in the case of a large number of transactions - immediately after the end of a reporting period. Otherwise, there may be difficulties in meeting deadlines, which we sincerely would like to avoid.

For preparation of financial statements, you must send us the following documents:

1. Extracts from all bank accounts of a company.
2. Copies of all contracts for which operations were performed for a reporting period; contracts must necessarily have appropriate requisites (signatures and seals of parties, as well as dates of signing).
3. Copies of all invoices for a reporting period, invoices should also have appropriate requisites (date, signature, seal); in invoices for acquisition and sale of goods, nomenclature (name) of goods, unit of measure, number of units, price per unit of goods, total amount by name and total amount under an invoice should be reflected.
4. If transactions were carried out on a basis of so-called agency contracts, then agency reports containing information on quantity and value of goods purchased and sold on behalf of a principal of goods, as well as amount of agency commission (fee), must be submitted without fail.
5. Journal of economic operations (if available).
6. Information on related parties: on subsidiaries and affiliates: it is necessary to disclose a structure of the group (number of related parties, percentage of ownership); In addition, it is necessary to provide financial statements of subsidiaries for a date corresponding to the end of a financial period of a Cyprus company, or the nearest to it; Usually we ask you to provide a balance sheet and a profit and loss account (for Russian companies this is form No. 1 - balance sheet and profit and loss account - form No. 2).
7. All additional documents that you consider necessary to provide, especially specific to your business.
8. In an audit process, auditors mandatorily make a request to each of banks, in which a company has a settlement account; To this end, an auditor sends a Bank authorization letter, which is signed by a person authorized to manage a bank account, then the letter must be sent to your bank; Information is prepared by a bank employee and sent directly to an auditor.

ATTENTION! Documents are better to be prepared at the time of a transaction. If you have any difficulties, you can always contact us for advice. Since primary documents are a basis for preparation of financial statements, neither accountants nor auditors are responsible for unreliability of these documents.

According to accounting rules, auditors and accountants are only responsible for correctness of a transaction in accounting reporting. If it is revealed that a document does not correspond to this transaction, but is forged, then responsibility for this will be borne exclusively by a beneficiary of a company.

We recommend preparing documents in English or in Russian, but with a general description of information contained in them in English.

Please take into consideration that completeness and correctness of execution of the documents significantly shortens a period of time for preparing reports, and often a cost of work!

Please pay attention to changes in the legislation of Cyprus:

Starting from April 1, 2015, when filling in IR tax forms for 4 companies registered in Cyprus, it is necessary to indicate such data as: names of counterparties, corresponding amounts of arrears, indicate and disclose related parties, and indicate whether so-called "arm’s length principle" is met, i.e. availability of a reasonable level of profitability on operations. This requirement is made already to be filled in declarations for 2014!

We kindly ask you to take above into account when preparing documents for preparation of a financial report and for passage of an audit, and take this fact into account when concluding transactions as far as possible in the future. In addition, it is necessary to indicate whether a company is VAT-registered in VAT authorities of Cyprus in an income tax return (form IR4).

The following information will be included in a relevant section:

• Whether a company is registered for VAT (or the group of companies in which a company is a member - for VAT), and if so, under what number.

• If registration for VAT is not carried out, it is necessary to explain why (2 options are offered to choose from):

I. Volume of turnover is less than limit set by the legislation (for sales - € 15.600, for purchases - € 10.251.61, for remote sales (sales on behalf of a person registered in another EU country) - € 35.000)

II. Operations within the scope of a company's activities are not subject to VAT laws. Auditors emphasize that responsibility for information reflected in tax return lies with directors and auditors, therefore they strongly recommend that a company's activities be monitored, and appropriate registration should be conducted with the first features of existence of activities subject to VAT legislation. Especially it is worth paying attention to the following types of operations (they can cause a need to register for VAT):

• If a Cyprus company sells goods / services to another Cyprus company or company registered in EU (investment, financial, insurance, medical activities are exceptions)

• If a Cyprus company is a recipient of goods / services from a foreign company (both European and non-European), it is also necessary to register for VAT.

This applies, in particular, to the following types of services: marketing, legal, managerial, accounting, consulting, in the field of promotion of new goods, services related to intellectual property rights, royalties, IT services. In this case, registration is mandatory, regardless of the type of a company’s activity (investment, financial, insurance, medical activities are not exceptions).

LIQUIDATION

Condition for a necessity of passing an audit is preserved even when you decide to liquidate a company for any reason.

Company's liquidation procedure can be initiated only after an audit of financial statements is completed from the moment of registration to the moment of liquidation of a company.

In order to complete operation of a company, it must be liquidated in any possible way, in order to avoid possible risks. In Cyprus, there are 4 ways to liquidate companies:

1. 1. Forced liquidation.
2. 2. Voluntary liquidation.
3. 3. In order of judicial supervision.
4. 4. Striking-off in an absence of debt.

The simplest and least expensive, and therefore often used, is liquidation by striking-off a company from the Registry of companies by the Registrar. This type of liquidation is possible if a company has neither assets nor liabilities to the state or third parties at the time of filing an application for liquidation.

To implement liquidation by striking-off a company from the Register, we will need:

1. 100% payment of an invoice (including payment for liquidation itself and annual maintenance until a liquidation date), as well as invoices for reporting services and auditing;
2. Letter of dissolution signed by a beneficiary (according to the model).
3. All documents reflecting a company's activities are necessary to compile a financial report and prepare an audit report that will confirm a company's lack of assets and liabilities to third parties;
4. Closing an account of a company is confirmed by a letter from a bank.

Further, special decisions of directors on liquidation will be prepared, a package of documents will be prepared for submission to the Registrar, who in turn will decide on validity of a liquidation, and then a company will be struck-off from the Register. Confirming document will be a certificate of liquidation of a relevant company. Or the Registrar provides a reasoned refusal to liquidate a company, if there is reason to believe that a company has unliquidated obligations, however, this option is unlikely when providing us with all documentation reflecting a company's activities.

ATTENTION! A willful refusal to comply with legislative acts by a Cypriot company, i.e. failure to pay annual payments, such as annual fee and maintenance fee, failure to perform timely reporting, audit and filing of tax returns, may result in extremely unfavorable legal consequences for a beneficiary of a company.