Preparing and filing financial statements and tax returns of and conducting an audit for a Cyprus company. Service offer

As Cyprus is not an offshore jurisdiction and Cyprus companies are required on a regular basis to file their financials and returns and pay taxes as prescribed by law, we recommend, before registering such a company, seeking advice from lawyers, auditors, and tax specialists regarding the administration of the company (which we can arrange upon request).

We also recommend obtaining prior advice from these specialists in the case of subsequent changes in the company’s operations or before making major transactions.

Section 142(1) of the Companies Law Cap. 113 requires Cyprus companies to file audited financial statements prepared in accordance with the International Financial Reporting Standards (IFRS).

This is a statutory requirement irrespective of whether the company carried on any business or not.

If the company remained dormant, it must prepare and file dormant accounts.

A company must submit returns to the tax authorities within one year of the financial year-end. The company’s financial year can be arbitrary, but the end-date of the financial year is usually aligned with the end of the calendar year (to simplify tax accounting for income tax, the reporting period for which is a calendar year).

It should also be noted that the financial year cannot exceed 12 months (18 months – for the first financial year).

Therefore, in practice, the financial year is usually set as follows:

Late filing of financial statements attracts penalties, in particular measures may be taken against the company’s directors who have failed to fulfil their duties.

To put together a package of documents for preparing the financial statements after the end of each financial year, we ask to provide information on the activities in the past financial year (it is enough to send copies):

1. bank account statements (in electronic form, where available), if for any reason they were not provided earlier as part of financial monitoring or were not provided all;
2. contracts and agreements made in the financial year;
3. previously made contracts and agreements which continue in the financial year in question (for example, loan agreements made in the previous financial year);
4. other underlying documentation related to the activity during this period / disclosing the business of the company in the financial year (invoices, statements of work performed, way bills, etc.).

It is important to note that Cyprus companies that have subsidiaries (with holdings in excess of 50%) must prepare consolidated financial statements for the group.

Exemption is granted to the so-called small and medium-sized groups where:

• total balance sheet (total value of assets without deducting liabilities) does not exceed EUR 20 000 000;
• net turnover does not exceed EUR 40 000 000; and
• average number of employees in the financial year does not exceed 250 people.

A group must meet at least two of the above three criteria. In addition, there are two general conditions to be fulfilled for the exemption to apply:

• these companies are not public, meaning that their shares are not traded at any stock exchange;
• preparation of consolidated financial statements is not mandated by any other legislation.

The reporting period for corporate income tax is a calendar year.

Since 2013, the tax rate has been 12.5%.

Filing of the company’s tax returns consists of two stages.

1. Filing a provisional tax return

Cyprus companies are required, before 31 July of each financial year, to estimate their profit for the current year, based on which provisional income tax is calculated, and to submit a provisional income tax return showing the calculated provisional tax.

If the provisional tax specified in the provisional tax return represents more than 75% of the final tax due after the end of the reporting period based on the company’s actual business performance, no penalties arise.

If the provisional tax was less than 75% of the final tax due, a 10% penalty will be charged on the difference between the provisional tax and the final tax.

As a result, if a provisional tax return is not filed, a penalty of 10% of the final tax due will be charged when the final tax return is submitted.

The provisional tax return is submitted to the Tax Department twice, with resulting provisional tax to be paid in two equal instalments by 31 July and 31 December of the same year. It is possible to submit a tax return to the Tax Department only once, paying the entire declared provisional income tax at the time.

If the corresponding 50% of the provisional tax is not paid by the above mentioned statutory deadlines, penalty interest will be charged on the underpaid amount (penalty interest rate changes annually).

Adjustments to the provisional tax return can be made until 31 December. This is advisable for companies that expect to receive significant profit in the reporting period, but are unable to accurately calculate mid-year provisional income tax; such an adjustment allows these companies to avoid penalties (10% on the difference between the provisional tax and the final tax due).

2. Filing the main tax return (Form IR4)

The tax return must be submitted to the Tax Department within 12 months of the end of the reporting period, i.e. before 31 December in the year following the reporting year (for electronic filing, this deadline is extended by another 3 months). The tax return must be certified (and effectively is prepared) by the company’s auditor.

If a tax return is filed late, the company will face a penalty of 5% of the tax due; it may also get fixed fines and action may be taken against its directors who have failed to fulfil their duties.

Please note that tax must be paid before 31 July in the year following the reporting year. Penalty interest is imposed for late payment.

Also, if a tax return is not filed on time, the Tax Department may for example refuse to issue a tax residence certificate to the company for the purposes of applying a double tax agreement.

Special Defence Contribution is levied on dividend income, passive interest income, and rental income received by Cyprus tax resident companies.

However, there are many exemptions from this contribution. For example, subject to compliance with anti-tax evasion policies, dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are exempt from SDC.

SDC is administered separately from income tax, although calculations for this tax must be included on Form IR4 (income tax return).

Account should be taken of VAT matters as well. In most EU countries, Cyprus included, VAT registration is not obligatory until the sales turnover within the country reaches the registration threshold, which is EUR 15 600 in Cyprus.

VAT registration becomes mandatory in the following cases:

A voluntary VAT registration is also possible.

Upon registration at the VAT Authority and allocation of VAT number, a Cyprus company must every quarter prepare and submit a VAT return and pay the resulting tax within 40 days of the end of the VAT period.

In addition, if a company buys and sells goods and services from/to companies incorporated in other EU countries, it has to register for INTRASTAT and/or VIES and submit returns to the Tax Department on the statutory forms.

An INTRASTAT return is submitted if the company buys and sells goods. The filing deadline for an INTRASTAT return is monthly 10 days from the end of each month.

A VIES return is submitted if the company buys and sells goods and services from/to companies. The filing deadline for a VIES return is 15 days from the end of the month in which such a sale was made.

The general VAT rate in Cyprus is 19%.

Cyprus companies normally have to deal with the taxes and tax reporting that has been described above. However, the Cyprus tax system includes other taxes and contributions to be paid and reported on.

The fee for a consultation is usually charged at the rate of USD 300 – USD 400 per hour of a specialist’s time.

[1] The fees are valid as of November 2024. The invoices may include 19% VAT on the fees for the services rendered.