Overview of Legislative Changes of Foreign Jurisdictions

2014 was marked by many events. Also, different countries adopted important legislative acts. We will focus in this article on some of the most significant legislative changes of foreign jurisdictions. We will speak about Cyprus, which adopted the Foreign Account Tax Compliance Act (abbreviated form – FATCA), the requirements for filing financial statements of Cypriot companies tightened, the rules of the regulator changed. In addition, we will mention the changes of the legislation of the British Virgin Islands.

Cyprus signs agreement with United States under FATCA

On 02 December 2014 the Cypriot finance minister and the US ambassador to Cyprus formally signed the intergovernmental agreement between Cyprus and the United States under the Foreign Account Tax Compliance Act (FATCA). The act is a US tax measure enacted in 2010 to prevent and detect tax evasion on income derived by US persons (citizens or residents) from sources outside the United States, improve taxpayer compliance and create greater transparency by strengthening information reporting and compliance with respect to US accounts and assets held overseas.

Like other EU members, in 2013 Cyprus undertook to enter into a Model 1 intergovernmental agreement (under which institutions, subject to FATCA, report information to their own tax authorities for onward transmission to the US authorities). Prior to the formal signature of the agreement, Cyprus was treated as having an agreement in effect from April 22 2014, which enabled foreign financial institutions resident in Cyprus to register on the Internal Revenue Service/FATCA website. In addition, the Assessment and Collection of Taxes Law will be amended to include the collection and automatic exchange of information in line with FATCA.

The purpose of FATCA

The purpose of FATCA is to “detect, deter and discourage offshore tax evasion” by US citizens or residents thus creating a greater transparency by strengthening information reporting and compliance with respect to US accounts.

Major functions impacted:

  • Client on-boarding;
  • Tax reporting;
  • Tax withholding.

What are the consequences of being non-compliant?

FATCA imposes a 30 per cent withholding tax on “withholdable” and “pass-through” payments made to a recalcitrant account holder or a non-participating FFI.

Reporting

FATCA requires reporting to the IRS certain information on direct and indirect US account holders. FATCA reporting will first be required in September 2015 (for 2014 activities), and will be less detailed for 2014 activity. More detailed requirements will be phased in for 2015 and later years.

The approach is US Indicia based on aggregated account balance threshold.

The documentation collected is based on the principle: if US Indicia has identified additional documentations required which are beyond Anti-Money Laundering obligations.

An account holder has indicia of U.S. status if he/she:

  • Is a U.S. citizen or resident;
  • Was born in the U.S.;
  • Has a U.S. residence or mailing address;
  • Has a U.S. telephone number;
  • Has provided standing instructions to transfer funds to a U.S. based account;
  • Has granted power of attorney over the account to a person with a U.S. address;
  • Has a “care of” or hold mail address that is the sole address of account holder.

To sum it up, the FATCA regulation combats offshore tax evasion on US source income maintained with FFI. It serves the goal of identifying US Person status and accounts held by such individuals & entities (>10%). It though carries some additional complexities, for example: the change in circumstances, 30+ statuses, repeatable remediation procedure, unpredictable changes in regulation expected in future. FATCA being a new piece of legislation in Cyprus as well as in some other countries needs to be studied in detail and in no way should it be neglected.

Talking about the innovation of the intergovernmental agreement between Cyprus and the USA, we come to the no least important change that will undoubtedly affect the business of companies in Cyprus, namely – tightening of requirements to reporting deadlines for Cyprus companies.

Requirements to submission of financial statements of Cyprus companies

To update the information and records the Registrar of Companies of Cyprus decided to proceed with the liquidation of dormant or inactive companies. A company is considered inactive, if it fails to provide the following:

  • Annual report with the financial statements for the period till 2013, inclusive, and/or;
  • Fails to pay the state annual fee (350 euros per year).

In the case of failure to submit the annual financial statements for the period till 2013 inclusive, in accordance with article 327 of the Companies Act, a company is excluded from the register of companies under the following procedure:

  • The first notice is mailed with a one month-term of respond;
  • The second notice is sent by registered mail within 14 days, in the case of failure to receive the response to the first notice. The company shall respond within one month;
  • The publication in the Cyprus Government Gazette. Should the company fail to respond to the second notice, upon expiration of one month an entry will be published in the Cyprus Government Gazette on closure of the company, mailing at the same time the Third Notice (notice of liquidation) to the company. The company has a 3 month-term to respond.

Thus, the total time till the final deactivation of a company makes up about 5 months.

If the company responds to notices received and provides all the necessary financial statements to the Registrar of Companies, the above procedure for removal of the company from the register may be at any suspended time during the entire period. It is important to note that removal of the company from the Register is not equivalent to the liquidation procedure, because in the first case, the company is “frozen”, just loses its status and legal capacity, but can be restored at the request of any interested person, including tax authorities, the prosecutor’s office.

Non-payment of annual state duty

Pursuant the Law 190 (I)/2012 from June 2011, all companies entered in the Cyprus Register of Companies, are obliged to pay till 30 June and further to pay the state duty to be considered capable legal entity, as well as to maintain records in the register of companies. In case of delayed payment of the appropriate deputy, the company is obliged to pay a fine, as follows:

  • Two (2) month delay from the due date, fine of 10%;
  • Five (5) month delay from the due date, an additional fine of 30%;
  • If the company fails to pay the annual duty with the fines imposed on it, the Cyprus Registrar of Companies removes the company from the Register of Companies in accordance with the Companies Act.

As for the method of payment of the duty and fines on it, it can be paid independently via the electronic payment system (JCC) by Visa credit card, cash at the cash desk of the Cyprus Registrar of Companies or through secretary/administrator of the Cyprus company.

Tightening of requirements to deadlines for reporting and to payment of duty (the latter is not an innovation of 2014) is aimed at maintaining active companies and closing “abandoned” ones.

Another tightening is connected with the all-European tendency to combat money laundering: the European Union introduces more new rules to control the flow of funds in this fight. Let’s focus on such innovations in Cyprus.

Directives of the European Union and the Cyprus Securities Commission

During the annual meeting in Berlin of the OECD’s Global Forum on tax transparency and exchange of information, Cyprus became one of the first signatories of the new Standard of automatic exchange of tax information. The signing of this document opens a new stage of automatic exchange of information, which is based on the provisions of the multilateral OECD Convention on mutual administrative assistance in tax matters. It is expected that countries that have signed the Standard first will exchange information on tax matters since September 2017. Other countries will start automatically the exchange in 2018.

The tax legislation became tighter. Some of the basic changes of taxation in Cyprus are the following:

  • Managing directors of companies are responsible for tax payment of their company;
  • Fines for failure to pay taxes or tax evasion increased.

On 28 March 2014 the Ministry of Finance of Cyprus issued a new decree, valid for 35 days, under which a number of reliefs are introduced in respect of the restrictive measures imposed in Cyprus a year ago. In an official press release the Ministry stated that this decree is evidence that “the island’s banking system stabilizes and recovers confidence”. However, it is worth mentioning that the Decree on international banks remains unchanged.

New reliefs are as follows:

  1. Cancelled limit for withdrawal of funds for individuals and legal entities.
  2. Increased current monthly limit on remittances in the Republic: for individuals – from € 20,000 to € 50,000; for legal entities – from € 100,000 to € 200,000.
  3. Any person is allowed to open a new bank account subject to the following conditions:
  • Such person is not an existing client of a credit organization;
  • Designation of the account – term deposit; and the total amount of invested assets shall make up over € 5,000.

However, it is worth considering that the new term deposit can not be withdrawn before the expiration of the term of deposit.

  1. The prohibition to withdraw the term deposit before it expires is cancelled.

In general, the Ministry of Finance said that Cyprus “has successfully passed the key points in the recovery process” and this proves that the banking sector of the island effectively works to strengthen their positions.

These were the main innovations in Cyprus. Now we would like to highlight a change of the legislation of the British Virgin Islands.

Change of the legislation of the British Virgin Islands

The amendment made to the British Virgin Islands legislation in September 2014 introduced a more precise definition of bookkeeping.

The amendments to the Mutual Legal Assistance (on Tax Matters) Act, 2003 (MLA), published in 2012 bound the limited liability company to carry out bookkeeping in accordance with the OECD. The 2014 amendments greatly expanded the requirements for bookkeeping.

The new edition of the law contains the concept of the so-called “supporting documentation”. The law does not contain a specific list of documents, but “supporting documentation” means any documentation reflecting the business of the company, – transactions on accounts, deals, etc. “Supporting documentation” can be invoices, copies of contracts, receipts, bank statements and other documents, allowing the preparation of financial statements. The company shall be ready at any time to submit information about its financial situation and the following information about the funds received and expended, sales and procurement of goods, data on assets and liabilities.

The company must inform in writing the registered agent about the business address at which this documentation is kept. In case of change of this address the company shall, within 14 days, inform in writing the registered agent about the relevant changes. Accounting reports and “supporting documentation”shall be kept for five years from the date of the deal (transaction). The registration agents carefully monitor compliance with this requirement; in the absence of such information, they are forbidden to serve such a company.

In this article, we have examined the changes that can not be overlooked. On the same time they follow the global trends: FATCA covers more and more countries, offshore jurisdictions gradually tighten requirements, tax authorities increase the level of control. All innovations just confirm the trend of globalization and to strengthening of the fight against tax evasion and money laundering.

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