Cyprus Tax Investigation on Physical Persons. The pursue of undeclared income.

AO - kt to add more hashtaqs and publish We explain what is a Capital Statement and how the Cyprus Income Tax Office conducts its investigations to individuals!

What is the Capital Statement: 

A Capital Statement is the tool used by the Cyprus Income Tax Office to Identify Undeclared Income (mainly from Directors or Owners of Cyprus Companies or Self Employed Persons). Is a statement that explains how the wealth of the taxpayer and their family was accumulated by their declared income sources.

In a nutshell, it is the assessment of wealth created by the tax payer and their family at different points in time, usually within a 7 year interval and an assessment / validation of how this wealth has been generated.

Even though we refer to a "capital statement" as a statement, rather it is a lengthy report / booklet summarising all 3rd party documentation gathered by the clients together with the accountants / tax experts workings to justify how their wealth is justified at a specific point in time based on their declared and taxed income. Family is the wife / husband and the unmarried children of the taxpayer in question (a marriage certificate must escort the statement).

Who issues / requests a capital statement?

Capital Statements are requested by the Cyprus Income Tax office to identify undeclared income of directors or shareholders of Cyprus Companies and self employed persons. The income tax office may also request these statements for employed persons or any person for which there are reasonable grounds of tax avoidance. Effectively a capital statement is a tool to assess / investigate taxpayers who seem NOT to be paying their fair amounts of tax.

This task is a very tricky and time consuming task and could entail the taxpayer to tax adventures if not exercised correctly. This exercise requires the accountants or tax expert of the client to gather independent 3rd party evidence for all the assets and all liabilities of the taxpayer and their family and verify that any increases in their net wealth are justifiable based on their declared income, which should also be supported by independent 3rd party evidence. In the event that the assets can not be justified by the family joined income then the Cyprus Income Tax Office will assume that the family has been earning undeclared income to acquire / generate the reported wealth, which was not taxed, and as a result it will tax it and charge penalties and fines to date.

The elements of a capital statement

Assets & Liabilities - Wealth Value

Included in the capital statement report is the below 3rd party independent documentation which evidences ownership of the assets and liabilities of the tax payer and their family in order to arrive the actual value of the wealth created in the specified interval.

3rd Party Documentation:

• Bank Confirmation Statements showing all bank current & loan accounts together with corresponding collateral and interest payments.
• Motor Vehicle ownership certificate.
• Title Deeds evidencing ownerships held.
• Pancyprian land registry search to evidence whether or not the tax payer, unmarried children or wife own property in Cyprus.
• Directors current accounts, extracts from audited financial statements and other relevant information.
• Household fixtures & fittings, additions, repairs and other relevant information.
• Any other fixed assets or liabilities in existence at the interval specified in the Capital Statement request.

Income & Expenses - How was wealth acquired / paid for?

Once the financial position / wealth of the family is been constructed then the Income Tax Office requires the tax payer to evidence how this net wealth was created and how it is justified based on the salaries earned and the relevant expenditure of the family.

Income documentation

• IR.63 - Employers confirmation of the year end total salary including dividends and bonuses, allowances etc.
• Dividend Declaration and payment documentation, if applicable.
• Personal Tax Returns (IR.1s).
• Social Insurance statements for the years in question form the Social Insurance Office.
• Any other income earned by the taxpayer or their family locally or overseas which can by evidenced and produced by an independent 3rd party.

Expense documentation

Once the income of the family or the tax payer is been calculated for all the years in question then the annual living expenditure must also be constructed.

Such living expenditure include:

• Living expenses (nutrition expenses, groceries, supermarket expenses, etc).
• Accommodation expenses (rent, electricity, water, maintenance, gas, etc).
• Car expenses (petrol, maintenance, servicing, insurances).
• School expenses (accommodation, excursions, tuition).
• Gifts to friends and relatives.
• Travel and entertainment expenses.
• Any other expenses relevant to the circumstance of the taxpayer and their family

The process of preparing a Capital Statement

The process of preparing a capital statement is a lengthy and cumbersome exercise as it involves the gathering of 3rd party independent evidence from various departments and sources of information. From experience, the more organised the tax payer is the smoother the process of gathering such information is. On the other hand, if wealth generated comprises many assets and assets of financial nature then the longer it takes to gather such information.

What causes delays in the gathering of information?

Usually the gathering of the below documents causes delays however and as mentioned above the more assets or liabilities the taxpayer has the longer it usually takes to gather the required information.

• Directors current account balances, especially if the financial statements are not up to date and need to be prepared by the accountants and auditors.
• Dividend declarations / evidence, especially if the financial statements or tax returns of the individual are not up to date.
• Bank confirmation statements, especially if the tax payer is really busy and does not have sufficient time to chase the banks to produce them; and / or if the tax payer is dealing with many banks.
• Existence of private loan agreements which are not written or duly signed and must be recreated.
• Assets jointly owned not backed up by deposited agreements or any agreements.
• Evidenced held by persons living overseas.

Why it is important to gather the information quickly?

The gathering of information is very important as there is a deadline to prepare the Capital Statement which it self is a complicated exercise. As a result the gathering of the required information would determine the length required to prepare this capital statement by the accountants / tax advisers. Usually the time frame given by the Income Tax Office for such a statement to be prepared is within two months but it is common practise to request extension*3.

Note: Extension is obtained by faxing the income tax office a letter explaining the reason for the extension and proposing a new timeframe. Even though the tax office may confirm receipt of the extension verbally, it does not provide such confirmation in writing, however this is a long tested practise.

THE CAPITAL STATEMENT WILL INDICATE THIS GAP AS THE PURCHASING PRICE OF THE NET ASSETS ACQUIRED CAN NOT BE JUSTIFIED BY THE NET INCOME EARNED WHICH COULD LEAD TO TAX ADVENTURES 

Should you be worried if you receive such a request?

The sincere answer is yes, however it depends on whether or not you have undeclared income and most importantly if you have used this income to acquire fixed assets such as houses, cars, or even liquid assets such as cash at bank, stocks, debentures.

If this is the case, then the capital statements will indicate this gap as the purchasing price of the net assets acquired can not be justified by the net income earned which could lead to tax adventures. On the other hand if you have been using your salary or declared dividends to acquire your assets there will be no such gap in this number crunching exercise and nothing to worry about!

WE STRONGLY ADVISE YOU TO PREPARE A CAPITAL STATEMENT EXERCISE' IN ADVANCE TO ENSURE TAT ARE NO LOOSE ENDS IN YOUR FINANCES BEFORE THE INCOME TAX OFFICE REQUEST IT

Can I Be Proactive and protect myself from Such an Investigation?

If the are reasons to believe that such a statement can not be satisfactory completed then we Strongly advice you to contact us to prepare for you a "Capital Statement Exercise" which will reveal gaps in the computations and the number crunching for which tax assistance will be offered by our experts to bridge these gaps.

Such gaps are usually created when you are allowed to withdraw money for your company (or business) under the directors current accounts, or when your financial statements are not up to date or if you have been given money from parents or other parties in cash form.

Irrespective, these gaps must be bridged to avoid tax adventures as your net worth will not be supported by adequate independent 3rd party evidence of income, consequently the Income Tax Office will tax this difference.

Common Issues & Deficiencies Identified in Capital Statements

We list below the most common deficiencies identified in the majority of capital statements prepared by our firm:

• Acquisition of assets and cars from undeclared income.
• Family assistance in cash form which is not allowed by the Income Tax Office; only bank to bank financial health is accepted by the income tax office.
• Financial Statements not up to date and as a result derail the timeframes and accountants / tax experts work until the dividends or directors current account balances are known.
• Undeclared commission income, becomes obvious in the statement.
• Undeclared rental income, becomes obvious in the statement.
• Personal loans or agreements not honoured with contracts.

CYAUSE AUDIT SERVICES

About Us

CYAUSE Audit Services Ltd is expertising in Cyprus Tax Investigation, focusing on the capital statement, the documents needed as well as how to be prepared for such exersise.

CYAUSE Audit Services is an Audit & Assurance firm with offices in Nicosia and Limassol. During 2015 we have been awarded by I.C.P.A.C and the A.C.C.A (local and international association of Chartered Certified Accountants) for the Quality of our Audit Services and our Office's Procedures.

Being a Truly International Audit & Assurance firm, we have associates from all over the world and we are constantly looking for new associates to expand our network further. At present, CYAUSE Audit Services operates internationally as Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience.

Our network covers almost 40 jurisdictions with over 2,000 professionals, it supports more than 10,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and processes at least 170,000 payslips globally.

CYAUSE Audit Services Ltd is also a member of the 3E Accounting Network, an international accounting network which originates from Hong Kong and has more than 80 members from all over the world.

Contact Us

If you would like us to assist you with your investment firm or fund please contact us at kt@cyprusaccountants.com.cy or call us at +357 22 336 321.

Learn More about Cyprus Corporate Environment

Information about CYAUSE Audit Services and the Cyprus Corporate & Tax System can be obtained from our Website or our YouTube channel which provides valuable information about the Corporate & Tax Environment of Cyprus.