Tax audits in Cyprus represent an important tool of state control aimed at detecting tax violations, ensuring tax transparency and combating tax evasion. In recent years, there has been an increase in tax control related to international initiatives such as BEPS (Base Erosion and Profit Shifting), developed by the OECD, as well as the tightening of the European Union (EU) tax transparency and information exchange requirements.

Cyprus has traditionally been seen as an attractive jurisdiction for international business due to its low corporate income tax rate (12.5%) and extensive tax planning opportunities. However, in response to international pressure, the country has adopted a number of legislative changes aimed at strengthening controls on transfer pricing, economic presence (substance) and compliance with automatic exchange of tax information obligations under EU Directive DAC6.

This analysis details the mechanisms of tax audits, the main risks for companies, preparation methods, legal defenses and a comparative analysis of tax controls in Cyprus and other jurisdictions.

Tax control in Cyprus: legal framework and audit mechanisms

Regulatory authorities and legal provisions

The main regulatory bodies exercising tax control in Cyprus are:

1. The Tax Department of Cyprus – the main body responsible for tax administration, collecting tax revenues, conducting audits and detecting irregularities.
2. Ministry of Finance of Cyprus – develops tax policy and monitors the implementation of tax legislation within the framework of the country’s international obligations.
3. Cyprus Tax Authority – processes tax returns and conducts corporate tax audits.

The main legislative acts regulating tax audits are:

• Income Tax Law (Income Tax Law, L118(I)/2002) – establishes the rules for the taxation of income of companies and individuals, as well as the mechanisms for conducting audits.
• VAT Law (VAT Law, L95(I)/2000) – regulates the procedure for administration and control of value added tax.
• AML Law (AML Law, L188(I)/2007) – obliges companies to provide information on beneficial owners and sources of income.
• Transfer Pricing Rules (Transfer Pricing Rules, effective January 1, 2022) – requires companies to maintain documentation confirming the market nature of transactions between related parties.

Types of tax audits

Inspections of Cypriot companies are divided into scheduled and unscheduled inspections.

1. Scheduled audits are conducted on a regular basis and cover a wide range of companies. They are aimed at confirming the correctness of tax reports and compliance with tax legislation.
2. Unscheduled audits are initiated in case of suspected tax offenses, as well as at the request of international organizations such as the EU, OECD and FATF (Financial Action Task Force).

An audit may be desk audit, when the tax authority analyzes the submitted documentation without on-site visit, or field audit, when inspectors visit the company’s office and conduct an on-site audit.

The most common reasons for the appointment of an unscheduled audit:

• Significant discrepancies in the company’s financial statements.
• Frequent losses with significant turnovers, which may indicate tax evasion schemes.
• Transactions with offshore companies with no real economic presence.
• Notifications from foreign tax authorities as part of automatic exchange of information.
• Complaints from counterparties, clients or employees.

Tax audit preparation

Internal tax audit

Companies should regularly conduct internal tax audits, which include:

1. Financial statement audits – making sure that all accounting records match the tax returns.
2. Transfer pricing controls – it is important to maintain documentation to support the market terms of transactions between related parties.
3. Compliance with Substance Requirements – the company must have a real office, employees and operations.
4. Compliance with reporting deadlines – penalties for delays can be up to EUR 10,000.
5. Availability of a full set of primary documents – invoices, contracts, certificates of work performed.

Using technology for tax control

Modern companies use specialized software to automate tax accounting:

• SAP, Oracle NetSuite – allow centralized management of accounting and tax liabilities.
• AI-systems of tax control – analyze data and identify potential tax risks.

Protecting the company during a tax audit

Defense strategies

When conducting a tax audit, a company can:

1. Engage tax lawyers and consultants – this reduces the risks of errors when communicating with tax authorities.
2. Appeal the results of an audit – an appeal can be filed with the Administrative Court of Cyprus.
3. Use international tax treaties – Cyprus has more than 60 double tax treaties.

Case law

Example: In 2022, a Cypriot company filed a lawsuit in the European Court of Justice against the Cypriot tax authorities for wrongful additional tax assessment. The Court recognized a violation of EU regulations and ordered the tax authorities to reconsider the decision.

Comparative analysis of tax control

Conclusion

Tax control in Cyprus is tightening, which requires companies to prepare thoroughly for audits. It is important to comply with tax accounting requirements, maintain transfer documentation and control tax risks. A competent tax planning strategy and legal protection can minimize the consequences of audits and avoid serious penalties.

AlmanovaLaw provides professional legal support in matters of tax control and protection of business interests in Cyprus. Our specialists have in-depth knowledge of tax legislation and will help companies to prepare for tax audits, minimize tax risks and effectively protect their interests in case of disputes with tax authorities.

We offer comprehensive services including:

1. Preliminary tax audit – detailed review of financial statements and identification of potential tax risks prior to an audit.
2. Development of defense strategy – preparation of arguments and justifications for tax audit, advice on transfer pricing and economic presence requirements.
3. Tax audit support – representation of the company’s interests before the Cyprus tax authorities, defense during in-house and on-site audits.
4. Tax appeals – preparation and filing of appeals, representation in administrative and court proceedings.
5. International tax planning – analysis of tax treaties, advising on avoidance of double taxation, use of legal methods of tax optimization.

Our team of lawyers and tax consultants will provide reliable protection of your business, help you avoid penalties and ensure full compliance with the requirements of Cypriot legislation. AlmanovaLaw is your reliable partner in tax regulation in Cyprus!