Dear Associates,

With this letter, we would like to inform you that we, Nasos A. Kyriakides & Partners LLC, have recently proceeded with setting up a VAT advisory and compliance department. The services to be provided will include specific review of agreements and assistance with VAT compliance including registration and filing of quarterly VAT returns. The need to set up a specialised department has arisen from the fact that lately it has come to our attention that we are asked to execute various agreements without those agreements being reviewed from a VAT viewpoint.

We take this opportunity to present a very brief summary of the VAT legislation applicable in Cyprus.

1. VAT REGISTRATION

A. Registration with the Cypriot VAT authorities is compulsory for businesses with (a) turnover subject to VAT in excess of €15.600 during the 12 preceding months or (b) expected turnover subject to VAT in excess of €15.600 within the next 30 days.

B. Businesses with turnover of less than €15.600 or with supplies that are outside the scope of VAT but for which the right to claim the amount of the related input VAT is granted, have the option to register on voluntary basis, enhancing their status as a business person within EU.

C. Furthermore an obligation for VAT registration arises for businesses carrying out economic activities from the receipt of services from abroad for which an obligation to account for Cyprus VAT under the reverse charge provision exists, subject to the registration threshold of €15.600 per any consecutive 12 month period.

D. Additionally, as from 1 January 2010 an obligation for VAT registration arises for businesses engaged in the supply of intra-community services for which the recipient must account for VAT under the reverse charge provisions. No registration threshold exists for the provision of intra-community supplies of services. In addition, a Company providing intra-community supplies of services is obliged to register with for VIES and make electronic declarations of intra-community supplies of services on a monthly basis.

2. EXAMPLES OF APPLICATION OF THE VAT LAW FOR COMPANIES ENGAGED IN INTERNATIONAL TRANSACTIONS

VAT may have an impact for companies engaged in international activities outside of Cyprus.

In the examples stated below, NO VAT MUST BE CHARGED BUT COMPULSORY VAT REGISTRATION ARISES due to the obligation to account for Cyprus VAT under the reverse charge provisions for the receipt of services from abroad. All companies will be able to claim 100% of the input VAT suffered in Cyprus and via the reverse charge provisions. All companies will always be in a VAT refund position (VAT suffered on services from Cyprus (e.g. legal and accounting fees).

A. A Cyprus company providing consultancy services to a Russian company. For the rendering of those services, the company subcontracts the services of a non EU company. No VAT must be charged on the provision of consultancy services to a Russian company.

B. A Cyprus company engaged in the purchase and sale of equipment with non EU parties. Goods are shipped from one non EU party to the other non EU party. The Cyprus company also pays a third party for intermediary services for the acquisition of equipment. No VAT must be charged on the sale of equipment.

C. A Cyprus company engaged in the granting of a loan to a company established outside the EU. The company received certain consultancy services from abroad in relation to the loan activities. No VAT must be charged on the interest.

D. A Cyprus company is engaged in intellectual property activities. It pays license fees to a company established in a non EU country and sublicenses those rights to another company established outside the EU. No VAT must be charged on the the license fees.

3. HOLDING COMPANIES

Holding of investments is not considered to be a business activity for VAT purposes. Hence, pure holding companies do not have the right or the obligation to register with the VAT authorities. This is an advantage in case where services related to holding activities are received from outside the E.U. If received within the E.U, the provider of the service will charge the Cyprus Company with VAT of its jurisdiction.

In case where a Company carries out economic activities (e.g. provision of loans or services) and also holds investments (subsidiaries) then on the receipt of services relating to its holding activities from abroad, it will need to self-charge VAT. This VAT may not be claimed since it does not relate to economic activities. Hence careful planning is needed in case where a company carries out economic activities and also holds investments.

4. PENALTIES

The penalty for late registration is €85 per month calculated from the month from which a company has an obligation to register with the VAT authorities. In addition, a penalty of €51 applies for each quarterly VAT return submitted late. In case that there is a VAT payable and this is not paid within the deadline, 10% penalty on the VAT payable and interest will arise. The penalty for late VIES registration is €50 per month.

In summary VAT is a transaction based tax. It’s therefore highly recommended that prior to the execution of an agreements, this is reviewed from a Cyprus Viewpoint.