Strategies for extracting profits from owner-managed companies: Benefits-in-kind

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What are benefits in kind? In general, these are direct or indirect benefits, which you as an employee or executive director of your company receive in addition to your salary. Some benefits in kind are taxable while others are not. The most common benefits you can claim from your company are: health insurance, company car, mobile, job-related benefits, accommodation, childcare, school tuition, travel and entertainment allowance, cheap or interest-free loan.

Fortunately or not, the Cyprus Income Tax Law 118(I)/2002 has only two instances mentioning the taxation of benefits in kind, both equally vague and unhelpful, so determining what is taxed is not straight forward and much of it boils down to your particular circumstances and a good professional tax advice.

Business and personal implications
The business rational of using benefits in kind is in the freedom of your company to structure and provide a taxable or non-taxable benefits.

The taxable benefits will be an allowable expense and reduce the company’s tax base. However, Cyprus social insurance legislation implies that taxable benefits in kind are insurable earnings and social insurance contribution must be pain by both, the employer and the employee. Furthermore, where the company pays an expense for your benefit or use, it will not be able to claim the input VAT, which adds to the total cost of this strategy. Although, this particular VAT implication can be sidestepped, the benefits in kind remain one of the tricky parts of Cyprus income tax and hard to generalise.

Benefits in kind form part of your emoluments and you will have to pay social insurance as well as income tax.

Tax effectiveness
Similar to salary and bonus remuneration, the tax effectiveness of the benefits in kind is good up to a point; however, contrary to salary and bonuses, the choice of benefits can make a bug difference in the overall cost.

Tags: tax strategies