Cyprus is situated in the eastern Mediterranean at the cross roads of three continents- Europe, Asia and Africa covering an area of 9251 sq.km.. The Republic of Cyprus was established in 1960, after gaining its independence as a British colony. Since 1974, however, a de facto division of the island has existed, with the Greek Cypriot community controlling 63% of the territory, and the Turkish Cypriots, backed by Turkish Army Units, 37%. It is a member of the Commonwealth and the European Union since 2004. It is a prosperous country with is annual Gross Domestic Product rising to an average of Euro 18,810 per capita. The economy is dominated by professional services, with the tourist and the financial services industries being the strongest over the years.
The Cyprus government has worked hard to create a favorable tax regime while at the same time maintaining a normal-looking domestic economy, albeit with rates of taxation, which are the most beneficial in Europe and very low by international standards. The success of this program is attested by the high numbers of International Business Companies (IBC) (over 50,000) registered in Cyprus since 1975.
With the island’s accession to the EU in 2004, a restructuring of the tax regime was introduced, with its implementation commenced on the 1st January, 2003. Domestic and International Business Companies are subject to the same tax provisions and a 10% corporation tax is levied on their profits. Since the 1st of January 2008 the islands official currency is the Euro and the Cyprus Pound is no longer used.
The population of Cyprus is about 800,000 with Greek Cypriots representing approximately 78%. Turkish Cypriots 18% and the remaining 4% representing other minorities Greek, English and Turkish are the official languages. English is spoken by most of the population and is widely used in commercial and governmental sectors.
The structure of the government is similar to other western democracies where human rights, political freedom and private property are safe guarded. Cyprus has a presidential system of government. The President is the head of State and is elected for a five year term. Executive power is in the hands of the Council of Ministers, the members of which are appointed by the president. The House of Representatives is the islands legislative body and it consists of 56 elected members who serve a five year term. The legal system is based is based in English law. Cyprus is a member of the United Nations, the Commonwealth and the Council of Europe. Cyprus became a full member of the European Union on the 1st May 2004.
The island has excellent telecommunications, air and port connections. There are two international airports in Larnaca and Paphos whereas the major port facilities are those of Limassol and Larnaca.
Cyprus is a free- enterprise economy with the government’s role being limited to regulation, supervision, planning and the provision of public utilities.
Excellent banking facilities are also available with a number of onshore banks, offshore banking units and specialized financial institutions operating on the island. International correspondent networks are maintained by onshore and offshore banks.
Under the current tax legislation, Cyprus has the lowest tax regime in Europe and its role as an international financial centre is greatly enhanced. Cyprus clearly stands as a prestigious tax – incentive EU country and is free from suspicions usually associated with “tax havens” which have zero tax.
The Cyprus legal system is fundamentally based on its English Law and practice which Cyprus inherited from the UK as a result of the British Colonial rule of Cyprus through to 1960. English case law is closely followed and all statues regulating business matters as procedures are based on essentially on English laws. A major difference between the English and the Cyprus legal system is that under the law, there is a written Constitution which aside European Law is the Supreme Law of State.
The accession of Cyprus into the European Union has brought about changes in legislation and Cyprus is now in full conformity with “Acquis Communitaire”.
The Supreme Court, which pronounces final judgement on administrative law matters, follows the French “Droit Asdminintratif” principles. More importantly, the republic is a signatory and forms part of any international treaties and conventions, like the European Convention on Human Rights.
Since the 1st of January 2008, the Republic of Cyprus as a member of the European Monetary Union, introduced the Euro as its official currency, replacing the Cyprus Pound at the locked exchange rate of £1CYP to 0.575284 EURO.
BENEFITS OF CYPRUS
Following the recent tax reforms and the reform of the Exchange Control Law all citizens of the European Union (EU) can register a company in Cyprus as any other Cypriot.
The permit from the Central Bank that was previously a precondition for owning shares in a Cyprus company is no longer required.
In addition all companies are the same and are taxed at the same rate of 12,5%.
it is no exaggeration to say that the accession of Cyprus to the European Union (EU) – as of the 1st of May 2004 and the enactment of the new Cyprus tax legislation, which is now compatible with the acquis communautaire, have made Cyprus one of the most attractive locations for the incorporation of International Business Companies (IBCs).
Following the recent tax reform a company is taxed in Cyprus if it is “resident in the Republic”. A company is only ‘resident in the Republic’ if its business is centrally managed and controlled in Cyprus. Therefore, under the new rules, a resident corporation is taxable on its worldwide income accrued or arising from sources both within and outside Cyprus if it is managed and controlled from Cyprus.
The IBCs incorporated in Cyprus can perform many functions such as the holding of other company shares, trade tax-free in stock-markets around the world or locally, hold land in other countries, resulting in valuable lawful tax benefits to its owners.
A uniform 12,5% corporate tax rate, applicable to the worldwide income, is now levied on all resident companies from the 1st of January, 2003. This is the lowest corporate tax rate in the European Union and thus the most advantageous standard rate of corporation tax for Cyprus.
In view of the new tax legislation, the Holding International Business Companies operating from Cyprus are now in a much more beneficial position because they can enjoy the benefits deriving from the tax exceptions as well as the corporate tax benefits by virtue of the new tax legislation.
Tax Exemptions – 50% of interest receivable. In view of the new tax legislation 50% of interest received by corporation is tax exempt, excluding interest received from the recipient’s ordinary course of business or closely connected with the recipient’s ordinary business. Interest interconnected or if part of the ordinary business of the company then the whole amount is normally taxed at 12,5%.
Restructuring provisions – In view of the incorporation of the EC Merger Directive 90/434/EEC into the new tax law, there are tax exemptions on the transfer of assets (including shares) under a re-organization (merger / de-merger / transfer of assets).
Gains on shares and Capital Gains Tax – Profits resulting from buying and selling shares are exempted from tax in Cyprus. Furthermore, there is no capital gains tax except for the 20% capital gains tax applying on gains accruing from disposal of immovable property held in Cyprus and shares in non-listed companies, which own immovable property in Cyprus. Therefore, there is no capital gains tax imposed on disposal of property owned abroad or disposal of a company’s shares that may hold property abroad.
Also the profits from a permanent establishment abroad are exempt from taxation. The exemption does not apply if (i) the Permanent establishment directly or indirectly engages in more than fifty per cent (50%) in activities that produce investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus.
Distributions by Cyprus Holding Companies Dividends paid to non-resident shareholders are exempt from withholding tax. In fact, Cyprus does not impose withholding taxes on payments of dividend, interest and royalties (provided the intellectual property rights are not used in Cyprus) to non-resident recipients.
Corporate Tax Benefits – Carry forward of Losses Tax losses for the year 2000 onwards may be carried forward for 5 years. Losses incurred abroad by a permanent establishment of a Cyprus company can be offset against profits of the Cyprus Company.
Group relief – The Group relief rules are now enacted, providing for group relief of tax losses between a holding Company and its subsidiaries in the event where the Holding Company owns at least 75% of the Subsidiary directly or indirectly and/or otherwise among companies of the same group for the whole year. However, losses brought forward will not be available for Group Relief.
By virtue of the said rules a company is considered as a member of a group if it is at least a 75% subsidiary of the other, or both companies are at least the 75% subsidiaries of a third company.
Net of Double Tax Treaties – Cyprus combines a low-tax regime with a network of double tax treaties. It has concluded the highest number of double tax treaties compared to any other offshore jurisdiction, particularly with Central and Eastern European Countries and a number of Middle Eastern countries. Most of the Treaties follow the OECD model and all of them have the impact of reducing or eliminating the normal withholding taxes imposed by the Contracting states on dividends, interest and royalty payments. This is beneficial for trade with certain Eastern European Countries and Russia because foreign investors investing in Eastern Europe have the opportunity to channel their investments through a country, such as Cyprus, which has a treaty with the investment recipient country allowing for a reduction and in some cases elimination of the withholding taxes.
If you need further clarifications or wish to know more about local taxation and the benefits you may derive from owning a Cypriot IBC we are at your disposal.
The business vehicle of the Holding Company, has become very popular after the accession of Cyprus to the European Union (EU) and the enactment of the new Cyprus tax legislation which is now compatible with the acquis communautaire. It important to note that the laws and practices of Cyprus are now harmonised with the EU Laws and Directives, the Code of Conduct and the Organization for Economic Cooperation and Development’s recommendation on Harmful Tax Corporation.
DOUBLE TAX TREATY NETWORK
The Double Tax Agreements concluded and their respective date of enforcement between Cyprus and other countries can be found on the official website of the Ministry of Finance and the below table.
Other than the fifty Double Tax Agreements which are presently in force, the conclusion of various other Agreements is pending. These Agreements are currently under negotiation. Moreover, certain Agreements have already been concluded and appear below, however they are pending enforcement.