Cyprus - The Ideal International Business Company Centre
Introduction
Cyprus is situated in the eastern part of the Mediterranean Sea, at the cross-roads of Europe, Africa and Asia. It enjoys a healthy and pleasant climate with dry summers and mild winters. Cyprus governmental structure is modelled on Western Democratic systems. It follows closely the United Kingdom legal system.
Cyprus signed an Association Agreement with the European Economic Community in 1972, and on 4 July 1990 made a formal application for full membership of the EEC.
During the Copenhagen European Council (12th - 13th December 2002) Cyprus officially confirmed the successful completion of the accession negotiations and was invited to join the European Union on 1st May 2004.
The signing of the Accession Treaty for Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia took place in Athens on April 16th, 2003.
As from 1st May 2004, Cyprus is a member state of European Union.
One of the Government's primary objectives of its policy is to attract foreign investment. To achieve this, it has offered incentives to non-residents encouraging them to establish legal entities for the purpose of managing their overseas affairs or offering services abroad from Cyprus.
Definition of International Business Company
An IBC (offshore company) in Cyprus is essentially a Cyprus registered company operating outside Cyprus.
Cyprus Tax
The main provisions of the tax reform affecting International Business Companies (IBC's) are outlined below:
(a) Cyprus tax residence
A company is taxed if it is a resident of Cyprus.
A company is resident if its management and control is in Cyprus. The incorporation of a company in Cyprus is not sufficient now to establish residence.
Although the term "management and control" is not defined in the legislation, it is generally understood to mean the place where the board meetings take place or where the majority of the board members reside.
A company which is resident is taxed in Cyprus, will only be taxed on its profits arising from a permanent establishment in Cyprus. The term "permanent establishment" basically includes an office, a branch, a factory or laboratory, a mine, an oilfield, or a construction site for a project exceeding three months. Rental from immoveable property located in Cyprus and profit from sale of goodwill in Cyprus is also
taxable irrespective of the existence of a permanent establishment.
(b) Corporation Tax
There is no longer a distinction between local companies and International Business Companies. A uniform corporation tax rate of 10% is applicable for all companies.
Exemptions from corporation tax
Dividend income received in Cyprus by a foreign corporation is wholly exempt from tax in Cyprus.
Profits earned from a permanent establishment abroad are fully exempt from corporation tax except if:
More than 50% of the paying company's activities result in investment income; and
The foreign tax is significantly lower than the tax rate payable in Cyprus.
Profits from the disposal of securities are not taxable for all Cyprus tax residents (individuals and companies).
50% of interest earned other than interest earned in the ordinary course of business (although other interest is subject to defence tax as explained below).
Tax losses
The five-year restriction for the carry - forward of tax losses has been abolished. Therefore, tax losses can now be carried forward indefinitely to be set - off against future profits.
Group relief
Provisions for group relief have been introduced whereby companies can transfer losses to be set off against taxable profits of other companies in the same group. Two companies will be considered as part of the same group if one is a 75% subsidiary of the other or both are 75% subsidiaries of a third company. Also, group companies must be Cyprus residents.
Reorganizations/amalgamations
The new tax legislation adopts the relevant EU directive whereby reorganizations, amalgamations, mergers and acquisitions can be effected without any tax implications.
(c) Withholding tax (special defence contribution):
On dividends payable
There is a 15% withholding tax on dividends distributed to shareholders who are residents of Cyprus, but no tax on dividends paid to non-resident shareholders.
There is a deemed distribution of dividends for an amount equal to 70% of profits if not actually distributed within two years after the end of the tax year in which the profits arose and payment of 15% withholding tax on deemed distribution. Profits allocated to non-resident shareholders are not subject to this tax.
On dividends receivable
Dividends received from a foreign company are not subject to withholding tax of 15% provided that:
The company receiving the
dividend owns at least 1% of the company paying the dividend;
Not more than 50% of the paying company's activities result in investment income; and
The foreign tax is not significantly lower than the tax rate payable in Cyprus;
There is no tax on dividends paid by a Cyprus resident company to another Cyprus resident company.
On interest earned
There is a 10% tax on any interest earned by any individual or company resident in Cyprus.
On interest and royalties payable
There is no withholding tax on payment of interest and royalties to non-resident of interest and royalties to non-resident individuals or companies.
On rents
There is a 3% withholding tax on rents earned by a Cyprus resident (after deduction of 25%).
Note: The special defense contribution on dividends, interest and rents is treated as income tax for the purposes of Double Tax Treaties as well as for the purposes of unilateral tax credit.
(d) Capital Gains Tax
Capital gains arising from the sale of immoveable property outside Cyprus is not within the scope of capital gains tax. Capital gains tax is only applicable for immoveable property situated in Cyprus.
(e) Value Added Tax
As from 1 January 2003, the standard VAT rate is 15% .
Under the new legislation, there is no longer a distinction between local companies and IBCs and therefore IBCs are subject to the same registration procedures as local companies. In most cases this benefits IBC's as their activities fall outside the scope of VAT while at the same time they can register on a voluntary basis and recover any input VAT on Cyprus expenses
(f) Taxation of employees
An individual is taxed if he is a resident of Cyprus.
An individual is considered resident if he spends in Cyprus more than 183 days per fiscal year.
All Cyprus residents are taxed in Cyprus on their worldwide income. Such income includes:
Employment income (including benefits)
Profits from a business activity
Rentals from immoveable property and royalties
Pensions received (pensions from abroad may be taxed at the rate of 5% for amounts in excess of CY£2000)
Non-residents of Cyprus are taxed in Cyprus only on income earned in Cyprus. Such income includes:
Employment income (including benefits), in relation to services rendered in Cyprus
Profits from a business activity which is carried out through a permanent establishment in Cyprus
Rentals from immoveable property situated in Cyprus
Pensions in respect of employment exercised in Cyprus, with the exception of pension paid from a fund established by the Government or local authority
As from 2003, the distinction between local and expatriate resident employees no longer exists. All individuals resident in Cyprus will be taxed at the following rates:
Chargeable income
Tax rate
£
%
Up to 10000
Nil
10001 - 15000
20
15001 - 20000
25
20001 plus
30
T axation of expatriates
If employed outside Cyprus, no taxation
If employed in Cyprus for 183 days or more, taxed on all income from employment
If employed in Cyprus for less than 183 days, taxed in Cyprus on the salary attributable to the employment in Cyprus.
The following types of income are exempt from taxation
Dividends
Interest received
Profits from the sale of shares
Salaried services rendered abroad by a Cyprus resident for a period totaling more than 90 days in a fiscal year to an employer who is not a Cyprus resident or at the permanent establishment abroad of a Cyprus resident
Withholding tax (special defense contribution) for resident individuals:
10% on interest received either in Cyprus or abroad
15% on dividends received either from abroad or in Cyprus including IBCs
3% on 75% of rental income from property wherever located.
Allowances deductible from income by individuals
Social insurance contributions
Life insurance premiums
Contributions to approved provident funds, pension schemes and medical schemes
For an employee who was not a Cyprus resident and is now taking up employment in Cyprus for the first time, a special exemption from income tax will apply for the first three years amounting to 20% of his salaried income up to a maximum annual amount of CY£5000 p.a.