INTRODUCTION

Cyprus is ideally suited for international business due to the many benefits it has to offer. Its geographic location and excellent commercial infrastructure coupled with numerous tax incentives are among the factors, that have assisted Cyprus towards becoming an important International Business Centre. Cyprus also benefits from a modern banking system.

To induce foreign investment, the Cyprus government introduced certain tax incentives regarding International Business Companies (IBC’s), Shipping Companies, International Trusts and Partnerships.

The fact that Cyprus is a low tax jurisdiction and not a tax haven is significant and ensures that entities incorporated in Cyprus do not attract the suspicions of foreign tax authorities.

INTERNATIONAL BUSINESS COMPANIES (IBC’s)
(formerly refered to as Offshore Companies)

International Business Companies (IBC’s) are only liable to 4.25% tax on their income. Also such companies are not liable to capital gains tax (except on gains arising from immovable property in Cyprus) and no withholding or other taxes are chargeable on their dividends. In order for a company to be classed as an IBC, the provisions of the Income Tax Laws must be satisfied. The provisions provide that:

• its shares must belong directly or indirectly exclusively to aliens; and

• its income must be derived from sources abroad.

A branch of a non-resident company is taxed at 4.25% if management and control is based in Cyprus. Where management and control is based outside Cyprus, branches of a non-resident company pay no tax.

IBC’s situated in Cyprus are required by the Central Bank of Cyprus to submit to the Central Bank independent audited accounts. This is required in order to facilitate the Bank in carrying out its function as a supervisory body.

All companies situated in Cyprus are required to maintain correct and proper records of the companies assets and liabilities, sales and purchases of stock and all monies received and disbursed by the company together with details of related transactions.

Also, companies with a share capital are required by law to submit an Annual Return to the Registrar of Companies. Accordingly, the Return must contain information relating to the company’s address, the amount of any mortgages, details of company directors and secretary’s, matters relating to the issue, discontinuance, forfeiture or surrender of shares, etc.

Residence and work permits are required by all non-resident personnel of Cypriot entities. Such residence and work permits are easily obtained by directors, executives and managers, normally within one month of application. Employees in administrative, clerical and non-executive positions may also obtain such residence and work permits fairly easily, in situations where there are no suitably qualified Cypriots.

A foreign employee of an IBC who is living and working in Cyprus is taxed at half the normal income tax rate applicable. Foreign employees living and working outside Cyprus pay tax at 10% of the normal tax rates. Where the remuneration to a foreign employee living and working outside Cyprus is paid through Cyprus, then no tax is paid at all.

Income received from foreign money capital interest will attract no income tax if imported into Cyprus and deposited with a bank operating in Cyprus. Furthermore, interest earned on borrowed foreign money capital invested in Cyprus may be exempt from tax, if, the Minister of Finance considers it to contribute towards the economic development of Cyprus.

With regard to Capital Gains Tax, no gain is considered to arise where IBC’s make a disposal of immovable property outside Cyprus. A gain is considered to arise where a disposal is made of immovable property or of shares in companies deriving value from immovable property in Cyprus. The current rate of tax is 20%.

Transactions carried out by IBC’s are considered to have been effected outside Cyprus. As such, with the exception of local expenditure, IBC’s are exempt from value added tax (VAT).

Confidentiality

Cyprus IBC’s must have a registered office in Cyprus. They are usually structured with nominee directors, secretary and shareholders whose details are placed on public file. This type of structure guarantees total confidentiality on Company records.

The beneficiary's details remain confidential and are not placed on public file although they must be disclosed to the Central Bank of Cyprus. The beneficiary may be a natural person or corporate body. Cyprus has strict commercial secrecy laws and Central Bank employees are bound by law not to divulge privileged information to any third party.

It is through these confidentiality requirements that Cyprus companies enjoy a greater international reputation amongst business persons than companies in other jurisdictions.

Shareholders

A minimum of two shareholders are required and details appear on the public file but anonymity can be retained by the use of nominee shareholders. Bank references on the beneficial owners must be submitted to the Central Bank of Cyprus but these details are protected by secrecy laws.

Directors

A minimum of one director is required and details appear on the public file but anonymity can be retained by the use of third party directors.

Time scale

Normally it will take approximately 4-7 working days from the receipt of bank references on the beneficial owners for incorporation to be achieved. Shelf companies are available, but the requirement to provide bank references on the beneficial owner’s means that such companies cannot be activated until references have been received in Cyprus.

INTERNATIONAL TRUSTS

An International Trust may in certain cases be used to obtain benefits from an applicable double tax treaty. Also, it may provide asset protection where this is required. Thirdly and perhaps most importantly, International Trusts in Cyprus are exempt from income tax and any other form of tax since income and profits of International Trusts are derived or deemed to be derived from sources outside Cyprus.

To establish an International Trust certain requirements must be satisfied. These are:

• the settlor must not be a permanent resident of Cyprus;

• no beneficiary other than a charity is a permanent resident in Cyprus;

• the trust property does not include any real property situated in Cyprus; and

• there must be at all times at least one trustee resident in Cyprus.

Once established the trust can remain in force for a period of one hundred years. The income of the international trust can be accumulated for the whole of this period.
 

SHIPPING COMPANIES

Shipping companies are virtually exempt from any type of tax.

• they pay no income tax on profits or dividends;

• they pay no estate duty;

• no capital gain is considered to arise from the sale or transfer of ownership of any ship or shares in a shipping company;

• emoluments of seamen employed on board Cyprus ships are exempt from tax;

• dividends distributed to shareholders of ship management IBC’s attract no tax;

• seamen employed by Cyprus ship management IBC’s, on board foreign flag ships or in respect of services on board Cyprus flag ships managed by them pay no tax in respect of emoluments received by them. To qualify for tax exemption in respect of foreign flag ships, the emoluments must be paid through a bank operating in Cyprus.

• foreign employees of shipping companies who derive their income from outside Cyprus are taxed at 10% of the normal tax rates applicable in Cyprus. If they receive their emoluments in Cyprus then they are totally exempt from tax.

• foreign employees of shipping companies who work within Cyprus, are taxed at half the rate of tax.

Furthermore, with regards to a ship sailing under the Cyprus flag, it is exempt from tax in respect of all profits, dividends, capital gains tax and estate duty arising from shipping activities.
 

INTERNATIONAL PARTNERSHIPS

International Partnerships also have certain advantages. The main advantage is that profits from the partnership do not attract tax in Cyprus either in the hands of the partners or by the partnership.
 
 

DOUBLE TAXATION TREATIES

As a signee of double taxation treaties with over twenty-six countries and with various tax concessions available to all forms of business, Cyprus offers tremendous possibilities for international tax planning activities. By using the provisions of these treaties and with a very low and sometimes total tax exemption in Cyprus, one may achieve total avoidance of any tax in both countries.

The primary purpose of double taxation treaties is to avoid the double taxation of income earned. This basically means that the taxpayer will not be charged to tax in more than one country, on the same income. There are two possibilities of achieving this:

• By the allowance of a tax credit against the tax levied on the tax payer by his country of residence; or

• By a tax exemption in one contracting state of the income taxed in the other contracting state.

Country	Dividends %	Interest %	Royalties %
Austria	10	0	0
Belgium	15	15	0
Bulgaria	0	0	0
Canada	15	15	10(12)
China	10	10	5(8)
Czech Republic	10	10	5(8)
Denmark	10(1)	10	0
Egypt	15	15	10
France	10(2)	10	0(10)
Germany	15(3)	10	0(10)
Hungary	15(4)	10(7)	0
India	15(2)	10	10
Italy	0	10	0
Ireland	0	0	0
Kuwait	10	10(7)	5(8)
Malta	15	10	10
Norway	5(5)	0	0
Poland	10	10	5
Romania	10	10	5(8)
Russia and CIS Rep.	0	0	0
Slovak Republic	10	10	5(19)
South Africa	0	0	0
Sweden	5(4)	10(7)	0
Syria	15(6)	10	10(17)
United Kingdom	15(6)	10	0(10)
USA	5(13)	10	0
Former Yugoslavia	10	10	10

* The numbers in brackets refer to the explanatory notes.

EXPLANATORY NOTES

In all cases the income is taxable in the country of residence according to the Law of the country, tax credit being allowed for foreign tax.

(1) 10% if recipient is a company with at least 25% direct share interest (15% in all other cases).

(2) 10% if recipient is a company with at least 10% direct share interest (15% in all other cases).

(3) 10% if recipient is a company with at least 25% direct share interest. If recipient is a company with more than 25% direct or indirect share interest and the German corporation tax on distributed profits is lower than that on undistributed profits while the difference between the two rates is 15% or more, the rate is 27% (15% in all other cases).

(4) 5% if recipient is a company with at least 25% direct share interest (15% in all other cases).

(5) Nil if received by a company which controls, directly or indirectly, not less than 50% of the voting power.

(6) A resident of Cyprus other than a company which either alone or together with one or more associated companies controls directly or indirectly at least 10% of the voting power, is entitled to a tax credit in respect of the dividend. Where a resident of Cyprus is entitled to a tax credit, tax may also be charged on the aggregate of the cash dividend and the tax credit at a rate not exceeding 15%. In this case any excess tax credit is repayable. Where the recipient is not entitled to a tax credit, the cash dividend is exempt from any tax.

(7) Nil if received by Government institutions or by any person in respect of debts guaranteed or financed by Government or financial institutions wholly owned by the Government.

(8) According to the Cyprus Income Tax Law, companies are not taxed for income tax on dividends.

(9) 5% on cinematographic films not including television films.

(10) 5% on cinematographic films including films and video tapes for television.

(11) Nil if royalties are copyright and other literary, dramatic, musical or artistic work not including film or videotape royalties.

(12) 5% if recipient is a company with at least 10% direct share interest (15% in all other cases).

(13) According to the personal tax rates starting at nil for chargeable income up to CY£2.000 and reaching 40% for income over CY8.000.

(14) There is a 30% withholding tax on dividends which is fully refundable to foreign corporation on application. The tax for individuals is restricted to the rates provided under the respective Tax Treaties as shown in the Table above.

(15) At the rate applicable in accordance with domestic law.

(16) Nil if received by a company which controls, directly or indirectly, not less than 25% of the voting power.

(17) 15% for patent, trademark, design or model, plan, secret formula or process or any copyright or scientific work, or industrial, commercial equipment or information.

(18) The Double Tax Treaty with Belgium has not been ratified

(19) For literary, artistic or scientific work, film, and TV royalties, the relevant non-treaty rate applies.