It has an attractive tax system including an extensive network of double taxation treaties, as well as highly professional accounting, legal and banking sectors. The legal system is based on English common law and English is fluently spoken throughout the island.
Today, Cyprus is firmly established as a reputable and dynamic international gateway for business, finance and commercial investments into or from Europe, the CIS, India, China and the Middle East.
It is a low tax jurisdiction but – as it is in full compliance with the EU Directives and OECD guidelines on harmful tax practices – is not a ‘tax haven.’ It is the preferred jurisdiction for a prestigious, tax efficient presence, offering unique business opportunities for investors and international businesses.
Tax regime
Prior to the accession of Cyprus to the European Union, a massive tax reform took place, harmonising the local tax regime with EU legislation. The new tax legislation was designed to promote the island as an international financial services centre.
The spearhead of the tax system is a favourable uniform 10 percent corporation tax rate, backed up by an absence of withholding taxes on payments of dividends, interest and royalties to non tax residents, as well as no taxation on alienation of securities, or real estate if situated abroad.
In addition to the beneficial provisions of the local legislation, the EU Parent-Subsidiary Directive and Interest and Royalties directives are fully applicable.
The use of Cypriot companies for holding of investments is widely used, since dividend income is almost certainly exempt from taxation in Cyprus (subject to easily met conditions) and sale of shares in subsidiaries should not attract any tax in Cyprus.
A Cypriot company will often be used as a treasury company for providing finance to other group entities usually in the form of back to back loans. Interest income is subject to tax at a rate of 10 percent, either under corporation tax (allowing for deduction of expenses) or under Special Defence Contribution (SDC) tax on the gross amount of interest income.
The decisive factor is whether the interest income is derived in the ordinary course of the company’s business (“active” income), in which case it is taxed under corporation tax; or if it is derived from non business activities like investments (“passive” income), in which case it is taxed under SDC with no deduction of expenses.
Reorganisations
The financial crisis of the last few years is still haunting the business world. In such periods there is increased M&A activity – be it internal, as a means of consolidating existing operations; or external, in the form of acquiring investment opportunities.
One of the most important factors to be taken into consideration is the tax efficiency of such a reorganisation. Under the reorganisation provisions of the domestic legislation (which is in line with the EU Merger Directive), any profits or gains resulting from a reorganisation are exempt from income tax, capital gains tax, stamp duty and special defence contribution in regards to the deemed dividend distribution provisions in the case of winding up.
In particular, a reorganisation can be (i) a merger, (ii) a division, (iii) a partial division, (iv) a transfer of assets, (v) an exchange of shares, or (vi) a transfer of registered office.
The reorganisation can be cross border, involving companies established in other EU member states.
Funds: International Collective Investment Schemes (ICIS)
The sole object of an ICIS is the collective investment of funds of unit holders. A private ICIS may have up to 100 investors and although regulated by the Central Bank of Cyprus, it may receive an exemption from some regulatory compliance requirements that a non-private ICIS will have to comply with.
An ICIS can take one of the following legal forms: an International Fixed Capital Company, an International Variable Company, an International Investment Limited Partnership, or an International Unit Trust Scheme.
Regarding the scope of the fund, the ICIS may be designated as an ICIS marketed to the general public, an ICIS marketed solely to experienced investors, or a private international collective investment scheme.
Each of the above types of ICIS is subject to different requirements and restrictions.
An ICIS enjoys the same tax benefits as any other limited liability company, namely a 10 percent corporation tax, absence of withholding tax on payments abroad, no taxation on sale of securities and no taxation on dividend income received (subject to easily met conditions).
The disposal of units in a fund by the unit holders will be treated as disposal of securities and the distribution of profits to non resident unit holders as dividends, both not subject to taxation in Cyprus.
A more complicated structure involving a Master-Feeder fund can be set up, where investors from different jurisdictions can invest to the Master Fund through the Feeder Funds allowing for country specific restrictions or regulations to be satisfied.
Cyprus-Russia amended tax treaty
Russia and Cyprus have renegotiated the existing double taxation treaty and have recently signed the relevant amendments. This development is expected to provide a boost to the existing business relationship and reaffirm that Cyprus is one of the leading sources of FDI to Russia.
The signing of the treaty, which is pending ratification and expected to come into effect as from 2012, removes any uncertainty in the taxation of income generated by persons in the contracting states.
This development puts Cyprus ahead of other jurisdictions such as the Netherlands, Luxembourg and
Switzerland, who will be renegotiating their treaty with Russia. Faced with the uncertainty of when these renegotiations will be completed and what the outcome will be, it is quite clear that today Cyprus is the jurisdiction of choice for investments from and into Russia.
New merchant shipping law
On 29 April 2010 the new shipping legislation was voted for by the Cypriot parliament. It applies as from 01 January 2010 and based again on tonnage tax, enhances the position of Cyprus in the international shipping industry.
The new legislation has been approved by the EU and provides for tonnage tax on the net tonnage of the vessel (regulated by the Department of Merchant Shipping), rather than corporation tax on the shipping operation profits.
Under the new legislation, qualifying persons are taken to be ship owners, charterers and ship managers. Another important provision allows for the creation of a fleet which may include both EU/EEA and third country vessels (subject to some conditions).
In combination with the favourable tax system, the total exemption from taxes on profits and distributions for qualifying persons, allows for highly tax efficient shipping operations.
Cyprus: A track record
Cyprus boasts a stable economy, membership to the EU and the Eurozone, a firm place on OECD’s ‘whitelist’ as well as highly educated and experienced professionals in the financial, legal and banking sectors. The cost of professional services is reasonably low compared with other jurisdictions and the advanced technological infrastructure allows for real time access to information.
Finally, Cyprus offers what investors are truly interested in; an opportunity to maximise their after tax return based in a safe, stable and experienced financial centre.
For more information email nicolas.kypreos@wtscyprus.com
WTS World Tax Service Cyprus Ltd
WTS Cyprus is a member firm of the global tax network WTS Alliance. It is headquartered
in Nicosia and specialises in the provision of tax services to international and local businesses. WTS Cyprus utilises the experience and knowhow of its management, staff and global network to provide value added services in an effective and efficient way.
WTS Alliance is a global network of tax experts in more than 90 countries. It was formed in 2003 and has been a trendsetter in establishing a tax-dedicated international network. WTS Alliance, headquartered in the Netherlands, is the coordinating body of the global network. Based upon strong quality criteria, only one partner per country is selected. WTS Alliance is currently represented in 23 countries and is growing continuously. In those countries where WTS Alliance is not yet represented by a member firm, clients’ requests are handled by tested cooperation partners. WTS Alliance makes it possible to present fast and consistent cross-border solutions to our clients.
WTS Alliance is covering inter alia the following tax areas:
– International Tax Planning
– Tax Consulting on Country Level
– Tax Compliance
– Cross-Border and Domestic M&A Tax Consultancy
– Financial Advisory Tax Services
– Investment Tax Law
– Real Estate Tax Services
– Transfer Pricing Design and Documentation
– Tax Optimisation of Value Chains and Sales Structures
– Tax Consultancy on Cross-Border Project Business (e.g. Construction Business)
– International VAT and GST Consultancy
– Private Client Tax Services
-Global Expatriate Services
