Cyprus has acceded to the European Union (EU) on May 1, 2004 and has since became a prime business and financial business centre within the EU. Cyprus is now not only the prime vehicle of investment in and out of Central and Eastern Europe, Russia, and the Middle East, but it is also a prime vehicle of investment in and out of the EU.
Cyprus has the infrastructure, the know-how, the legal system, the professional services and the expertise to fulfill successfully its new strategic role as one EU’s prime International and Financial Centre.
As of 1 of October, 2004, the Government of Cyprus has lifted all restrictions on foreign direct investment from non-EU countries in order to attract more foreign direct investment and further promote Cyprus as an International Financial Business Centre. All restrictions concerning maximum allowable percentage participation, as well as minimum monetary level of foreign investment in any enterprise (entity) in Cyprus, were lifted from October 1, 2004 for all non-EU citizens.
The State Investment Policy now allows 100% foreign participation in Cyprus Entities in most sectors of the economy, not only for EU citizens, but also for investors from third countries.
Thus, entities and individuals from all over the world can establish Cyprus Companies or other legal entities to invest and do business in or out of Cyprus without restrictions whatsoever.
Having amended its tax legislation in anticipation to EU Accession, Cyprus has set up a tax system that is ideally suited to inbound and outbound EU investors.
The Cyprus tax climate offers:
- Low taxation
- EU status
- Possibilities for tax planning in order to legally lower taxes even further (in some cases to 0%)
- Extensive double tax treaty network
- Exemption from tax on dividends received
- Exemption from tax of profit generated from transactions in securities
- Exemption from withholding tax on the repatriation of income either of dividends, interest and royalties
- Access to EU directives
The Cyprus Banking System
The banking system in Cyprus, which is modelled on the British System, is well developed, highly organized and capable of providing fast and efficient service worldwide. The system is structured around the Central Bank, which monitors the operations of the commercial banks and other financial institutions.
In their effort to satisfy the diverse needs fro the business community, the commercial banks are full members of the Society for Worldwide Interbank Financial Telecommunications (SWIFT) and provide a wide range of facilities.
Cyprus Exchange Control
There are no exchange control regulations. Accordingly, the island is an ideal location for the maintenance, transfer and conversion of funds, which is facilitated by excellent telecommunication and efficient international banking services.
Confidentiality in Cyprus
Confidentiality in all business transactions is an element which the Cypriot Authorities have perfected, in respect to the activities of nearly all commercial sectors. Laws and procedures governing financial and business conduct have been specifically drafted to ensure that this element is carefully protected and maintained.
Thus, the registration of Cyprus Companies can be done through the appointment of nominees to hold shares on behalf of the beneficial owners – whose identity remains secret. Privacy of the trusts’ constitution and membership, as well their transactions and activities is secured through the absence of registration or reporting requirements – even the identity of the settler may be protected, if required. In Cyprus, the cornerstone of banking policy is safeguarding the confidentiality of a Bank’s customers and their transactions.
The location of a holding company is an important consideration in any international structure where is a desire to minimize the tax charged on income and gains. As we are moving forward in time from EU Accession we are seeing more and more clients preferring Cyprus as a holding company location to other traditional jurisdictions.
Leading tax experts, notably among which also the late Prof. Dr Gassner (Tax Chair of University of Vienna and Chairman of the International Fiscal Association), have stated that Cyprus has one of the most beneficial and versatile ‘’Holding Company Regimes’’ currently available in the World.
In order to appreciate the merits of Cyprus as a holding company jurisdiction, it suffices to compare the main typical holding company ‘’optimality criteria’’ (set out below) and the benefits provided by the Cyprus Holding Company Regime (also set out below).
Optimality Criteria for a Holding Company:
Holding companies perform the following functions within a group:
- Asset ownership / participation interest in operating & non-operating group companies.
- Accumulation of capital and shareholder value.
- Consolidation of business segments.
- Asset protection / mitigation of risks.
- Receiving dividends from operating companies.
- Distribution of profits to shareholders.
- Reinvestment of capital into new projects.
For illustration purposes, a holding company should ideally be resident in a jurisdiction which:
- Enables the extraction of foreign sourced dividends at mitigated or preferably zero rates of foreign withholding tax.
- Enables foreign dividends received to be taxed at low or preferably zero rates of domestic corporation or other taxes in the country of residence of the holding company – Not only one should plan to have a holding company in a jurisdiction which can receive foreign dividends with reduced withholding taxes, but one also need to ensure that those dividends are not highly taxed in the holding company’s country of residence.
- Permits the distribution of available profits to non-resident shareholders at low or preferably zero rates of withholding tax – Care needs to be taken that the jurisdiction chosen for a holding company is not one that will impose excessive withholding taxes on distributions of income to the shareholders of the company.
- Allows for the realization of capital gains from the disposal of shares in foreign companies at low or preferably zero rates of both foreign and domestic corporation tax on the gains – All the leading holding company jurisdictions provide, for an exemption from taxation on holding companies realized gains, the disposal of shares in foreign companies.
- Enables the tax – free liquidation of the holding company itself.
- Foreign dividends are tax – exempt (provided that certain conditions are satisfied);
- No capital gains tax is payable on the sale or transfer of securities and the gains are exempt from Income Tax (except gains from disposal of shares in companies owing Real Estate situated in Cyprus).
- Profits from a Permanent Establishment (PE) outside Cyprus are tax – exempt and its losses can be set – off against Cyprus Income.
- No withholding taxes on outgoing dividends, interest and royalties (with some exceptions).
- Compared to other ‘’key’’ Holding Company Jurisdictions, only Cyprus and the UK have 0% dividend withholding tax (DWT), so no need for complex and expensive ‘’structuring out’’ of DWT. THIS IS AN IMPORTANT COMPETITIVE ADVANTAGE OF CYPRUS compared to other Holding Company Jurisdictions.
- No capital gains or income tax on the liquidation of participations or the liquidation of the Cypriot Holding Company itself.
- No net worth taxes (as mentioned before no capital gains taxes) during the life of the Cypriot Holding Company.
- Tax losses are carried forward indefinitely and can also be surrendered as group relief.
- Mergers, takeovers and other re – organizations can take place within groups with no tax consequence.
- Unilateral tax – relief is granted to all Cyprus Companies for foreign tax suffered irrespective of the absence of a double tax treaty.
- No obligation for the Holding Company (or right) for VAT registration & compliance.
- Low duties – taxes on the establishment of companies.
- Low expense level for professional / financial fees.
Such companies can be used for the invoicing / re-invoicing of goods and services (as well as for the receipt of trading commissions) from any country to any destination and for transit trade activities in combination with the operation of bonded warehouses, bonded factories and the free trade zones.
Cyprus Companies may provide services such as sales promotion, accounting function, provision of labour – executive staff, consulting, market research, commission agency, intermediation, client introduction and many others. They may employ expatriate staff, who benefit from double tax treaty provisions, by paying tax and social insurance in Cyprus at low rates, thus avoiding the high tax tares in their home country.
In this way, profits made by the Cyprus Company are taxed at Cyprus’ Low Corporate Tax Rate of 12,5%, instead of higher corporate tax rates. Trading from a low – tax EU State such as Cyprus and using appropriate tax planning – structuring to mitigate Cyprus Tax sometimes to levels below 12,5% – is far superior strategy nowadays than trading through an offshore company registered in a tax haven.
Group Finance Companies perform the following functions:
- Sourcing external debt finance.
- Accumulation of interest income and tax optimization of high tax country group operating companies.
- Redistribution of funds within the group.
Such companies may take advantage of the Cyprus Double Tax Treaties by providing loans in treaty countries or other countries where withholding tax on interest is low or nil.
The use of Cyprus Entities for group finance are extremely attractive. Cyprus Finance Companies can fulfill intra – company financial management functions, such as granting of loans for project financing or working capital requirements. Interest payments to the Cyprus Financing Company is tax deductible in the country of the borrower reducing the overall corporation tax liability. Choosing the right international jurisdiction for the use of double tax treaties can reduce or eliminate withholding taxes on interest payments.
These structures are particularly attractive for investment into high – tax countries where, local rules permitting, high debt structures are widely used.
Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Cyprus (Group) Finance are the following:
- Absence of interest withholding tax(under a Double Tax Treaty or the Interest and Royalty Directive).
- Low overall tax burden.
- Possibility of deducting interest expenses from taxable income.
- Absence of thin capitalization rules of their inapplicability in the case of ‘’back to back’’ financing.
- Absence of interest withholding tax in connection with interest paid on loan financing, irrespective of jurisdiction or the absence of a DTT (even for interest payments to offshore jurisdictions).
- Reasonable level of ‘’margin’’ required by tax authorities.
- Low expense level for professional / financial fees.
Other Popular Cyprus Tax Structures Include: Cyprus Royalty Routing Structures, UK Companies (Tax – Resident in Cyprus), Cyprus Non – Resident Companies.
Other Important Aspects of Cyprus Tax Law
Taxable and non – taxable Cyprus entities
A company is considered to be a tax resident in Cyprus if it is managed and controlled in Cyprus. Although no definition of ‘management and control’ is provided in the tax law itself, its meaning was established by Court decisions in England. As a rule of thumb, if the majority of directors (or nominee directors) of the company are residents in Cyprus, board meetings are held in Cyprus and important management decisions are taken in Cyprus, management and control is considered to be exercised in Cyprus.
Group relief in Cyprus companies
The taxable losses of any company may be set – off against the taxable profits of another company in the same group provided that the two companies are members of the same group for the whole year and are both tax residents of Cyprus. For the purpose of group relief, a company is deemed of the same tax group of:
(a) it is 75% subsidiary of another company, or
(b) both are 75% subsidiary of a third company.