A lot has happened to Cyprus over the past 12 to 18 months as the country found itself caught up in the conflagration of the Eurozone debt and banking crisis. As a result, some taxes have been raised on both individuals and companies, but, on the whole, Cyprus remains an attractive jurisdiction for holding companies.Cyprus is no longer an offshore jurisdiction in the strictsense of the word, but its tax regime, coupled with itslocation at the cross roads of Eastern Europe, the MiddleEast, North Africa and Asia, an extensive network ofdouble-tax treaties, its membership of the European Unionand its sophisticated European business environment andstable economy mean that the island has become an idealplace to locate holding, trading and intermediarycompanies.
Cypruss taxation regime doesnt stand out particularly amongits offshore competitors, but changes to tax legislation approvedin 2002 gave Cyprus the lowest rate of corporate tax in the EUat 10%. Cyprus has also adopted the EUs Code of Conduct onharmful tax practices and is placed on the Organization forEconomic Cooperation and Developments (OECD) white list oftax compliant jurisdictions and therefore has a reputationaladvantage over some of its offshore competitors. Cyprus wasalso rated as the most attractive tax regime in Europe (with thenet attractiveness score of 90%) by a 2009 KPMG poll, ahead ofIreland, Switzerland and Malta.The Income Tax Act No. 118(I) of 2002 applied the 10%corporate tax rate to both offshore and onshore companies,although after a short transition period, this distinction has nowbeen removed; as from January 1, 2003, an offshore company(IBC) no longer has a separate taxation status, and is taxedaccording to the same principles as a regular company.
Thus, IBCs are now allowed to trade inside Cyprus. A pre-existing IBC which made an irrevocable commitment not totrade inside Cyprus until 2006 was able to claim the existinglow tax rate for the three years 2003, 2004 and 2005.Cypriot companies also pay a 2% levy on wage bills (meantto subsidize pensioners), and a Special Contribution (SDC)related to defence. In effect, the SDC applies the 10%corporate tax rate to inter-company dividend and interestpayments. In a series of revenue-raising measuresapproved by the Cypriot House of Representatives in thesecond half of 2011, the SDC rate on deemed dividendspayments to individuals was increased from 15% to 17%effective August 31, 2011, and to 20% effective January 1,2012. Interest income not received in the ordinary course ofbusiness or that is not connected to the ordinary course ofthe business is subject to SDC of 15% (increased from 10%on August 31, 2011).
In addition, as a result of the austerity measures approved in2011, all companies registered in Cyprus are required to pay anannual levy of EUR350, up to a maximum of EUR20,000 forgroups of companies. The first payment of this fee was due tobe made by December 31, 2011, with subsequent paymentsfalling due on June 30 each year.Profits from activities of a permanent establishment situatedoutside Cyprus remain completely exempt. This exemption willnot apply to a Cyprus company if: (i) its foreign permanentestablishment directly or indirectly engages in more than fiftyper cent (50%) of its activities in producing investment income,and (ii) the foreign tax burden is substantially lower than that inCyprus (unlikely unless the foreign PE is located in no- or low-tax jurisdiction). In Cyprus, the term "Permanent Establishment"has the same meaning as defined in the OECD Model TaxConvention on Income and on Capital with the exemption of "abuilding site or construction or installation project", whichconstitutes a permanent establishment only if it lasts more thanthree months.
There are a number of company forms available in Cyprus, but themost commonly used for a Cypriot holding company is the privatelimited liability company. When 100% foreign-owned, a privatecompany used to be referred to as an offshore company,although the expression International Business Companysubsequently came into favour to describe such entities.Cypriot companies are formed under the Cyprus Companies Law,Cap. 113, which is virtually a copy of the English 1948 CompaniesAct. In order to form a foreign-owned company in Cyprus, a bankreference and copy of the owners passport are required for theregistration. The bank reference must be issued by a bankincluded on the Central Bank of Cypruss list of qualifying banks. Aholding company using the private limited company form will needat least one shareholder and at least one director, which can be anatural person or a body corporate of any nationality. A companymust have a registered office. There is no minimum share capital.
Under amendments to the Cyprus Company Law in 2003, everycompany must prepare a full set of financial statements inaccordance with International Financial Reporting Standards, andevery parent company that has one or more subsidiaries, otherthan a company which is itself a wholly owned subsidiary, shouldpresent consolidated financial statements. Under article 120, everycompany must complete an annual return within a period of 42days from the date of its Annual General Meeting and must fileimmediately with the Registrar of Companies a copy of the annualreturn, signed by a director and the company secretary. Underarticle 121, the annual return filed with the Registrar of Companiesmust be accompanied by the full set of financial statements.A substantial number of companies involved in the trading ordistribution of FMCG (fast moving consumer goods) and otherphysical goods use Cyprus as a trading base for theMediterranean, Middle East and North African region.
Non-resident enterprises (i.e. those neither managed andcontrolled nor with a local permanent establishment) areallowed to store, maintain, break bulk or re-package their owntransit goods in bonded warehouses, providing the handlingdoesnt result in any change of customs tariff classification.They are also permitted to conduct sales activities on the island,as long as no local deliveries result, and no permanentestablishment is created.Cyprus is not a particularly convenient base for supplying theCIS and Eastern Europe in physical terms, but that does notprevent companies with interests in those regions fromestablishing holding companies in Cyprus, and very many do so.Not only are the Cyprus treaty withholding tax rates normallylower than those in other countries treaties, but there will be nolocal taxation as long as no permanent establishment is created,and even if it is, Cypruss own 10% tax rate on company profitsis itself low. The combination is quite hard to beat.
However, a protocol amending the 1998 tax treaty betweenRussia and Cyprus, signed in November 2010, includes specialprovisions which change the way Cypriot real estate holdingcompanies are taxed in Russia. The most important change inthe treaty relates to source-state taxation of capital gains incompanies which predominantly hold real estate as their mainactivity: where more than half the companys assets compriseRussian immovable property, Russia will be able to apply itsdomestic capital gains tax. This conforms to articles contained inthe standard OECD model tax convention. Prior to this change,capital gains taxing rights were applied in the country ofresidence of the selling company. The protocol was ratified byCyprus in 2010, and by the Russian State Duma in February2012. The Protocol is due to take effect on January 1, 2013, butthe amendments affecting real estate holding companies willbecome effective four years from the date on which the Protocolenters into force.
A frequent feature of international trade and investment,particularly as between advanced and less advanced countries,is the transfer of technology or brand or intellectual property inreturn for license, franchise or royalty payments. Due to itsnetwork of double-tax treaties and favourable taxation regime,Cyprus is a suitable place in which to locate an intermediarycompany to handle payments streams which might otherwisebe highly taxed in the receiving country. Unusually for a low-tax jurisdiction, Cyprus has more than 40 double-taxagreements, and this list is being added to on a regular basis;in 2012 new DTAs were signed with Austria and Luxembourg,and as of May 25, 2012, Cyprus has 46 double tax treaties.Such payments for intellectual property would normally bedeductible expenses in the originating country, and under thetax treaties will be subject to low or zero withholding tax(Central and Eastern Europe, China, India, South Africa and anumber of Middle Eastern countries).
At worst, the income received in Cyprus will be taxed, afterdeduction of expenses, at 10%.It is not surprising in the light of the above factors that manyinternational investors choose Cyprus as a location forfinancial holding and investment companies as conduits forinvestment to and from Eastern Europe, the Near and FarEast, and Africa.