GST

Cyprus Tax Incentives

Tax Incentives
 
Cyprus has a significantly upgraded image as a jurisdiction since its EU Accession on 1 May 2004.

With the enactment of its New Tax Legislation on 1 January 2003 (including 3 amending laws, the last one in November 2004) and the abolition of the "offshore regime", Cyprus has put a simplified, effective and transparent tax system in place that is fully EU, OECD, FATF and FSF compliant.

The result is a stable EU, "non-offshore" tax-competitive jurisdiction with exciting tax planning potential for EU and non-EU clients alike.

In summary, Cyprus is the "lowest-tax EU Jurisdiction" that is not offshore. The standard corporate tax rate of 10% (0% for shipping companies, 4.25% for maritime management companies) is the lowest in the European Union, and the lowest "non-offshore jurisdiction corporate tax rate" in the world. Cyprus is now a premier holding, finance, royalty and trading company jurisdiction.
However, Cyprus' biggest asset is its friendly and investor-friendly Tax Authorities who achieved a long and stable history of always being keen to help foreign investors.
Thin spreads of profit are acceptable and so it is possible that a lot of legal tax-planning strategies can be effectively and easily employed in order to lower Cyprus Tax… even at levels significantly lower than 10%.

Invoices from offshore companies are acceptable in Cyprus Companies' books and payments to offshore companies bear no withholding tax (tax planning point).
  •           Possibility to obtain Advance Tax Rulings.
  •           Absence of strict transfer pricing rules.
  •           No specific substance requirements.

There is added commercial value and monetary benefits due to the ability to register for EU VAT in Cyprus.
Trading in securities is essentially a tax-exempt activity as any profit from the disposal of any type of security, irrespective of whether this profit forms part of a company's trading activity or is of a capital nature.
The foreign beneficial owners of Cyprus Companies, Branches and Partnerships are not liable to additional tax on dividends or profits over and above the amount paid or payable by the respective legal entities.
The "out-of-Cyprus profits" of Cyprus Non-Resident Companies are not taxable - escape tax altogether in Cyprus - (Cyprus Companies with management & control exercised outside Cyprus) - in other words an "EU Offshore Vehicle"

Maritime Management Companies are taxed at 4.25% and shipping income is tax-exempt.

Low personal tax rates that reach a maximum of 30% for income over 20.000 CYP (35.000 EURO) and substantial relief for overseas employment and for non-residents taking up employment in Cyprus for the first time.
Low social insurance contributions (6.3% of gross salary) - total employer contributions to  various funds amount to 10% of gross salary and total employee contributions to 6.3%.

  • No capital gains tax or net worth taxes except with respect to Real Estate situated in Cyprus. 
  • Beneficial use of EU Directives that have been transposed into the Cyprus Tax Legislation.
  • Wide and exceptionally beneficial Double Tax Treaty Network.
  • Attractive Permanent Establishment (PE) rules and generous PE provisions available in the               DTT Network.
  • Mergers, Takeovers and other Re-Organizations can take place within groups without tax consequence.
  • Unilateral tax-relief is granted to all Cyprus Companies for foreign tax suffered irrespective of the absence of a double tax treaty.
  • Tax losses are carried forward indefinitely and can also be surrendered as group relief.
  • Interest deduction for borrowing costs provided.Low duties - taxes on the establishment of companies.
  • Very low expense level (fees) for financial and professional service provision compared to other EU Jurisdictions. The difference is more evident in the case of professional service recurring costs (administration, accounting & tax compliance) are estimated to be at 35- 40% of Western European rates! Note: One could very easily be misled by the low quoted start up costs for major European Jurisdictions as to the final total costs which can be considerable if one calculates recurring costs!
  • EU Directives, Cyprus' Double Tax Treaty Network

The Netherlands, Luxembourg and other classic Holding Company Jurisdictions now face a new outstanding competitor. As we are moving forward in time from EU Accession, we are seeing more and more clients preferring Cyprus as a holding jurisdiction to other traditional jurisdictions. However, sometimes, best results can be achieved by combining Cyprus with other jurisdictions such as The Netherlands and Luxembourg, rather than by substitution.

Beneficial use of EU Directives enacted into Cyprus Law (effectively "copied" - transposed into Cyprus Law and their benefits extended to residents of Third Countries):

Parent / Subsidiary Directive (no withholding tax on payment of dividends, no transitional period [immediate effect], no minimum participation [shareholding limits], no minimum holding period, dividend exempt subject to conditions, tax credit for tax withheld abroad).

Interest / Royalties Directive (no withholding tax on interest paid to non-residents, no transitional period [immediate effect], 25% minimum participation [shareholding] required only in the case of royalties, no minimum holding period, interest taxed depending on nature, royalties subject to corporation tax, tax credit for tax withheld abroad).

Merger Directive (involves resident and Non-Resident Companies, leads to elimination of the tax consequence of any reorganization, merger, division, transfer of assets, and exchange of shares).

Cyprus has a wide and beneficial Double-Tax Treaty (DTT) Network. There are currently 40 DTTs in force and 39 others being negotiated. It has to be noted here that Cyprus has fewer DTTs than some competing EU Jurisdictions, but in many cases more beneficial than its competitors' treaties such as those with Russia, Romania, Yugoslavia and the whole of Eastern Europe; and the Middle East. The existence of these treaties, combined with the low overall tax paid by Cyprus Companies, offer significant possibilities for international tax planning through the island.

A significant number of double tax treaties concluded by Cyprus, lowers or eliminates foreign withholding taxes on dividends, interest and royalties or capital gains paid out from or arising in the contracting states, some also include particularly beneficial tax sparing credit provisions for dividends, interest and royalties. A "tax sparing credit" is a tax credit available to the recipient, which is higher than the actual tax paid in Cyprus. Tax Sparing Credit provisions can be found in the treaties concluded with Canada, China, Czech and Slovak Republics, Denmark, Egypt, Germany, Greece, India, Ireland, Italy, Malta, Mauritius, Poland, Romania, Russia, Syria, Thailand, UK and former Yugoslavia.

Cyprus Holding Companies

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 Holding Companies are the following:

Participation Exemption:Foreign dividends are tax-exempt (provided that a minimum 1% holding in the company paying the dividend is maintained. Also note that this exemption does not apply if the non-resident company paying the dividend carries on, directly or indirectly, more than 50% of investment activities - passive income - AND the overseas tax burden is significantly lower than the Cyprus Tax Burden [(practically interpreted by the Tax Authorities to mean less than 5% "headline tax"] and NO other rules, minimum holding period, minimum investment thresholds etc.).

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 owning Real Estate situated in Cyprus - only to the extent that the gain relates to the particular Cyprus Real Estate). Also, profits from a Permanent Establishment (PE) outside Cyprus are tax-exempt and its losses can be set-off against Cyprus Income (this exemption also does not apply if the PE carries on more than 50% of investment activities - passive income - AND the overseas tax burden is significantly lower than the Cyprus tax burden). This exemption (PE) in conjunction with the use of some of Cyprus' DTTs can result in PE profits avoiding tax altogether.

Simple rules and no need for additional, and sometimes complex and expensive tax structuring to circumvent anti-avoidance provisions, as it usually is the case with other jurisdictions in the case of dividends or capital gains.

Low or no withholding taxes on outgoing dividends, interest and royalties (no withholding tax on dividends and interest irrespective of the country or residence of the recipient (even offshore jurisdictions) or the existence of a Double Tax Treat; no withholding tax on royalty payments for use of the rights outside Cyprus, 10% if the rights will be used in Cyprus (subject to DTT & EU Directives) and 5% on films (subject to DTT & EU Directives).

We note here that, 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 thin capitalization rules.
  • Limited anti-avoidance provisions.
  • Interest deduction for borrowing costs is provided.
  • Absence of strict CFC Legislation.
  •  Attractive Permanent Establishment (PE) rules and generous PE provisions available in the             
  • DTT Network.
  • No specific substance requirements.
  • No obligation for the Holding Company (or right) for VAT registration & compliance.
  • Low duties - taxes on the establishment of companies.
  • Absence of "strict" transfer pricing rules.
  • Possibility to obtain Advance Tax Rulings.
  • Low expense level for professional / financial fees.
In conclusion, the Cyprus Tax System Enables:

The extraction of foreign sourced dividends, at mitigated or zero rates of foreign withholding tax (owing to the use of the Parent Subsidiary Directive or the Use of Double Tax Treaties if the Directive is not applicable).

The receipt of foreign dividends at zero rates of corporation tax or special defense contribution (local withholding tax) or any other local taxes (subject to conditions - anti avoidance provisions that are easy to satisfy), i.e. "an EU Holding Company with no domestic tax leakage on holding activities".

The distribution of available profits to non-resident shareholders at zero rates of dividend withholding tax, irrespective of jurisdiction or the absence of a DTT (even to offshore jurisdictions).

Allows for the realization of capital gains from the disposal of shares in foreign companies at zero rates of corporation and capital gains tax on the gains", irrespective of holding period and shareholder percentage and no capital gains tax on the liquidation of the Holding Company itself.

Cyprus (Group) Finance & Royalty Companies

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 & Royalty Companies are the following:

Important Features of Cyprus (Group) Finance Companies:

  •           Absence (under a Double Tax Treaty or the Interest and Royalty Directive) of interest  withholding tax.
  •           Low overall tax burden.
  •           Possibility of deducting interest expenses from taxable income.
  •           Absence of thin capitalization rules or 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.
  • Important Features of Cyprus Royalty Companies:
  • Absence or reduction (under a Double Tax Treaty or the Interest and Royalty Directive) of withholding tax on royalties paid to Cyprus Company.
  • Low overall tax burden.
  • Tax deduction of royalty payments.
  •  Effective tax depreciation of investments in intellectual property.
  • Absence of withholding tax on royalty payments irrespective of jurisdiction or the absence of a DTT (including to offshore companies) for rights used outside Cyprus - the usual case
  • Neutral VAT treatment.
  • Reasonable level of "margin" required by tax authorities.
  • Effective protection of intellectual property rights by Legislation and the participation of Cyprus in international agreements.
  • Low expense level for professional / financial fees.
  • Flexible & Modern Legislation

Restrictions concerning maximum allowable percentage participation, as well as minimum monetary level of foreign investment in any enterprise / legal entity in Cyprus, were lifted from January 2000 for EU Citizens, and from 1 October 2004 for non-EU Citizens.

Now, Cyprus' Investment Policy allows 100% foreign participation in Cyprus Entities in almost all sectors of the economy not only for EU Citizens, but also for investors from third countries.

Please note that restrictions still remain on few sectors in the areas of Real Estate development (it is permitted to buy property for private use), tertiary education, public utilities, radio & television stations, newspapers, magazines and airlines.

  • Full exemption from all exchange controls – restrictions, both for EU and non-EU Nationals.
  • The legislation ensures full anonymity of foreign beneficiaries– no public body possesses the identity of the final beneficiaries, not even The Registrar of Companies or the Tax Authorities.
  • Strict Bank Confidentiality which is the cornerstone of State Policy.
  • Cyprus Entities, whether beneficially owned by foreign nationals or local persons can engage into either local or international activities without the need for any special permit (activities inside Cyprus by non-EU nationals were prohibited before October 2004).

Excellent Infrastructure
 
  • Modern and efficient multilingual banking & financial services sector.
  • Excellent air and sea connections and telecommunications services.
  • Professional, friendly and efficient Government Services and Tax Authorities.
  • A mature professional services sector (an indicative of the profession high standards in Cyprus is that Cyprus was the first country in the world been approved by The Institute of Chartered Accountants of England & Wales to qualify Chartered Accountants locally, without the need to work in the UK).
  • Very low expense level (fees) for financial and professional service provision compared to other EU Jurisdictions. The difference is more evident in the case of professional service recurring costs (administration, accounting & tax compliance) are estimated to be at 35- 40% of Western European rates! One could very easily be misled by the low quoted start up costs for major European Jurisdictions as to the final total costs which can be considerable if one calculates recurring costs!


EU Financial & Business Centre
 
  • Cyprus is a member of the EU and a fully flexed, modern international business and financial centre, with excellent infrastructure, situated at a strategic geographic location and time zone. English is the most widely used business language. The Cyprus Legal System is based upon English Common Law.
  • Cyprus has succeeded in differentiating itself from other financial centres. It has a favorable tax system with a wide network of very beneficial double tax treaties. As a result, Cyprus today is firmly established as a reputable, dynamic, international business, financial and commercial gateway for investments into or from Europe (East and West incl. Russia) and the Middle East.
  • Cyprus is a tax-incentive country and not a "tax-heaven". Cyprus Companies are EU Companies enjoying the full rights of an EU National (EC Treaty & 4 basic freedoms), are "non-offshore" and are not on any "black-list". Essentially, Cyprus combines an "onshore EU face" with "low-tax advantages".
  • There is added commercial value and monetary benefits due to the ability to register for EU VAT in Cyprus.
  • Cyprus has an excellent infrastructure allowing clients to create "substance" to their tax planning in the form of setting up fully-flexed offices or operations in the island (avoidance, if deemed necessary, of just a bronze plated presence).
  • Cyprus is the jurisdiction of choice for a prestigious, non-offshore, but low-tax presence. During the past thirty years Cyprus has established itself as the main business and financial centre for inward and outward investment in Russia, Central and Eastern Europe and the Middle East.