The Cyprus Business Environment:On several occasions, major business networks and organisations across Europe have recognized Cyprus as being amongst the most attractive European tax jurisdictions. Cyprus is well-known for its stable tax legal framework, the consistency in interpreting its tax legislation and its favourable tax rates.
Reputation and stability
Cyprus joined the European Union in 2004, and together with the advantages of a common European market and the benefits of the Euro currency it adopted in 2008, the country has shown determination in ensuring macro-economic stability, low inflation and low interest rates. Cyprus participates in the EU’s internal market that implies free movement of goods, services and capital. In other words, there are no legal restrictions to European citizens who wish to visit Cyprus, conduct business or live there.
Cyprus’ business-friendly environment has been attracting foreign investment and capital flows for decades and its regulatory and financial environment is fully compliant with that of the European Union. Also, the Cyprus tax system is in line with the European Union Code of Conduct for business taxation framework as well as with the OECD policies against harmful tax practices.
Located in the eastern Mediterranean, at the crossroads of three continents, Cyprus is the link between Europe, Africa and Asia. Just a one-hour flight separates Cyprus from Athens, Cairo and Tel-Aviv and it barely takes three hours to reach Dubai and Moscow and one extra hour till the London financial centre.
Cyprus time zone: GMT +2
Banking & financial regulation
- Banking (commercial) is of high standards, based on the EU and British models
- Number of banks operating in Cyprus: over 40 (Cypriot + international)
- Conformity with EC Directives: the regulator is the constitutionally independent Central Bank of Cyprus and is integrated with the Eurosystem. The Central Bank’s governance is in line with the Treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank.
- Cyprus Stock Exchange Supervision: the Cyprus Securities and Exchange Commission (CySEC) undertakes supervision and control of the operations of the Cyprus Stock Exchange and the issuers of securities listed on the Cyprus Stock Exchange.
- Both the Central Bank and CySEC supervise and issue licenses for the investment services companies, collective investment schemes, brokerage firms, investment consultants and mutual fund management companies which are fast-growing in Cyprus.
The legal system in Cyprus is based on a combination of EU law and common law by reason of EU membership and historical links with the United Kingdom, respectively.
The Cyprus company law and other business laws find their origins in the laws of the UK and have been updated for modern business practices as well as harmonised with subsequent EC Directives.
International business people are quickly familiar with the legal and commercial structure of Cyprus and find it to be very enabling in their operations in Cyprus.
Cyprus has long-standing and excellent economic and diplomatic relations with the rest of Europe, China, India, Russia, Canada, USA and the neighbouring countries of the Middle East. This has resulted in great esteem for Cypriot entities around the world.
The telecommunications infrastructure in Cyprus is very advanced and counts several providers of modern solutions and products.
Cyprus has two international airports serviced by more than 35 international airlines, with daily flights to most European capitals, the Middle East and Russia as well as to global hubs for long haul and onward international destinations. Both Larnaca and Pafos international airports have a capacity of up to 10 million passengers per year.
High standard of living – low cost base centre and skilled workforce
Cyprus is one of the few international financial centres with considerably low operational costs.
In combination with high living standards, a year-round sunny climate and a low crime rate, it is an ideal place to relocate and set up a business.
Setting-up and maintaining a structure in Cyprus incurs relatively low costs. In particular regarding incorporation costs and tax and company law compliance fees. Rent, labour and operational costs are more competitive than most other European jurisdictions.
Cyprus boats a young, skilled and flexible work force, with most academic training received in the UK and the USA and ranks high among countries in the world in term of university graduates/per capita ratio, with the percentage of graduates from tertiary education ranked first in the EU.
CYPRUS’S ADVANTAGEOUS TAX SYSTEM
Cyprus is an ideal location for any international business seeking a tax efficient jurisdiction.
The island’s advantageous tax system has all the features expected from an international financial centre. Its tax legislation and its regulatory framework are straight forward, business community-tax authority relations are excellent and taxation of the commercial and financial sector is conducted efficiently.
Cyprus’ efficient and transparent tax environment strengthens Cyprus’s competitiveness and makes it an attractive jurisdiction for business operations.
Corporate tax rate
The corporate income tax rate in Cyprus is of 12.5%, making it one of the lowest EU-wide.
Exemption from tax for dividend income
In general, dividend income is exempt from tax, irrespective of its source.
A company is exempt from tax on dividend income irrespective of its source if it answers either one of the following criteria:
- The company engages directly or indirectly in more than 50% of the activities that give rise to non-investment income
- The tax burden on the dividend paying the company’s income is of at least 6.25%.
If derived (directly or indirectly) from trading subsidiaries, dividends are not deemed to be sourced from investment income.
No withholding taxes
In the case of dividends paid to non-resident shareholders, the law allows an exemption from withholding tax in Cyprus. The same applies for interest paid from Cyprus as well as for royalties paid from Cyprus regarding intellectual property exploited outside Cyprus.
The nil withholding tax rates apply irrespective of whether the recipient is a company or an individual, the country of residence of the recipient or whether a relevant tax treaty exists.
Notional interest deduction upon the introduction of new equity
Upon the introduction of new equity, Cyprus companies are entitled to a notional interest deduction (NID)
Equity introduced to a company as from 1 January 2015 (new equity) in the form of paid-up share capital or share premium is eligible for an annual notional interest deduction (NID).
The annual NID deduction is calculated as an interest rate on the new equity, and cannot exceed 80% of the taxable profit derived from assets, financed by new equity. The relevant interest rate is the yield on 10-year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 3% premium (subject to a minimum amount which is the yield on the 10 year Cyprus government bond as at the same date plus a 3% premium).
Capital gains and income tax exemption for securities
There is no income or capital gains tax on profits and gains derived from the disposal of securities in Cyprus, irrespective of whether the profits and gains are considered to be of a revenue or capital nature. As defined by the governing law, securities include bonds, shares, founder’s shares, debentures, and other securities of companies or other legal persons as well as options over such securities.
Capital gains and income tax exemption for real estate
Cypriot companies can be used to hold real estate or other assets outside Cyprus with no Cypriot capital gains tax implications on disposal of the assets. Capital gains tax only applies to gains on the direct disposal of immovable property situated in Cyprus and under certain circumstances in the indirect disposal of immovable property situated in Cyprus.
Foreign exchange neutrality
Cypriot companies are eligible for tax exemption on foreign exchange gains, with the exception of foreign exchange gains arising from trading in foreign currencies and related derivatives.
Permanent establishment abroad
Generally, profits arising from a permanent establishment maintained abroad are exempt from tax in Cyprus.
Income from intellectual property
The corporate income tax rate of 12.5% applies for only 20% of the net profits of a Cypriot company from the exploitation or disposal of its intellectual property (IP). In addition to the deduction of all direct expenses related to the production of income or profit, the net profit is also calculated by including 20% of the IP acquisition cost in each of the first five years of ownership.
Interest incurred by a Cypriot company for the acquisition of fixed assets used in the business for the generation of taxable income is tax deductible.
There are no thin capitalisation rules or minimum capitalisation requirements in Cyprus.
A wide network of tax treaties
Cyprus boasts a wide network of tax treaties, currently with over 60 countries, including major countries in North America, Europe, Africa, the Middle East as well as China, South Africa, India and Russia.
The majority of these double tax treaties provide for reduced or no withholding tax rates on dividends, interest and royalties paid from a country party to the treaty and the avoidance of double taxation for a resident of one of the treaty countries who derives income from the other treaty country.
Unilateral tax credit relief
Relief for taxes paid abroad takes the form of a tax credit provided the respective income is subject to taxation in Cyprus. The relief is granted unilaterally, whether there is a tax treaty between the two countries or not. Where there is a treaty, its provisions apply if they are deemed more beneficial. For dividend income received from an EU resident company or if a tax agreement provides so, an underlying tax credit is also allowed to the Cypriot recipient of the dividend against any tax payable on that income in Cyprus.
Advance rulings and prior approvals
The tax authorities of Cyprus provide interpretations of the law under an advance ruling system.
The standard rate is 19%. Some goods and services qualify for reduced VAT rates of 5% and 9%.
Capital & net worth taxes, capital & stamp duties
Cyprus does not have annual capital taxes, net worth taxes or any significant stamp and capital duties.
The EC Merger Directive has been fully adopted by Cyprus. Thus, when a transaction is a “reorganisation”, it benefits from an exemption from corporate income tax, tax on capital gains, stamp duties and property transfer fees.
Generally, a reorganisation will include: a merger, a division, a part-division, the transfer of assets and the exchange of shares that involve companies both resident and non-resident in Cyprus.
Cross border mergers and re-domiciliation of companies
Cyprus law permits the merger of two or more EU member companies, whether a merger involves Cypriot companies or Cypriot and non-Cypriot EU companies and whether the Cypriot company is or is not the surviving company. Provided they are allowed by their jurisdiction of residence to do so, non-Cypriot companies can deregister in that jurisdiction and are allowed by Cyprus law to domicile in Cyprus. Cypriot companies are also allowed to deregister from the Cypriot Register of Companies and choose domicile in another jurisdiction.
For cross-border and domestic mergers as well as for re-domiciliations and migrations of tax residency, the tax burden is generally neutral, as there is no Cypriot “taxation on exit” applied to these restructurings.
Liquidation of a Cypriot company
In the case of liquidation of a Cypriot company, owned by non-resident shareholders, and irrespective of the liquidation method, Cyprus legislation does not have capital gains tax, income tax or any other taxes.
Personal tax rates
They are progressive, and up to a maximum of 35% on income exceeding €60,000 per annum.
Relief for overseas employment
Cypriot residents who are under employment outside Cyprus of a non- Cypriot employer or an overseas branch of a Cypriot employer are exempt from taxation on their remuneration income from the provision of salaried services overseas for an aggregate period in the year of more than 90 days.
Relief for non-residents taking up employment in Cyprus
Individuals that are physically present in Cyprus for less than 184 days per calendar year are only taxable in Cyprus on income that is derived from sources within Cyprus and employment occurring in Cyprus.
Remuneration from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the start of his /her employment in Cyprus qualifies for a 50% exemption.
Ten-year income tax exemption on 50% of the remuneration from any employment exercised in Cyprus: this concerns individuals who were resident outside Cyprus before the start of his/her employment in Cyprus. The ten years start from the first year of employment provided that the income of the employee generated in Cyprus exceeds €100,000 per year. If the employee was a Cypriot tax resident either in the preceding tax year or for at least three of the last five tax years prior to the tax year of commencement of employment, the exemption does not apply.
Five-year exemption on 20% of the income or €8,550 (whichever is the lower) arising from any employment in Cyprus by any individual who was resident outside Cyprus before the start of the employment. The five years’ period starts from 1 January following the year of commencement of the employment and can be claimed until the tax year of 2020.
The Formation & Uses of Cyprus Companies
Formation of companies – The Cypriot company
A Cypriot company can either take the form of a private company, established by one or more persons. It can also take the form of a public company, established by any seven or more persons that co-operate a limited liability company for any legal purpose and form.
The constitutional documents of a Company are its Memorandum and Articles of Association. They specify the activities in which the company may engage and the means used to govern its business. The persons establishing the company sign the Memorandum of Association and comply with the Cyprus Companies Law Cap.113.
There is no minimum issued and paid up capital requirement for a private company. Generally, companies have a share capital of at least €1,000.
Every company must have a registered office address in Cyprus which may be used as the business address of the company. It must also have a company secretary. It is not required, but it is common practice for the directors to be Cypriot residents.
Cypriot companies are required to maintain proper accounting and financial statements that comply with IFRS.
In addition, pursuing to the provisions of the Cyprus Companies Law Cap.113, every private limited-liability company (including small or dormant company shall submit its financial statements to an auditor for auditing).
Three categories of companies and groups are established by the Cyprus Companies Law Cap.113: Small, Medium and Large. The Small and Medium groups are not required to prepare consolidated financial statements unless any of their affiliate companies is a public-interest entity or if another legislation requires them to prepare the consolidated financial statements.
Board of Directors Report: (renamed “Management Report”) it includes a fair review of the performance and development of the company business and of its financial position as well as a description of the main risks and uncertainties that the company is facing.
The requirement for preparing a management report does not apply to Small companies with shares that are not listed in the regulated markets of any EU member state, and which are not required to prepare consolidated financial statements in accordance with the Cyprus Companies Law Cap.113, provided that the requirements regarding the acquisition of their own shares are included in the notes of the financial statements. Medium-sized companies, the shares of which are not listed in the stock exchange of any EU member state, and which are exempt in accordance with the Cyprus Companies Law Cap.113 from the obligation to prepare consolidated financial statements, are exempt from the obligation concerning the non-financial information.
Small and medium groups are not required to prepare the consolidated management report unless they are linked with a public-interest entity.
The Cyprus company must prepare and submit to the Registrar of Companies and Official Receiver at the reporting date, pursuant to the Cyprus Companies Law Cap.113 (as per the law, it is the date after the completion of the 18 months of its incorporation) its annual return. It is a statement outlining details about the share capital, the directors and the secretary of the company and the shareholders. This return is supplemented by a copy of the financial statements which were approved at the company’s annual general meeting. It has to be submitted to the Registrar of Companies and Official Receiver within 28 days from the date of its preparation.
Copies of all documents presented to the Annual General Meeting of a company may be submitted to the Registrar of Companies in the English language and any other language generally used in the international financial sector. Any required translations are usually undertaken by local advisers at minimal cost. Cypriot tax law stipulates that every company is required to submit an annual corporate income tax return.
Common Cypriot companies
The investment holding company
A Cypriot investment holding company constitutes a perfect gateway to the EU. The dividends it receives suffer no withholding tax. Also, paying dividends to shareholders is not subject to deduction of withholding tax.
The IP holding company
Cyprus companies that own qualifying intangible assets or intellectual property (IP) are eligible to claim 80% of their net profit from the exploitation of such qualifying IP as tax exempt. The net profit is calculated after deduction of all expenses directly associated with the production of the IP from the licensing income of the IP. Qualifying IP benefit from an annual capital allowance of 20% and any profit arising from their disposal benefits from the 80% exemption.
The financing and/or Treasury Company
There is no withholding tax for Cypriot companies receiving interest on loans to EU group companies and interest can be paid without deduction of withholding tax.
Income and gains on disposal of securities (shares, repos, bonds) of Cyprus companies trading in such securities are exempt from Cypriot tax.
Ship owning & management
Cyprus boasts the 10th largest merchant fleet in the world by registrations.
There are specific tax exemptions for shipowning and shipmanaging companies as well as for companies that employ crews working in international waters. The Cyprus tonnage tax regime is very competitive.
Regional Employment Company
Regional employment companies can pay their offshore employees without Cypriot tax, social security or other obligations as per Minimal Cypriot compliance obligations.
We are a team of experienced professionals, all sharing a unique drive for learning and development through teamwork. The Group utilizes its various core activities to implement customized solutions for its clients. Our collective experience spans the areas of Global Corporate & Fiduciary Services, Assurance & Advisory Services, Fund Administration, Tax Advisory, Corporate Governance, Financial Services, Private Wealth Services and Compliance.
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