Antonis Taliotis
In 2007 Cyprus was voted the most attractive European tax regime by major business organisations across Europe. Cyprus was commended for the stability of its tax law, the consistency in interpreting its tax legislation and its low tax rates.
This recent accolade shows how the Cyprus tax system, combined with its first-rate infrastructure, highly skilled workforce and membership of the European Union has made Cyprus the International business hub it is today. Cyprus has become a favoured location for international commerce as well as reputable multinationals seeking a legitimate tax efficient jurisdiction, raising Cyprus to a new level of International business.
Growing with Europe
As a member state of the European Union since 2004, Cyprus has entered a new era as an economy offering a great number of advantages within a common European market. The Euro was adopted by Cyprus as its unit of currency on 1 January 2008, further confirming the country’s macro-economic stability and its commitment to low inflation, low interest rates and high growth.
Cyprus participates in the European Union’s internal market where there is free movement of goods, services and capital. European citizens are able to conduct business, travel to and live in Cyprus with no legal restrictions.
Demonstrating a stable financial and business-friendly environment since the 1970s, Cyprus has attracted foreign investment and capital flows for decades. As part of its preparation for European Union accession, Cyprus undertook a harmonisation of its financial and regulatory environment with that of the European Union. A general tax reform came into effect on 1 January 2003 to align the Cyprus tax system with European principles of equality and to demonstrate a commitment by Cyprus to the OECD against harmful tax practices.
The Cyprus tax system
An advantageous tax system
The Cyprus tax legislation and its regulation is predictable and straight forward in nature. Relations between the business community and the tax authorities are excellent and ensure the efficiency of taxation of the commercial and financial sector. By providing a transparent and efficient environment, the tax system enhances Cyprus’ competitiveness and contributes to making Cyprus an attractive jurisdiction in which to structure International operations. The Cyprus tax authorities provide advance interpretations of the law under a ruling system.
Corporate tax rate
Cyprus has a corporate income tax rate of 10%. This is the lowest corporate tax rate in the European Union.
Exemption from tax on dividend income
Dividend income is exempt from tax irrespective of its source, provided that a minimum 1% holding in the company paying the dividend is maintained and either the paying company engages directly or indirectly in more than 50% of activities that give rise to non-investment income or the non-Cypriot tax burden on the dividend paying company’s income is not lower than 5%.
Permanent establishment abroad
Profits from a permanent establishment maintained abroad are generally exempt from tax in Cyprus.
Dividends are not considered to be sourced from investment income if they are derived directly or indirectly from trading subsidiaries.
No withholding taxes
Dividends paid to non-resident shareholders are exempt from withholding tax in Cyprus. Also, no withholding tax is imposed on interest paid from Cyprus as well as on royalties paid from Cyprus in respect of intellectual property exploited outside the Republic. The nil withholding tax rates apply irrespective of whether the recipient is a body corporate or an individual, the country of residence of the recipient or whether a relevant double tax treaty exists.
Capital gains and income tax exemption for securities
Cyprus does not impose income or capital gains tax on the profits and gains derived from the disposal of securities, irrespective of whether the profits and gains are considered to be of a revenue or capital nature.
Securities, as defined in the law, include shares, debentures, government bonds, founder’s shares or other securities of companies or other legal persons which have been incorporated in Cyprus or abroad and options thereon.
Cypriot companies can be used to hold real estate or other assets outside Cyprus with no Cypriot capital gains tax implications, disposal of the assets as capital gains tax only applies to gains on the disposal of immovable property which is situated in Cyprus or unlisted shares in a company which owns immovable property situated in Cyprus.
Interest deductibility
Interest incurred by a Cypriot company is generally deductible if in respect of funding the acquisition of assets used in a business, which derives taxable income. Practice statements and case law provide further guidance on deductibility of interest.
Thin capitalisation
Cyprus does not have any thin capitalisation rules or minimum capitalisation requirements.
A wide network of double tax treaties
Cyprus boasts an extensive network of double tax treaties, currently with more than 40 countries including countries in North America, Western and Eastern Europe as well as emerging markets such as China, India and Russia.
Generally, most treaties provide for reduced or nil rates of withholding tax on dividends, interest and royalties paid out of the treaty country and the avoidance of double taxation in the case where a resident in one of the treaty countries derives income from the other treaty country.
Unilateral tax credit relief
Relief for taxes paid abroad is in the form of a tax credit if the respective income is subject to tax in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty. Where a treaty is in force, the treaty provisions apply if more beneficial. Where dividend income is received from a company resident in the European Union or if a double tax treaty provides, an underlying tax credit is also allowed to the Cypriot recipient of the dividend against any tax payable on that income.
VAT
The headline Cypriot VAT rate is 15%, the lowest in the European Union.
Capital & stamp duties
Cyprus does not have any annual capital taxes and net worth taxes and there are no significant capital and stamp duties.
Personal tax rates
The personal tax rates are progressive and reach a top marginal tax rate of 30% on income in excess of €36,300 per annum.
Reorganizations
Cyprus has fully adopted the EC Merger Directive and therefore where a transaction is a “reorganization”, it is exempt from corporate income tax, capital gains tax and transfer fees.
A reorganization generally includes a merger, division, transfer of assets and exchange of shares, involving companies that are resident in Cyprus and/or companies that are not resident in Cyprus.
Cross-border mergers and re-domiciliation of companies
Cyprus legislation allows for the merger of two or more companies, whether a merger of Cypriot or Cypriot and non-Cypriot companies and whether the Cypriot company is the surviving company or not.
Non-Cypriot companies which are allowed by their jurisdiction of incorporation to deregister in that jurisdiction and register elsewhere, can become domiciled in Cyprus. Cypriot companies are also permitted to deregister from the Cypriot Register of Companies and become domiciled in another jurisdiction.
Cross-border and domestic mergers, as well as the re-domiciliation and change in jurisdiction of tax residency, are generally tax neutral, there being no Cypriot “exit taxation” applied to such restructures.
No capital gains or income tax on the liquidation of participations or of the Cypriot company
The liquidation of participations held by a Cypriot company does not give rise to any taxes in Cyprus. Furthermore, no capital gains tax, income tax or any other taxes arise on the liquidation of a Cypriot company owned by non-resident shareholders, irrespective of the method of liquidation.
Uses of Cyprus companies
- ‘Gateway’ holding company: As an intermediary between EU and non-EU jurisdictions, as well as in combination with emerging markets such as Russia and India, a Cypriot company receives dividends from subsidiaries suffering no or little withholding tax at source in accordance with the provisions of the EC Parent-Subsidiary Directive or under Cyprus’ extensive network of double tax treaties. Disposals of shares in the subsidiaries can be made with no Cypriot tax consequences. Dividends can by paid by the Cypriot company without deduction of withholding tax.
- Finance company: Undertaking a group financing function, a Cypriot company can receive interest income suffering no or little withholding tax at source, in accordance with the provisions of the EC Interest & Royalties Directive or under Cyprus’ extensive network of double tax treaties and pay interest without deduction of withholding tax. The net profits would be taxable at 10%.
- Investment trading company: Profits from the disposal of securities; shares, bonds, debentures and options, are exempt from tax irrespective of whether this profit forms part of a company’s trading activity or is capital in nature.
- Intellectual property holding company: Royalty income can be derived suffering no or little withholding tax at source in accordance with the provisions of the EC Interest & Royalties Directive or under Cyprus’ extensive network of double tax treaties.
- Ship owning and/or ship management company: Specific tax exemptions apply to companies owning Cyprus flagged ships or providing ship management services.
- Company for oil & gas exploration: Combined with the permanent establishment exemption, often the exploration activity can be undertaken in a tax free manner.
Multilaw
What you’re looking at is a full member of the European Union with all the requisite standards and codes; the law is British-based and the economy is healthy. There is also a very strong property market and if one looks at companies like Aristo Developers (ISO approved with over twenty years presence) it’s easy to see why Cyprus is proving so attractive property wise.
Capital gains and income tax exemption for securities
Euro Adoption