Cyprus company: Tax and other Issues
Cyprus is a part of the European Union since 2004 and is the third largest island of the Mediterranean, is situated at the crossroads of three continents Europe, Asia and Africa.
The law under which business takes place is based on the same principals applicable to the UK legal system and the business language is English. Cyprus is well known as a low tax jurisdiction, with only 12,5% corporate tax on net profits and other generous tax exemptions on dividends and profits from the sale of shares, shipping and royalties.
The above combined with the extensive network of over 50 double tax treaties and the excellent and highly efficient business environment, high level of professional services and legal system make Cyprus a very attractive International Business Center on the white list of the OECD for investment in Europe and the CIS countries.
Cyprus has a presidential system of government which is modeled on western democratic systems where human rights, political and private property are safeguarded.
The legal system is based on the same principles applicable in the United Kingdom and the Cyprus legislation has adjusted to the European Union laws and antimoney laundering legislation and procedures.
Cyprus has an open economy, with the major business activities being on tourism and services. Cyprus accounting profession follows the international accounting and auditing standards, that of the accounting members of the local institute of CPAs, ACCA and ACA.
The Island has excellent transportation and telecommunication infrastructure. There are modern ports, 2 international airports and the road network consists of motorways and large carriage-ways linking all the cities.
But at the same time Cyprus offers quality of life, high standards of health and educational services as well as secured and pleasant environment by the sea and under the Mediterranean sky.
Corporate tax: 12,5%
– Cyprus is a low tax jurisdiction, with only 12,5% on profits made. Due to the generous tax deductibility rules, the effective tax rate is even lower.
– Expenses that are deducted include entertainment expenses for business purposes, premises maintenance, donations, depreciation.
– In addition, losses brought forward can be set off against future profits for the next 5 years.
– Losses incurred from any business activities from outside Cyprus are allowed as a deduction from the other profits by the Cyprus company.
– Finally, with regards to group of companies, provided that for the whole financial year, 75% or more of the shares of a Cyprus company are held by the same companies that are in the same group, losses can then be set off against profits.
– Dividends received from abroad or from another Cyprus company are in most cases tax exempt.
– There is no withholding tax on incoming dividends paid by European Companies under European parent subsidiary director. Withholding tax on dividends from non EU countries benefit from the wide Double Tax Treaty agreements Cyprus has with many countries. Among those DTT, the agreements with Russia, Ukraine and other CIS countries offer a lot of opportunities for lower withholding taxes.
– There is no withholding tax on dividends paid by Cyprus companies to non tax residents of Cyprus or to other Cyprus companies. The same applies on interest paid to non tax residents of Cyprus.
Cyprus has the best IP tax regime in Europe since:
– 80% tax exemption is granted on income from royalties after deducting expenses relating to the IP (provided the IP is the owner of the company) reducing the effective tax rate from 12,5% to 2,5% on the net profit.
– 80% tax exemption is granted also on capital gains from sale of IP.
– Legislation covers a very wide range of Intellectual properties acquired or developed by the company and includes Patents, Trademarks, copyrights, formulas, designs, knowhow and processes.
– The IP can be registered in any country but the important factor is that it must be owned by the Cyprus company.
– The cost of acquisition or development of an IP acquired by a Cyprus company maybe capitalized and written off on a straight line basis over 5 years giving an annual writing down allowance of 20%.
Royalties have a 10% withholding tax when the gross amount of royalties is earned from non resident sources within Cyprus. No withholding tax is applied when the Cyprus company royalties are used outside Cyprus. Corporate rate is then applied on the profit margin left in the Cyprus Company.
Capital Gains: 0%
No inheritance tax applies in Cyprus
There is no corporation tax or capital gains tax on profits from trading and disposal of securities of private or public companies. The same applies to the income of investment funds and investment companies from trading in securities.
Capital Gains tax is 0% on profits created by the sale of immovable property outside Cyprus and is only imposed when profits are realized from the sale of property in Cyprus.
Companies such as ship management companies benefit of a 4.25% tax and shipping companies with ships under Cyprus flag at the rate of 0%. In addition, Cyprus International Trusts are tax exempt for income that is earned outside the island.
USES OF COMPANIES
As an intermediary investor
By acting as an intermediary investor, a Cyprus company can be placed in the middle of two or more countries that have not signed a double tax agreement between them but Cyprus has. This has as a result in reducing or avoiding the withholding tax in the cases where the investor is in the country that has not a double tax agreement with the country that the investment is being made. With Cyprus in the middle, an effective structure is created benefiting from the double tax agreements Cyprus has with many countries.
As an investment company, trading securities
By using a Cyprus company in the security trade, the investor is being benefit by the tax exempt of the profits from sale of shares/debentures of both the private and public companies.
As a holding company
By using the Cyprus company as a holding company, the following are the benefits:
– Profit from sale of securities is completely tax exempt
– Incoming dividends received by a Cyprus company from its subsidiaries are exempt from corporate tax
-No withholding tax on dividend paid by the Cyprus company to other Cyprus company or to a non tax resident of Cyprus
– The withholding tax on dividends paid to the Cyprus company is either reduced or avoided altogether in the case of European subsidiary companies
-Losses from business carried on outside Cyprus or losses of companies in the same group or losses carried forward from previous years are set off against the current profits of the Cyprus company.
As a trading company
Cyprus company is appropriate as a trading vehicle due to the law tax rate and because Cyprus is an ideal country to establish company’s headquarters or regional offices due to its geographical position at the crossroads of Europe, Asia, Africa, the reasonable costs for maintaining offices, high level of professional services and availability of qualified personnel, the excellent business infrastructure, the experienced and efficient commercial banking. This factor is gaining increasing importance due to the trend internationally for substance and transparency.
As a Finance Company
The main usage of this type of Cyprus company is that of providing loans in countries with which Cyprus has double tax treaty agreements, having low or no withholding tax on interest.
As a Permanent Establishment
A Cyprus company can be established in a country to which it has double tax treaty agreement. In this way, it avoids the tax of the country of operations. In the case where the project exceeds the 3 months, then profits of the Cyprus company from the permanent establishment are tax exempt.
As a Shipping or Ship management company
The tax on these type of companies is only 4.25% and there is the possibility of paying tonnage tax on the ships they manage which is very low instead of corporate tax of 4.25%.
Shipping companies whose ships are under Cyprus flag are totally tax exempt.
TYPES OF COMPANIES
The most commonly used type of Cyprus company is the limited liability company and is registered with the registrar of companies. The registry is open meaning that the information is accessible to the public including director, shareholder and past history.
In order to form a Cyprus company the following are needed:
In order to apply for a new name, 1 week is needed to get approval none the less, our company offers of the shelf companies that are ready for use
At least one director individual or corporate entity of any nationality.
At least one individual or legal entity – Secretary be provided by us
At least one either a legal entity or an individual of any nationality
Must be in Cyprus Service can be provided by us
OBLIGATIONS OF CYPRUS COMPANY
Cyprus companies need to be audited once a year and submit the financial statements as well as the annual returns to the Registrar of companies. Tax returns are filed within 15 months after the accounting year end.
Annual levy of €350 is paid every year at the Registrar of Companies
Is paid either provisionally in the current year in 2 installments on July and December or the foul taxation is paid next June after the accounting year end.