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A.G. GEORGHIOU
& CO
Certified
Public Accountants
OFFSHORE
TAXATION IN CYPRUS
INTRODUCTION
The income tax laws
in Cyprus
follow very closely the principles of the English laws. Both companies and
individuals are taxed under the Income Tax Law.
Tax is assessed in
the year in which the income is earned or realised on a current year basis.
Income includes gains or profits from any trade, business, profession or
vocation or from any office or employment including dividends, interest,
rents, royalties and others.
Ibc’s and
their expatriate employees enjoy substantial tax advantages which derive from
domestic Cypriot legislation and from Cyprus double tax treaties. In
contrast to tax havens, Cyprus
is a tax incentive country which offers benefits aimed at attracting non
residents who wish to conduct their business from the island. The most
important advantages are those relating to corporate and personal taxation.
Main Taxation Provisions and rates
IBC’s will no
longer be taxed by virtue of their registration in Cyprus
but instead they will be considered tax residents if they will be managed and
controlled in Cyprus.
The Cyprus Company shall be regarded as managed and
controlled outside Cyprus
if:
 The majority of its Directors are
residents of Cyprus.
The Board of Directors meets in Cyprus.
All major policy decisions are taken at
board meetings in Cyprus.
All major contracts should be signed in
Cyprus
with the local Directors being involved in such Signings.
The Seal of the company should be
authorized to be used in Cyprus.
1. It must be pointed
out that if the company is not or it ceases to be managed and controlled in Cyprus, and thus becomes not taxable in Cyprus, it shall not be able to avail of the
benefits of the Double tax treaties which Cyprus has with various countries
all over the world
2. IBC’s will
be taxable as any other local company at the corporate tax rates(10%) and
they will be entitled to the new beneficial tax provisions
3. For the years
2003 and 2004 there is an additional company tax of 5% on all profits which
exceed C£1.000.000
4. IBC’s will
be subject to obtaining the relevant permits; will also be allowed to derive
income from within Cyprus.
5. IBC’s will
be subject to the provisions of the Social Cohesion fund Law and will be
required to contribute at the rate of 2% on the gross emoluments of its tax
resident employees working in Cyprus.
6. 50% of income
from interested will be exempted from corporate tax but the whole amount of
interest received or credited will be subject to the special contribution at
the rate of 10%. However interest from ordinary trading activities such as
banking and finance activities will be considered as trading income and taxed
only at the normal corporate rates prevailing. Interest income from deposits
with banks operating in the Republic which are currently completely exempt
will be subject to tax as above.
7. Dividends which
may be received by the company by a from a foreign company provided that the
Cyprus Company holds at least 1% of the share capital of that foreign company
and the income of that foreign company is not by more that 50% investment
income and the foreign company that pays the dividend is subject to tax in
the foreign country at a rate which is not substantially lower than 10% are
fully exempt from any kind of tax in Cyprus.
8. The company Will
not be obliged or pay any withholding tax on any dividends which it may
distribute to its shareholders, individuals, or corporations who are not
residents of Cyprus.
9. The profits which
the company may have from a permanent establishment outside Cyprus shall be fully tax exempt
unless the income of such permanent establishments consists by more of 50% of
foreign income that the permanent establishment is subject to tax at a tax
rate substantially lower than 10%.
10. IBC’s
holding royalty rights will continue to be exempt from any withholding tax on
Royalties payable if the right is granted for use outside Cyprus.
11. Profits from
buying and selling shares will be exempted from tax.
12. The company will
also be liable to pay Special defence contribution at the rate of 3% on 75%
of the amounts of rents earned by it.
It is important to
note that the company will be entitled to tax credit under any relevant
Double tax treaties as well as to unilateral tax credit in respect if any tax
paid by the company in any foreign country with which Cyprus does not have a
double tax treaty. Both the Credit under the relevant tax treaties as well as
the unilateral tax credit will equally apply in respect of cooperation tax
and or to special defence contribution, it follows that if the company
receives any dividends which under the NEW
tax regime might be taxable in Cyprus or it earns any interest from
abroad or any rentals from outside Cyprus and on any such kind of income it
pays any tax outside Cyprus the amount of such tax paid shall be deducted
from any Cyprus tax.
The present taxation
rates for companies and individuals are as follows:
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Cyprus Companies
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All profits - 10%
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IBC’S
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All profits - 0%
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Offshore branches managed
and controlled in Cyprus
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All profits - 10%
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Offshore branches
managed and controlled outside Cyprus
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All profits - 0%
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TAXATION OF SHIPPING COMPANIES
The profit of Cyprus ship owning companies with ships flying
the Cyprus
flag and operating in international waters, are totally taxes exempt.
Dividends.
Dividends of foreign shareholders
Shareholders of
offshore companies are exempt from tax on dividend income. Foreign shareholders
of companies other than offshore are taxed on dividend income as follows:
Corporations - the tax withheld on
dividends payable to a foreign company is refunded unconditionally.
Individuals - an individual is entitled to
repayment of the difference between the tax withheld by the company and his
personal tax liability, if such liability is lower. If his personal liability
is higher, he will have to pay the excess unless he is a resident in a
country with which Cyprus
has a tax treaty.
Royalties and interest
Royalties or
interest may be taxed at lower rates or totally exempted from tax if they are
received by a resident of a country with which Cyprus has a treaty for the
avoidance of double taxation. Royalties paid by offshore companies to non
residents are not liable to withholding tax if the use of such rights is
outside the Republic. Interest is either taxed at 25% or is exempt from tax
if it satisfies certain conditions.
Employees
Foreign employees of
offshore entities providing their services in Cyprus
are liable to Cyprus
income tax at a rate equal to half of the normal tax rates for
individuals’ i.e 0% to 20%.
Foreign employees of offshore
entities working outside Cyprus
but receiving their salaries out of foreign funds remitted through Cyprus are not liable to Cyprus income tax.
Foreign employees of offshore
entities working outside Cyprus
but receiving their salaries out of foreign funds not remitted through Cyprus are taxed at a rate equal to one tenth
of the Cyprus
tax rates i.e. 0% to 4%.
Foreign employees of offshore
entities working both in Cyprus
and abroad are liable to income tax at the above-mentioned rates on the basis
of time apportionment.
Foreign employees of offshore
entities working in Cyprus
are exempt from paying national insurance contributions.
Service / management fees
Payment for management
services, technical assistance, use of know how, etc., by a Cyprus subsidiary to its foreign
parent may be made without deduction of tax. They are tax deductible,
provided they are commercially justifiable.
Capital gains
Residents - Companies and individuals
are liable to 20% tax on capital gains.
IBC’s - no capital gains
tax is payable on the sale or transfer of shares in an offshore company.
International tax planning
Cyprus holds an important
position in international tax planning through its favourable tax regime but
also in conjunction with its wide network of double tax treaties.
The main purpose of these
treaties (which are discussed in more detail in another section) is the
avoidance of double taxation of income earned in any of the two contracting
states. Under these agreements either a credit is allowed in a contracting
state on the same income or such income is exempt from tax. Thus the taxpayer
does not pay more than the higher of the two rates or he is not taxed twice
on the same income.
Cyprus has concluded an
impressive number of treaties for the avoidance of double taxation. There are
currently 33 treaties in force. The existence of these treaties, combined
with the low tax paid by offshore enterprises, as well as their beneficial
owners and expatriate employees, offer significant possibilities for
international tax planning through the island. In contrast to Cyprus,
tax havens lack, in almost all cases, double tax treaties.
Other taxes
There is full estate duty
exemption on the inheritance of shares in an offshore company.
There is full duty exemption on
contracts entered into by offshore entities.
There is full exemption from
the special contribution for refugee’s tax and the special defence
contribution tax by offshore entities.
Other incentives and advantages
Free zone facilities.
Bonded warehouse facilities.
10 years tax holiday for
companies engaged in the manufacture of approved goods not previously
produced locally.
Import duty relief on plant and
machinery.
Double tax treaties with a
number of countries.
There are no restrictions on
remittances of profits by non resident entities, no restrictions on payments to
parent companies and no requirements for minimum net assets. Other than for
offshore banks and insurance companies, there are no requirements for legal
reserves.
Duty free imports by foreign
employees of offshore entities are allowed. These include motor cars and
household effects, but not furniture.
Trusts, whose income arise
abroad and have no property in Cyprus, are free from taxes on
income or capital.
Tax on investment income is
levied on those expatriates who have retired on the island, strictly on a
remittance basis. The first C£2.000 is exempt and the balance is taxed
at 5%. Pensions remitted from abroad to expatriates retired on the island are
liable to income tax at 10% of the normal rates.
VAT
The VAT legislation was passed by
the House of Representatives on 20 December 1990. Every legal person or
individual who delivers goods or provides services which are subject to VAT
and whose turnover exceeds C£12.000 per annum must be registered for
VAT purposes. All persons liable to VAT are required to issue invoices and
keep proper books and records.
Transactions effected by
offshore enterprises are by definition outside the Republic and therefore
outside the scope of VAT. As a result offshore enterprises are not be obliged
to register for VAT and thus will not be entitled to claim a refund of the
VAT paid by them on their purchases or expenses. However specific relaxation
to this rule has been made with regard to telecommunications.
Tax procedures
As with the majority of other
Cypriot legislation, tax matters are based on English principles but in a
more simplified form.
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COMPANIES
Companies are required to
submit provisional self-assessments on their estimated income for the current
year by 1 August and pay the tax thereon. In the absence of any provisional
self- assessment, the provisional assessment is raised by the Income Tax
Office based on the previous year's tax assessment. Provisional tax is
payable by three equal instalments at 1 August, 30 September and 31 December
in the year of assessment. An offshore company may revise its provisional
self-assessment at any time during the year.
Offshore companies must submit
their annual tax return by 31 December after the end of their financial year and
pay their tax under self-assessment.
Company accounts must be
audited by an independent auditor authorised by the minister of finance and
may be submitted either in Greek or English. The conversion of foreign
currency amounts into Cyprus Pounds for taxation purposes may be made either
at the average rate for the year or at the rate ruling at the end of the
year. Whatever method is selected must be used consistently in all other
years.
The accounts and computations
are subject to examination and agreement by the District Income Tax Office.
Although under the Income Tax Law the commissioner has the power to ask for
the production of books and documents out of which the accounts were
prepared, this is exercised selectively and in very few deserving cases. In
the case of offshore companies a very liberal policy is followed in the
review of accounts by the department of inland revenue.
If there is a delay in the payment of tax, interest
at the fixed rate of 9% per annum is charged. Interest at the same rate is
payable on refundable taxes. Any objection to an assessment must be filed by
the end of the month following the month in which the assessment is raised.
The taxpayer may then file recourse to the Supreme court if still aggrieved
by the commissioner's final decision.
Employees
Expatriate employees are
required to submit their annual tax returns to their district income tax
office by 30 April after the end of the year.
Each employer, including
offshore companies, must operate a system of Pay As You Earn (PAYE) in
respect of the emoluments paid to their employees. Should the employer fail
in this obligation and the income tax authorities are unable to recover the
amount of tax due, they have the right to claim this from the employer. The
PAYE tax deducted for a month is paid over to the director of inland revenue
at the district income tax office by the end of the month following the month
in which the tax was deducted. Interest is charged on delayed payments at the
rate of 9% per annum. An additional charge of 1% of the tax is collected for
every month of delay provided this charge does not exceed 11% of the tax
payable.
A tax clearance certificate is
required for the annual renewal of an expatriate's resident and working
permit.
Vat
In accordance with the
value added tax law of 2000 international business companies are treated in
the same way as all other Cypriot companies in relation to vat.
IBC’s
belonging to the Republic
of Cyprus and carry out
transactions outside the Republic do no have to register for Vat purposes,
however they can register voluntarily of they wish.
Immovable Property
and Cyprus
Offshore Companies
Immovable property outside Cyprus
Dealings in immovable property
in other treaty countries constitute business profits as far as the absence
of a permanent establishment can be shown by the Cyprus offshore company. The
absence of the permanent establishment can be achieved by the use of an
independent agent. This is frequently used in the case of immovable property
in the United Kingdom.
An immovable property is held
by an offshore company for two reasons:
For trading
The double tax treaties of Cyprus provide that no income tax or capital
gains tax is payable in that other country (USA
and Canada
excluded).
If the profit received in Cyprus
is deemed as income is taxed at the rate of 10%, and if is deemed of a
capital nature the tax is nil.
For investment
The sale of shares in the
offshore company holding the immovable property may in some cases result to
extraction of gains without the payment of tax (especially in the case of United Kingdom).
In the case of Denmark, Greece,
Ireland and Kuwait,
the alienation of shares in a company is not liable to tax in that country.
Immovable property in Cyprus
Offshore companies
Offshore companies in Cyprus are not allowed to hold immovable
property in Cyprus
other than their own offices. Any gain on disposal of such offices is taxed
at the capital gains tax rate of 20%.
Individuals
Property disposed by a non
resident is exempted from capital gains tax, provided that this was
originally acquired with foreign exchange.
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DOUBLE
TAX TREATIES
Introduction
The Cyprus double tax treaties have
been drafted very closely to the Organisation in Economic Cooperation and Development
(OECD) Model Treaty. The OECD model has been changed where necessary in order
to conform with the tax systems of the countries concerned.
Cyprus provides
substantial tax advantages to foreign investors, coupled with the provision
of the double tax treaties, it makes good sense to make good use of such
treaties.
It is certainly the policy of
the Cyprus Government to encourage tax incentives for aliens, in order to
develop Cyprus
as a financial centre in its area, without, proclaiming or promoting itself
as a tax haven.
The following form part of the
main provisions included in the OECD model:
Residence
In order for an individual, or
a company to take advantage of a double tax treaty, he or it must be resident
of one or two contracting states i.e. to be resident of Cyprus for tax purposes.
A resident of a contracting
state is given by article 4.1 of the OECD model, namely "any person who,
under the laws of that state, is liable to tax therein by reason of his
domicile, residence, place of management or any other criterion of a similar
nature".
Permanent establishment
Permanent establishment is
defined by article 5 of the OECD model meaning a fixed place of business
through which the business of the enterprise is wholly or partly carried on.
It includes especially a place of management, a branch, an office, a factory,
a workshop, a mine, oil or gas well, a quarry or any other place of
extraction of natural resources.
Business profits
Article 7 of the OECD model
deals with business profits and states that these shall be taxable only in
that state unless the enterprise carries on business in the other contracting
state through a permanent establishment situated therein.
Dividends
The withholding taxes that are
applicable to treaty countries are low, and this together with the low tax
rates for offshore companies, makes investments in treaty countries through Cyprus
very important.
Additionally investments can
take place through Cyprus
by a third country with the end result of great savings on tax planning.
Similar benefits can be accrued
by the use of payments been affected by the use of interest or royalties.
Limitation of treaties
In some of the double tax
treaties that have been established a number of anti avoidance provisions
exist. These are to be found in the treaties with the France, Germany,
UK, U.S.A. and Canada.
Double tax treaties and Eastern Europe
There are three main factors,
besides the geographical one, which justifies the description of Cyprus
as a "turn-table between East and West" both with regards to
business relations and to the resulting tax consequences:
The number of double tax
treaties which Cyprus has
concluded with Eastern Europe.
The extensive number of
treaties that Cyprus has
with countries other than those of Eastern Europe.
The favourable tax regime which
is applicable under Cyprus
legislation to non residents.
Thus, Cyprus treaties with Eastern Europe enable a Cyprus
legal entity to extract from East European countries profits at reduced tax
rate or with no tax at all.
List of Countries with Double Tax Treaties
List of double tax treaties in force
Austria
Bulgaria
Belarus
Belgium
Bulgaria
Canada
China
Czech Republic
Denmark
Egypt
France
Germany
Greece
Hungary
India
Ireland
Italy
Kuwait
Lebanon
Malta
Mauritius
Norway
Poland
Romania
Russia
Singapore
Slovakia
South
Africa
Sweden
Syria
Thailand
United
Kingdom
USA
Yugoslavia
Double
tax treaties awaiting ratification
…
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