Cyprus: Offshore Business Sectors
Financial Holding and Investment Activities
Many international investors choose Cyprus as the location for financial holding and investment companies, due to the island's combination of tax treaties and low-tax regime.
Investment into Central and Eastern European countries and a number of Middle Eastern countries, as well as India, China and South Africa, benefits from low treaty withholding tax rates. Often it would be best for the investment to have a high debt component, since the interest is normally a charge against profit in the destination country, and there is a low or zero withholding tax on interest payments. There is no case in which the withholding rate on dividends is less than the rate on interest payments, and it is sometimes more. The old Russian treaty had zero withholding on both counts, but the new treaty has 5% withholding on dividends if the beneficial owner has directly invested in the capital of the company not less than US$100,000.
Whatever the mix of interest and dividends, the income once in Cyprus will in the worst case be taxed after deduction of expenses and attached tax credits at 10%.
Under the new regime, from 2003 dividend income from abroad is untaxed in most cases. While a few Western countries have lower withholding rates than Cyprus in their treaties with Central and Eastern European states, none competes on profits tax rates. Profits can then be retained or distributed without further taxation.
Distributions to some countries benefit from tax-sparing credits; US investors will be able to mix low-tax Cyprus income with high-tax income, avoiding wastage of tax credits; and even for countries like the UK which have rules on the attribution of profits from Controlled Foreign Corporations there are benefits to be got from careful planning of international financing structures.
As part of Cyprus's accession to the EU, companies and individuals giving investment advice now come under the supervision of the Securities and Exchange Commission (SEC) Local investment companies such as brokerages and banks are however able to compete in the financial services single European market. The new regulations cover a multitude of investment services including brokers acting on their clients' or their own behalf and portfolio investment managers among others, and identifies which companies are permitted to offer such services. In addition, it is compulsory for local finance service providers to contribute to a compensation fund for investors; foreign advisors on the Island can make voluntary contributions.