Cyprus: Offshore Legal and Tax Regimes
The offshore regime in Cyprus has changed as part of the island's accession to the EU, and as a result of agreements with the Organisation for Economic Cooperation and Development (OECD). Cyprus was excluded from the OECD's June 2000 'harmful' tax haven blacklist in return for pledging a commitment to amend its tax practices. In April 2009, Cyprus was placed on the OECD 'white list' of territories which have 'substantially implemented' the internationally agreed standard in tax transparency.
In July, 2002, as part of the Income Tax Act No. 118(I) of 2002, Parliament approved a uniform 10% corporate tax rate, to apply to both onshore and offshore companies, plus a 2% levy on wage bills (meant to subsidise pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, the rules are complex.
The 10% corporate tax gives Cyprus one of the lowest rates in the EU, alongside Ireland (12.5%), with the exception of the Isle of Man, Jersey and Guernsey, which have all announced a nil rate - but these islands are not in the EU anyway for most purposes.
The new regime introduced a 'residence'-based system of taxation, and was in operation from 1st January 2003.
Further proposals included the exchange of tax and finance information, as well as the signing of double tax treaties, between Cyprus and additional OECD member countries. Cyprus proposed to maintain its company and trust management regime, although the identity of the beneficiaries has to be disclosed to the tax authorities when a company is registered or when a change of ownership takes place. The new rules came into effect from December 31, 2003 for new companies registering in Cyprus, while those that are already registered on the island had until December 31, 2005 to comply with the new requirements.
After the EU finally agreed its Tax Directive in June, 2003, the Commission said it intended to give the ten acceding states, of which Cyprus was one, until 2007 to implement the Directive, which included a 'Code of Conduct' on 'harmful tax practices' and rules to avoid the double taxation of royalty and interest payments. However, a statement released by the Cypriot Ministry of Finance at the time said that Cyprus would adopt the new code in full in 2004. The royalties and company interest directive was in place from January 2004, according to the ministry, which pointed out that it was already compliant with the Code of Conduct rules as a result of its recent tax reforms.
A new tonnage tax system was approved by the European Commission on March 24, 2010 under state aid rules for maritime transport. The simplified tonnage tax system extends the favourable benefits available to owners of Cyprus flag vessels and ship managers to owners of foreign flag vessels and charterers. It also extends the tax benefits that previously only covered profits from the operation of vessels in shipping activities, to cover profits on the sale of vessels, interest earned on funds used other than for investment purposes and dividends paid directly or indirectly from shipping-related profits.
The remainder of this section describes the offshore regime prior to implementation of the changes outlined above. As far as taxation is concerned, it is now mostly of historical interest, except that offshore companies in existence before the end of 2002 were allowed to continue to make use of the 4.25% corporation tax rate until 2006 if they so chose.
For further information about the taxation of companies in Cyprus, see Domestic Corporate Taxation.