CYPRUS: OFFSHORE BUSINESS SECTORS

In 1975 the Cyprus Government began to create a welcoming regime for offshore companies. Due to Cyprus's particularly favourable tax treaties with Russia, the CIS and the countries of eastern Europe, the island is chosen by a high proportion of firms needing to set up an offshore base as a holding or investment company, or trading subsidiary, for those regions. Among emerging markets there are also favourable tax treaties with China, India, South Africa and a number of Middle Eastern countries.

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 (but since decided to reverse) 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.

The remainder of this section describes the most important types of international business activity carried out from the island. As far as the taxation of offshore companies is concerned, it is now of mainly historical interest, although existing companies were allowed to opt to continue the 4.5% 'offshore' taxation level through 2006. In other respects the sectors described are ongoing.

For further information about the taxation of companies in Cyprus under the new regime, see Direct Corporate Taxation.

Cyprus Trade Marketing & Distribution

Cyprus's taxation regime doesn't stand out particularly among its offshore competitors, but the island does have some considerable advantages, including its geographical location, its network of double tax treaties (especially those with the CIS and Eastern Europe), and its relatively sophisticated, European business environment.

Thus, a substantial number of companies involved in the trading or distribution of FMCG and other physical goods use Cyprus as a trading base for the Mediterranean, Middle East and North African region. Non-resident enterprises (ie those neither 'managed and controlled' nor with a local permanent establishment) are allowed to store, maintain, break bulk or re-package their own transit goods in bonded warehouses, providing the handling doesn't result in any change of customs' tariff classification. They are also permitted to conduct sales activities on the island, as long as no local deliveries result, and no permanent establishment is created.

Cyprus is not a particularly convenient base for supplying the CIS and Eastern Europe in physical terms, but that does not prevent companies with interests in those regions from establishing holding companies in Cyprus, and very many do so. Not only are the Cyprus treaty withholding tax rates normally lower than those in other countries' treaties, but there will be no local taxation as long as no permanent establishment is created, and even if it is, Cyprus's own 10% tax rate on company profits is itself low. The combination is quite hard to beat; see below, Financial Holding and Investment Activities.

Along with other low-tax jurisdictions, Cyprus is a suitable place in which to base e-commerce services for retail or wholesale distribution of material or non-material goods: see Offshore-e-com.com for extended descriptions of how such businesses can take advantage of the combination of offshore and e-commerce.

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Cyprus Licensing, Royalties & Franchising

A frequent feature of international trade and investment, particularly as between advanced and less advanced countries, is the transfer of technology or 'brand' or intellectual property in return for license, franchise or royalty payments. Due to its network of double-tax treaties and favourable taxation regime, Cyprus is a suitable place in which to locate an intermediary company to handle payments streams which might otherwise be highly-taxed in the receiving country.

Such payments would normally be deductible expenses in the originating country, and under the tax treaties will be subject to low or zero withholding tax (Central and Eastern Europe, China, India, South Africa and a number of Middle Eastern countries). At worst, the income received in Cyprus will be taxed after deduction of expenses at 10%. See below under Financial Holding and Investment Activities for comments on the tax treatment of repatriated Cyprus profits in Western countries.

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Cyprus Financial Holding & 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 USD100,000.

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.

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Cyprus Offshore Banking Unit

An Offshore Banking Unit (now known as an International Banking Unit - IBU) is a Cypriot limited liability company, or a branch of a foreign bank, which has obtained a banking license from the Central Bank. In Cyprus, non-Cypriot banks are offered the status of IBU, being restricted to banking operations with non-residents in foreign currencies, and with Cyprus-registered non-resident companies and their expatriate staff. The Central Bank issues IBU licenses and normally requires fully-staffed operation. If the IBU is controlled from abroad, and there is no local permanent establishment, there will be no profits tax.

The following forms are permitted:

Branches of foreign banks
The Central Bank favours this arrangement; there are no liquidity or risk ratio requirements, and there is no reserve requirement.

Subsidiaries of foreign banks
These are supervised more closely, and liquidity and risk ratios may be imposed.

Representative Offices
Representative Offices may be formed under the Companies Law, but may not conduct banking business except with clients of their parent bank.

Administrative Banking Units (ABUs)
These units carry out their banking business through local Cyprus banks but are otherwise similar to branches or subsidiaries.

Commercial banking arrangements and practices follow the British model.

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Cyprus Offshore Financial Services Company

An Offshore Financial Services Company (OFC) used to be an offshore company (although see Offshore Tax Regimes for the general rules governing offshore companies) which engaged in any of the following:

• dealing, buying, selling, subscribing to or underwriting investments
• managing investments belonging to other persons
• giving investment advice to actual or potential investors
• establishing collective investment schemes

The usual Central Bank vetting process for offshore companies also ensured that prospective OFCs were linked to existing investment or financial services companies in well-regulated (meaning in practice, high-tax) countries, although exceptions were made for the internal financial services of respectable companies. The Central Bank imposed additional conditions on OFCs, and usually requires a 'Letter of Comfort' from the foreign parent or associate.

In 2001, as part of preparations to join the EU, Cyprus began to construct a modernised regime for mutual fund operation. The Cyprus Mutual Fund Law came into force in March, 2003, allowing both native and foreign firms to offer mutual funds to Cypriot residents.

The new law, the International Collective Investment Schemes Law No. 47, offered many benefits to international mutual funds.

“Our objective is to upgrade the depth and breadth of the offshore financial sector,” Andreas Philippou, chief senior manager of the Central Bank’s Banking Supervision and Regulation Division, announced at the time.

“Previously, mutual funds took advantage of low taxes through the feeder funds,” he adds. “Now we want the funds themselves to be domiciled in Cyprus.”

It was decided by the SEC that prospectuses can be written in English, though the rules required that a potential purchaser of the fund has a sufficient enough grasp of the language to understand the implications of buying into the fund.

The major objective of the new law is to provide transparency in the market place. All funds have to publicise their bid/offer rates and make clear commissions and costs in their promotional literature.

The Central Bank of Cyprus (Bank) which is the regulatory and supervisory authority for Schemes, their managers and trustees, may upon a written application, recognise a company incorporated under the Cyprus Companies Law, a trust created under the International Trust Law or a partnership registered under the Partnership and Business Names Law, as an International Collective Investment Scheme.

Under the new legislation, therefore, a Scheme may take one of the following forms:

• International Fixed Capital Company (IFCC)
• International Variable Capital Company (IVCC)
• International Unit Trust Scheme (IUTS)
• lnternational Investment Limited Partnership (IILP)

All four legal types of Schemes, can either be of limited or unlimited duration.

A Scheme, once recognised, may be designated by the Bank as:

• A Scheme to be marketed to the general public;or
• A Scheme to be marketed solely to experienced investors; or
• A private international collective investment scheme.

A manager of a Scheme must be approved by the Bank. In this respect, a manager must on an ongoing basis, satisfy, among other, the Bank that, having regard to the investment policy and the particular investment objectives of the Scheme for which it acts as manager that it has sufficient financial and operational resources at its disposal to meet its liabilities, as well as sufficient investment expertise to conduct its business effectively.

Trustees of Schemes must also be approved by the Bank. Under the Law, only the following can act as trustees of Schemes:

• A Cyprus local or international bank or an overseas bank established in a jurisdiction which in the opinion of the Bank exercises adequate banking supervision and which has such minimum paid-up share capital as the Bank may from time to time prescribe; or
• A local or international or an overseas professional trustee company which is adequately supervised and which has such minimum paid up share capital as the Bank may from time to time prescribe; or
  A company incorporated in the Republic, which is a subsidiary of a person referred to at (1) and (2) above, provided that its liabilities are fully guaranteed by that person.

Every Scheme, its manager and trustee are subject to on-site inspections by the Central Bank of Cyprus. In addition, the Bank may, under certain circumstances, apply to the Court in order to appoint an inspector to investigate the affairs of the Scheme, its manager or trustee, or any associated undertaking of any of the aforementioned.

Every Scheme, its manager and trustee are also subject to off-site monitoring and are, therefore, required to furnish the Bank with such information and returns concerning the business of the Scheme, its manager or trustee as the Bank may specify from time to time.

On November 26, 2007, the Investment Services and Activities and Regulated Markets Law 2007 (Law 144(I)/2007) was published in the Cyprus Gazette. This legislation, effective November 1, 2007, brought Cypriot investment law into compliance with the European Union Markets in Financial Instruments Directive (MiFID).

Law 144(I)/2007 replaced the Investment Firm Law of 2002. As a result of the new legislation, Cyprus Investment Firms (CIFs) are required to classify their clients as retail clients, professional clients.

The new law stipulates that investment advisers must be suitable qualified. It is a criminal offence to accept payment for investment services without a licence under the law. Those found guilty of an offence under the law face fines, imprisonment, or a ban from providing investment services for up to five years.

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Cyprus Professional Services

Cyprus is a convenient and popular location in which to locate professional services operations servicing Europe, the Middle East and Africa. Several hundred business and professional consultancies have fully-staffed offices on the island.

Before the merging of the offshore and onshore regimes, partnerships as well as companies could have offshore status, which conferred tax advantages for both employers and employees (see Offshore Tax Regimes ). The pure partnership form has traditionally not often been chosen due to the open-ended liability of the partners, but the Limited Partnership permits individual partners to share profits but with only limited liability. There is no tax on the income of individual partners; the profits of offshore companies (whether free-standing or in a limited partnership) were taxed after deduction of expenses at 10%. See above under Financial Holding and Investment Activities for comments on the tax treatment of repatriated Cyprus profits in Western countries.

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Cyprus Insurance

See Offshore Business Review – Insurance for a more general treatment of captive insurance companies.

The regulatory authority is the Superintendant of Insurance at the Ministry of Finance. However, the Government has traditionally had a benign attitude towards captives, and has reduced the normal minimum capital for an insurance company, as well as exempting captives from solvency margin rules and the requirement to maintain Central Bank deposits. In other respects the insurance supervisory regime has to be followed.

Captive insurance companies having non-resident ownership and deriving their income from sources outside Cyprus are not subject to Cypriot taxation.

As at December 31, 2008, the Insurance Companies Control Service (ICCS) of the Ministry of Finance, under the authority of the Superintendent of Insurance, was responsible for the supervision of 39 insurance/reinsurance undertakings incorporated in Cyprus (same as in the previous year). The supervision of these undertakings was exercised in accordance with the Insurance Services and Other Related Issues Laws of 2002-2008 and their accompanying Regulations of 2002-2004.

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Cyprus Ship Management & Maritime Operations

See Offshore Business Review – Shipping for a more general treatment of offshore shipping registries.

In recent years Cyprus has developed a maritime policy which is highly favourable for ship owners.

The Cyprus Merchant Shipping Laws are based on the English Merchant Shipping Acts 1894-1954. Registration is administered by the Department of Merchant Shipping of the Ministry of Communications and Works. A ship may be registered in Cyprus if it is majority-owned by a Cypriot person or company; a non-Cypriot company qualifies if it is majority-owned by Cypriots.

Shipping companies owned by non-residents and deriving their income from sources outside Cyprus are not subject to Cypriot taxation (N.B. Cyprus recently extended a tonnage tax regime for companies engaged in international maritime transport and liable to corporate tax in Cyprus. See below).

A vessel may only be registered in the Register of Cyprus Ships if:

• More than 50% of the shares of the ship are owned
  • by Cypriot citizens or
  • by citizens of EU member states provided they have appointed an authorized represnetative in Cyprus;
• 100% of the shares of the ship are owned by one or more corporations which have been established and operate
  • in accordance with the laws of the Republic of Cyprus and have their registered office in Cyprus, or
  • in accordance with the laws of any other EU member state provded that an authorized represenative is appointed in Cyprus, or the management of the ship is entrusted in full to a Cypriot or a Community ship management company having its place of business in Cyprus.
  • outside Cyprus or outside any other member state but controlled by Cypriot citizens or citizens of member states and have either appointed an authorised representative in Cyprus or the management of the ship is entrusted in full to a Cypriot or a Community ship management company having its place of business in Cyprus. The corporation is deemed to be controlled by Cypriots or citizens of any other member states when more than 50% of its shares are owned by Cypriots or citizens of any other member states or when the majority of the Directors of the corporation are Cypriot citizens or citizens of any other member state.

Registration traditionally depends on the age and type of the ship. In July, 2005, Cyprus amended its policy on the registration of vessels for the purpose of harmonisation with the European Acquis and also to overcome problems encountered during the implementation of the existing policy. The new government policy covers, inter alia, new categories of vessels, such as research vessels and small passenger vessels.

Under the latest rules, cargo vessels of more than 500 tons and not exceeding 15 years of age may be freely registered in Cyprus. Vessels over 15 years of age but not exceeding 20 may be registered subject to a satisfactory entry inspection. Vessels over 20 years of age but not exceeding 25 must also undergo an entry inspection and, where it is required by legislation that the vessel should comply with the ISM Code, operated by a ship management company having its principal place of business in the EU or European Economic Area (EEA). Vessels over the age of 25 are not accepted for registration in the Cyprus register.

Passenger vessels (defined as those carrying more than 12 passengers on international voyages) not exceeding 30 years in age may be registered in Cyprus provided they pass and entry inspection. Passenger vessels exceeding 30 years of age but no older than 40 years must pass various safety inspections and be operated by a ship management company with its principle place of business in the EU, among other requirements. Passenger vessels older than 40 years are not accepted for registration on the Cyprus Register.

Yachts and other pleasure craft may be registered in Cyprus provided that they are used exclusively for recreation and are not engaged in any commercial operations, irrespective of size. Vessels in this category which do not exceed 25 years of age may be registered without any additional conditions. Vessels exceeding 25 years of age must pass an entry inspection.

Ships may be provisionally registered while they are in a non-Cyprus port; this must be converted into permanent registration during an actual visit to Cyprus within 9 months.

Registration fees in Cyprus are low, and compare favourably with those in other registries. There have traditionally been many advantages of Cyprus registration, some being:

• No income tax, estate duty or capital gains tax for Cyprus-registered ships
• No income tax in Cyprus for foreign crew
• No stamp duty on documents or mortgage deeds
• Anonymity of beneficial owners through nominee or trustee shareholders
• Recognition of Competence Certificates from many countries
• Easy deletion of ships from the Register

In June, 2003, the Cyprus government decided to abolish VAT levied on luxury yachts berthed in the country's marinas. The tax, which had been set at a rate of 30% for vessels berthing in the country for six months or more was highly unpopular amongst the yachting community and was criticised for deterring wealthy tourists at a time of particular economic fragility.

Commenting on the move Cyprus Shipping Council President, Andreas Droussiotis, said: "We do not object to the VAT, because that is normal in Europe. But no other country in the EU has a 30% luxury tax."

In an effort to show that such a high rate of tax benefited neither the yachting industry nor the government, a study was commissioned by opponents of the tax earlier in the year. It found that the government did not significantly increase its revenue as the majority of yacht owners were deterred from berthing as a result of the VAT.

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 Merchant Shipping (Fees and Taxing Provisions) Law was enacted in May 2010 and introduces a new tonnage tax system in Cyprus from the fiscal year 2010. The tonnage tax system is available to any owner charterer or ship manager who owns, charters or manages a qualifying ship in a qualifying activity. The tonnage tax is calculated on the net tonnage of the ship according to a broad range of bands and rates prescribed in legislation. The rates applicable to ship managers are 25% of those applied for ship owners and charterers.

A qualifying ship is any seagoing vessel certified under applicable international or national rules and regulations and registered in the ship register of any member of the International Maritime Organization or the International Labour Organization that is recognized by Cyprus. The regime excludes certain types of ships, such as fishing vessels, ships primarily for sports or recreation, river vessels, non-self propelled floating cranes, and tug boats.

Any commercial activity that constitutes maritime transport, crew management, and/or technical management is considered a qualifying activity. The definition of maritime transport includes the traditional carriage of goods and passengers, as well as ancillary services such as all hotel, catering, entertainment and retailing activities on board a qualifying vessel, the loading and unloading of cargo, and the operation of ticketing facilities and passenger terminals. Towage, dredging and cable laying are also eligible for the tonnage tax.

Owners of Cyprus flag ships automatically fall under the new tonnage tax regime. Ship owners of EU/EEA flag ships or third country flag ships may opt to be taxed under the tonnage tax system.

Ship owners of third countries must satisfy certain requirements in order to qualify for the tonnage tax. These include the requirement that a share of their fleet be comprised of EU flag ships, provided that this share is not reduced over a three year period.

Any ship owner opting in to the tonnage tax regime must remain in the system for 10 years. Early withdrawal will incur penalties, calculated as the difference between the amount paid during the period the ship owner was under the tonnage tax system.

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