In 1975 the Cyprus Government began to create a welcoming regime
for offshore companies, and more than 54,000
offshore enterprises were registered. In 2007,
there were more than 137,650 companies on the
companies register. 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 the lowest rate in
the EU, after Ireland (12.5%), with the exception
of the Isle of Man, Jersery and Guernsey, which
have all announced a nil rate - but these islands
are not in the EU anyway for most purposes.
The new
regime introduces 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.
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 will 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. The annual
supervision fee is $15,000.
Subsidiaries
of foreign banks
These are supervised more closely, and liquidity
and risk ratios may be imposed. The annual supervision
fee is $15,000.
Representative
Offices
Representative Offices may be formed under the
Companies Law, but may not conduct banking business
except with clients of their parent bank; the
annual supervisory fee is $5,000.
Administrative
Banking Units (ABUs)
These units carry out their banking business
through local Cyprus banks but are otherwise
similar to branches or subsidiaries. The annual
supervisory fee is $10,000.
In
addition to the Central Bank, the Cypriot banking
system consists of 4 banks listed on the
Cyprus Stock Exchange, 8
subsidiaries of foreign banks, 2 banks licenced
to conduct limited banking operations, 8 branches
of banks from EU countries, 17 branches of non-EU
banks, 2 Representative Offices and 4 other
banks. 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 (see Offshore Tax Regimes for the general rules
governing offshore companies) which engages
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 ensures that prospective OFCs are linked
to existing investment or financial services
companies in well-regulated (meaning in practice,
high-tax) countries, although exceptions are
made for the internal financial services of
respectable companies. The Central Bank imposes
additional conditions on OFCs, and usually requires
a 'Letter of Comfort' from the foreign parent
or associate.
Following
Cyprus's accession to the EU, the Central Bank
is permitting advisory firms to continue under
current arrangements until such time as a new
law concerning their operation and regulation
is enacted by the Cyprus Securities and Exchange
Commission.
Cyprus's
network of double-tax treaties creates some extremely beneficial
scenarios for Cyprus OFCs by comparison with
other low tax jurisdictions. For this reason,
Cyprus is often chosen as a base for funds or
financial services subsidiaries intending to
invest into the countries of Eastern Europe
and the CIS.
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.
Most
of the applications are expected to come from
foreign-based firms offering mutual funds to
Cypriot residents. The new rules require a company
to deposit its prospectus with the SEC which
will then investigate whether the fund is regulated
by an approved body. This process is significantly
accelerated if the fund is regulated by a body
within the EU.
The
new law, the International Collective Investment
Schemes Law No. 47, offers many benefits to
international mutual funds.
“Our
objective is to upgrade the depth and breadth
of the offshore financial sector,” says Andreas
Philippou, chief senior manager of the Central
Bank’s Banking Supervision and Regulation Division.
“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’s
a very exciting development,” said
a Cypriot banker. “It’s opening a lot of doors
that weren’t open before, encouraging foreign
financial institutions to use Cyprus as a regional
base.”
It
has been decided by the SEC that prospectuses
can be written in English, though rules will
require 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
will 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.
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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. More than
200 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
is not often 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.
Cyprus
captive insurance companies are nominally regulated
as insurance companies per se under the Insurance
Companies Laws 1974-90. The regulatory authority
is the Superintendant of Insurance at the Ministry
of Finance. However, the Government has a benign
attitude towards captives, and usually reduces
the normal minimum capital for an insurance
company from CYP200,000 to CYP10,000, 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.
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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.
From 32nd place among maritime nations in 1980,
Cyprus rose to occupy 5th place with nearly 3,000 ships totalling
nearly 30m gross tons, but
has since slipped to to
9th place, with 1,800 ships.
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.
The
special tax treatment of shipping companies
has been allowed to survive the general restructuring
of the offshore sector put into effect as from
2003 (see above).
Registration
depends on the age of the ship: up to 17 years
of age, registration is freely permitted; between
18 and 23 years of age, registration is permitted
subject to conditions governing crewing, safety
and locus of management (in practice, the crewing
requirements are a dead letter); ships older
than 20 years may be registered if in addition
they are owned 100% by permanent Cypriot residents.
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. Furthermore
the policy introduces new age limits for certain
categories of vessels: the age limit for cargo
vessels with a gross tonnage less than 1000
has been increased to 23 years and passenger
vessels exceeding 35 years of age may no longer
be registered in the Cyprus Register of Ships.
Similarly, fishing vessels over 20 years of
age are not accepted for registration in the
Cyprus Register of Ships. Also the year of major
conversion or reconstruction of a vessel is
now taken into account for the purpose of calculating
of the age of the vessel under the new policy.
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 are 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.
2005
and 2006 saw a reduction in the number of ships
on the Cyprus register, which has dropped from
5th to 9th place.
Speaker
after speaker at a Cyprus maritime conference
in June, 2006, called for the setting up of
a Cyprus Chamber of Shipping and blamed poor
liaison between the industry and the government
for the fall in the Cyprus fleet,
It
is easy to blame the poor performance of the
Register on difficulties with Turkey, which
will still not allow Cyprus-flagged ships to
use its ports, but many speakers said that this
was not the primary factor.
Charalambos Mylonas, Chairman of the Cyprus Union of Shipowners,
praised the Department of Shipping, but said
that in competing countries such as Malta and
the Bahamas, close co-operation between the
private sector and government through a Chamber
of Shipping has been effective at improving
performance.
Mr
Mylonas also complained that shipping-related
legislation often failed to pass through parliament,
for reasons that were obscure; and he criticized
the executive government for delays.
Eleftherios Montarios, president of the maritime committee of the
Cyprus Bar Association, echoed other speakers
in calling for the establishment of a Chamber
of Shipping, and said that a White Paper produced
in the 1990s which laid out a legislative programme
for the maritime sector should not have been
neglected.
The
Executive Committee of the Paris Memorandum
of Understanding on port state control (the
Paris MOU) has admitted
Cyprus to its White List, recognizing the significant
improvement Cyprus has achieved concerning security
standards of the Cyprus Registry and the drastic
reduction of detentions of Cyprus ships.
The
Committee has also decided that Cyprus will
be a regular member of the Paris MOU. "'This
fact consists an independent evidence and supports
even more the picture of Cyprus as a serious
and reliable navigational country,'' said an
announcement.
The MOU, as it is known, compiles three lists,
White, Black and Grey. Over the last few years
Cyprus has moved rapidly up through the ranks
of the Grey List. The White List members, who
include the UK, Sweden, the US and Germany,
record the lowest rates of detention of inspected
ships, and incur fewer inspections in MOU ports.
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