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
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.
Further
proposals include the exchange of tax and
finance information, as well as the signing
of double tax treaties, between Cyprus and
additional OECD member countries. Cyprus has
proposed to maintain its company and trust
management regime, although the identity of
the beneficiaries will have 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 is one, until
2007 to implement the Directive, which includes
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 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.
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 are allowed to continue to
make use of the 4.25% corporation tax rate
until 2006 if they so choose.
For further information about the taxation of companies in Cyprus,
see Direct Corporate
Taxation.
Cyprus Forms of Offshore
Operation
Offshore entities took the following forms:
NB:
See above for new rules applying to Cyprus
companies from 2003.
Checks
are made to exclude undesirable operations,
and conditions are usually imposed:
-
The
entity must be entirely foreign-owned
-
The
objects of the business and sources of income
must be outside Cyprus
-
No
local borrowing is permitted
-
Audited
annual accounts must be filed with the Central
Bank
-
Local
payments must be recorded and reported
Anonymity
may be achieved by using nominee shareholders;
the beneficial owners must be made known to
the Central Bank, which is then statute-bound
to non-disclosure. NB There is no provision
under the law for migration or re-domiciliation.
The
expression 'International Business Company'
(IBC) simply refers to a duly authorised offshore
Limited Liability Company. There are no formal
requirements in addition to those in standard
Cyprus company law, but the Central Bank recommends
a minimum authorised share capital of CYŁ10,000.
This does not have to be paid up, unless the
company concerned wants to make use of the import
duty concessions described in Tax Treatment of Offshore Operations.
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Cyprus
Tax Treatment of Offshore Operations
See
Domestic Corporate Taxes for the general principles of
Cyprus corporate taxation, which also apply
to offshore entities.
NB:
See above for new rules applying to Cyprus companies
from 2003.
All
offshore companies are taxed at 4.25% of profits;
offshore branches of foreign companies with
management and control in Cyprus are also taxed
at 4.25%; branches with management and control
outside Cyprus are exempt from tax on profits
derived from sources outside Cyprus.
Offshore
partnerships are not taxed on profits originating
outside Cyprus.
There
is no withholding tax on dividends paid by offshore
companies; but no tax credit either on any tax
paid.
Interest
or royalties paid by an offshore company to
another person or company outside Cyprus are
not subject to withholding tax.
Estate
duty is not charged on inheritance of shares
in offshore companies, and the sale of or transfer
of their assets (other than Cyprus real estate)
is exempt from capital gains and other taxes.
Offshore
entities (and their expatriate staff) may import
various goods duty-free:
- Motor
vehicles (not buses, motor-bicycles, coaches
or caravans)
- Office
equipment (not air conditioners and consumables)
- Household
effects (not furniture and air conditioners)
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Cyprus
Taxation of Foreign Employees of Offshore Operations
This
section refers to the taxation of foreign employees
of offshore operations, see Domestic Personal Taxes for the general principles
of individual taxation in Cyprus, which also
apply to the resident employees of offshore
entities.
Salaries from services provided from outside Cyprus for more than
90 days to a non Cypriot resident employer or
in the permanent establishment of a Cypriot
resident employer are not taxed in Cyprus.
Expatriate employees who at the start of their employment were non-residents
of Cyprus, for the first three years of their
employment will be exempted from tax on 20%
of their salary or CYP5.000 whichever is the
lowest.
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Cyprus
Exchange Control
Once
Central Bank consent has been received for offshore
status, the entity is non-resident with complete
freedom from Cyprus exchange control restrictions;
thus it may maintain bank accounts inside or
outside Cyprus in any currency and use its funds
as it chooses.
By
2004, almost exchange control restrictions had
been removed by the Central Bank as part of
EU accession.
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Cyprus
Offshore Activities
Offshore
entities may not carry out any trading activities
in Cyprus with Cypriot residents. The only permissible
activities within Cyprus are those compatible
with the exercise of management and control.
NB:
See above for new rules applying to Cyprus companies
from 2003.
Certain
borderline activities may be carried on with
express Central Bank permission, such as:
- Transit
trade through Cyprus
- Repackaging
for re-export, within a tariff classification
- Printing
of foreign-language magazines or books for
distribution abroad
- Storage,
repair or maintenance of goods to be used
or sold outside Cyprus
- Establishment
of a private bonded warehouse for the display
of foreign-made goods intended for re-export.
- Sales
activities, provided these do not result in
sales in Cyprus or to Cypriot companies.
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Cyprus Employment
& Residence
NB: Following
Cyprus's accession to the EU, citizens of EU
Member States are evidently exempt from local
Work Permit rules, although it is taking some
time for the bureaucracy to get used to this
new situation. The rules outlined below now
apply only to non-EU citizens.
The employees
of offshore entities in Cyprus require 'Temporary
Work and Residence (TRE) Permits', which are
issued by the Central Bank. For this purpose,
employees are categorized either as Executives
or Non-Executives.
In
effect, Executives are defined as senior management,
and three only of them are permitted unless
the Central Bank can be persuaded otherwise.
The minimum age for an Executive is 24, and
the minimum salary is CYP12,000 pa.
Non-Executives
are those foreigners employed in managerial,
professional, administrative, technical and
clerical positions. The employer must make an
effort to recruit suitable local personnel.
Permits are issued by the Ministry of Labour.
In
both cases, a fair amount of documentation is
required by the authorities. Permits are normally
issued for 2 years, renewable for a further
three years.
Under
a law implemented in July 2000, foreigners to
Cyprus must either have a five-year work permit
or have worked on the island for five years
or have a combination of worked time and work
permit totalling a minimum of five years before
their spouses can join them.
But in
November 2000, the Cyprus government introduced
new regulations designed to make it easier for
some foreigners to have their loved ones live
with them. However, this solely applies to those
EU nationals and non-Cypriots who work in certain
sectors which are: offshore workers, reporters,
foreign correspondents, accountants with big
firms, lecturers, teachers and those who have
invested more than Ł100,000 in local businesses.
The five-year
permits will be automatically granted to new
foreign entrants into these sectors and those
renewing permits will be given extensions long
enough to enable them to meet the 'five years
in total' clause.
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