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Cyprus: Offshore Business Sectors

Financial Holding and Investment Activities

The combination of many tax treaties and low-tax regime perusades many international investors to choose Cyprus as the location for financial holding and investment companies.

Investment in Central and Eastern European countries, a number of Middle Eastern countries and the emerging markets India, China and South Africa benefits from low treaty withholding tax rates. Often it is best if the investment has 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. The withholding rate on dividends is never less than the rate on interest payments, and it is sometimes more. The previous Russian treaty had zero withholding on both counts, while the new treaty has 5% withholding on dividends if the beneficial owner has directly invested not less than US$100,000 in the capital of the company.

Whatever the mix of interest and dividends, once in Cyprus, the income will at worst be taxed at 12.5%, after deduction of expenses and attached tax credits.

From 2003, dividend income from abroad has usually been untaxed. While a few Western countries have lower withholding rates than Cyprus in their treaties with Central and Eastern European states, none of them compete 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 Cypriot income with high-tax income, avoiding wastage of tax credits. Even for countries like the UK which have rules on the attribution of profits from controlled foreign corporations, careful planning of international financing structures can be beneficial.

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 identify which companies are permitted to offer such services, and cover a multitude of investment services, including brokers acting on their clients' or their own behalf and portfolio investment. In addition, it is compulsory for local financial service providers to contribute to a compensation fund for investors; foreign advisors on the Island can make voluntary contributions.

 

 

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