Cyprus: Country Report
- Introduction
- Business Environment
- Economic Environment
- Offshore Environment
- Taxation
- Corporate Legislation
- Banking
Cyprus is an island in the Eastern Mediterranean, at the hub of three continents, Europe, Asia and Africa. It was formerly a British colony, but since 1986 is has been independent. The island of Cyprus is the third biggest in the Mediterranean (9,250 sq km).
The majority of the people is Greek, living in the southern part of the island. Cyprus has a population of around 800.000, and about 200,000 Turkish Cypriots and Turkish immigrants live in the northern part of the island, separated from the south by a UN-supervised buffer zone.
The official languages in the two zones are Greek and Turkish, but most Cypriots speak English, which is extensively used in business and commerce.
Cyprus is an independent and sovereign republic with a presidential system of government, which is modelled on western democratic systems. Executive power is vested in the President, who is also the Head of State. The President is directly elected for a five-year term of office and is eligible for re-election.
Cyprus is a member of the United nations, the European Union and the Commonwealth. It maintains politically and economically viable relations with Arab countries, as well as considerable trade with Eastern European countries, Its ties to Britain and Greece are close.
Nicosia, the capital, is home to approximately one third of the population and is the business and administrative centre of the island. Limassol, the second largest city, is the island’s principal port, industrial and commercial centre and an important tourist resort. Larnaca and Paphos are also important tourist resorts and possess international airports.
Businesses operating within the Free Zone are subject to minimal customs formalities; they may import plant, machinery, equipment and raw materials duty-free, while their foreign employees are liable to only 50% of the normal rates of income tax.
As a result of its relationship with Great Britain, Cyprus is a common law country with its companies laws patterned after Britain’s.
There are many elements that contribute to making Cyprus an attractive environment for doing business. These include the strategic location, the sophisticated infrastructure, the highly-educated workforce, the favorable tax system, and the modern banking and insurance networks. All these, coupled with the comparatively low operating costs, the high standard of living and the countless other lifestyle advantages on offer, make Cyprus the perfect place for today’s investors and businesspeople.
Cyprus is ranked 29th in the world and 1st in the region of Southern Europe, according to the 2005 Human Development Report, with a Human Development Index value of 0,891.
There are currently approximately 30 foreign banks and over 1200 International Business Companies (IBCs) with fully-fledged offices in Cyprus. The successful integration of the latest technology into the economy, the constant improvement of the island’s infrastructure and the high quality of the Cypriot labour force, have turned Cyprus into a centre of international business, contributing significantly to the economic growth of the broader region.
IBCs have played a central role in the development of Cyprus as a world class business centre. The international business community has long maintained its confidence in Cyprus, building a strong presence in the country’s economy.
Cyprus has a record of successful economic performance, reflected in rapid growth, full employment conditions, external and internal stability, almost throughout the post-independence period.
This can be largely attributed to the sound macro-economic policies of successive governments, the adoption of a market-oriented economic system, and a well-educated, dynamic and flexible entrepreneurial workforce. The result is a thriving and stable economy, with high growth rate, low inflation rate and low unemployment rate
Cypriots enjoy a high standard of living. In terms of per capita income, estimated at CY£9.834 in 2005 (EUR 17.048), Cyprus is classified by the World Bank among the high-income economies.
Cyprus has moved up four places in the Global Competitiveness Index, emerging as the world’s 34th most competitive economy in 2005, With a score of 4.54 points, Cyprus outperformed eight fellow EU member states, including Italy, Czech Republic, Malta, Hungary, in the 117 strong Global Competitive Index.
The tertiary sector of services is considered as the backbone of the Cyprus economy, accounting for about 76,7% of GDP in 2005. This reflects the gradual evolution of the economy from an exporter of minerals (mainly copper and asbestos) and agricultural products during 1960-73, an exporter of manufacturing products (mainly clothing) at the end of the 1970s, to an international business and service centre in the 1980s – today.
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 favorable 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 favorable tax treaties with China, India, South Africa and a number of Middle Eastern countries.
The 10% corporate tax gives Cyprus the lowest rate in the EU, after 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 introduces a ‘residence’-based system of taxation, and was in operation from 1st January 2003.
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
In recent years Cyprus has developed a maritime policy which is highly favorable for ship owners. From 32nd place among maritime nations in 1980, Cyprus rose to occupy 5th place with nearly 3,000 ships totaling nearly 30m gross tons, but has since slipped to 9th place, with 1,800 ships.
General
Cyprus has a very attractive tax climate for both onshore and offshore business. With the lowest tax rate within the European Union, no withholding taxes on dividends and interests, and many other incentives Cyprus has committed itself in maintaining and enhance Cyprus’s attractiveness as an international business centre.
Based on the Standard & Poor’s Fiscal Flexibility Index and Rankings 2006, Cyprus leads the scores indicating the highest degree of fiscal flexibility among the 28 countries sampled.
Residence
Legal entities are considered resident in Cyprus for tax purposes if they are managed and controlled from Cyprus. A company resident in Cyprus is liable to pay tax in Cyprus on its worldwide income and more specifically on all income accruing or arising from sources within and outside the Republic. On the other hand, companies that are not resident in Cyprus, are liable to tax in Cyprus on income accruing or arising from sources within Cyprus only.
Tax administration
The fiscal year in Cyprus is the calendar year. For financial statements covering accounting periods other than the calendar year, taxable income is apportioned to the relevant years pro-rata.
Every company must file a provisional tax return before 1 August during the year of assessment and, on basis of this return, pay the tax due in 3 installments.
The Companies law requires every company to keep ‘proper books of account’, which give a true and fair view of the state of the company’s affairs and explain its transactions.
All limited liability companies with the exception of ‘exempt private companies’ must file a copy of the financial statements, auditor’s report and directors report with the Registrar of Companies. A copy of financial statements and the annual report must be laid before the company in general meeting within nine months form the end of the financial year or twelve months in case of a company having interests abroad.
The European union has allowed Cyprus to use the International Financial reporting Standards, provided it would introduce the requirements included in the 4th and 7th directives, which are not covered by IFRS.
Taxable Income and rates
All residents of Cyprus are subject to a uniform method of taxation.
Corporate taxation
Corporation tax is imposed on business profits; interest and discounts; rents, royalties, remunerations or other profits from property; and net consideration in respect of trade goodwill. Expenses incurred for the production of income are tax deductible.
Losses brought forward or surrendered by other group companies (group relief) can be
set off against taxable profits. Companies, other than public corporate bodies, are subject to corporation tax at a rate of 10%. Public corporate bodies (as defined by law) are subject to a 25% rate. Certain types of income (i.e. dividends, interest and rent)can be subject to a special
defense contribution at the rate of 15%, 10% and 3%, respectively.
Dividends
Dividends received from companies located in Cyprus or abroad are exempt from corporation tax. Dividends received by a Cyprus resident company from another Cyprus resident company also are exempt from the special defense contribution.
Dividends received from nonresident companies are exempt from the special defense contribution if the recipient holds at least 1% of the payer company. The exemption does not apply if the payer company engages, directly or indirectly, more than 50% in activities that lead to investment income and the foreign tax burden on the income of the payer company is substantially lower (i.e. less than 5%) than the tax burden of the company in Cyprus. If not exempt, dividends are liable to the special defense contribution at a rate of 15%.
Participation exemption
For taxation of dividends and capital gains, see above. Participation exemption is not necessary to avoid double taxation of profits.
Deemed distribution of dividends
If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then:
70% of accounting profits (after adjustments) are deemed to have been distributed.
15% special contribution for defense is imposed on deemed dividend distribution applicable to shareholders who are residents of Cyprus.
Deemed distribution is reduced with payments of actual dividends, which have already been paid during the two years following the year in which the profits relate to.
When an actual dividend is paid after the deemed dividend distribution, then special contribution for defense is imposed only on the additional dividend paid.
Capital Gains
Profits from the sale of securities are fully tax exempt. Capital gains tax at the rate of 20% is imposed on gains from the disposal of immovable property situated in Cyprus and on gains from the disposal of shares in an unlisted company that owns immovable property situated in Cyprus.
Losses
Tax losses can be carried forward and set off against taxable income of subsequent years without any time limit. No carry back is available. The limit of five years for carrying losses forward has been abolished. Tax losses incurred in 1997 and subsequent years may now be carried forward indefinitely and be set off against taxable income in future years.
Withholding taxes and Double tax Treaties
Dividends
Dividends paid to nonresidents (companies or individuals) are not subject to withholding tax. Dividends paid to resident companies are not subject to withholding tax but dividends paid to resident individuals are subject to a special defense contribution at the rate of 15%, which is applied as a withholding tax.
Interest
There is no withholding tax on interest payments made to nonresidents.
Interest paid to residents is subject to a 10% special defense contribution deducted at
source.
Royalties
Royalties paid to nonresidents for the use of rights in Cyprus are subject to a final withholding tax of 5% on film royalties, and 10% on all other royalties. These rates may be reduced under a tax treaty or eliminated under the EC interest and royalties directive. Royalties paid to nonresidents for the use of rights outside Cyprus are exempt from withholding tax. There is no withholding tax on the payment of royalties by a resident company to another resident company.
Double Tax treaties
Cyprus has entered into over 40 double taxation agreements for the avoidance of double taxation of income. The Cyprus double tax treaties have been drafted very closely to the Organisation of Economic Cooperation and Development (OECD) Model Treaty. The treaties aim to avoid double taxation of income earned in these countries. This is achieved usually by either exempting the income from tax, by providing a tax credit for the amount of tax paid in other contracting country or by a reduced withholding tax.
Based upon Cyprus’s treaty network, withholding tax over royalty, dividend or interests payments to the Cyprus company may be reduced or there may even be totally exempt from withholding tax.
For a complete overview, and the texts, of all Cyprus Double Tax Treaties look at the Cyprus Downloads.
Anti-avoidance rules
Transfer Pricing
The arm’s length principle requires that transactions between related parties be carried out at market values and on normal commercial terms. Arm’s length provisions have been introduced, according to which any reduction in taxable income arising as a result of transactions between connected persons or companies which are not carried out at arm’s length shall be disregarded and income shall be taxed as if such transactions had taken place at proper arm’s length.
Thin capitalization
No
Controlled foreign companies
No
Other
Under a general anti-avoidance provision, any artificial/fictitious transaction may be disregarded and the Commissioner of Income Tax may assess tax on the person concerned
VAT
Taxable transactions
VAT is levied on the sale of goods, the provision of services and the import of goods from outside the EU.
Rates
The standard rate is 15%, with reduced rates of 5% and 8%.
Registration
The registration threshold for VAT purposes is EUR 15,377. For intracommunity
acquisitions of goods, the registration threshold is EUR 10,251.
Filing and payment
The deadline for submission of quarterly VAT returns is the 10th of the second month following the relevant period. Payments of VAT must be effected by the same date.
Special Incentives for offshore businesses
International Banking Units
Offshore Financial Services Company
Offshore Captive Insurance Company
Shipping Company (Ship)
General
From 1878 until 1960 when it became independent, Cyprus was a possession of Great Britain. The legal system of Cyprus derives from the common law tradition so that there is no civil code such as the civil code of Greece. Cyprus company law is based on English company law. English jurisprudence on company law serves as precedent and persuasive authority for Cyprus company law.
The fundament legislation that governs the formation, existence and governance of corporate entities in Cyprus is based on the Companies Act of 1948 of the United Kingdom. Cyprus has not adopted the reforms set forth in the Companies Act 1967 of the United Kingdom nor any subsequent company law modifications.
Provided entities
Cyprus Private Company limited by shares
Cyprus Public company limited by shares
Cyprus Company Limited by guarantee
Cyprus Branch of Oversea Company
Cyprus General Partnership
Cyprus Limited Partnership
Cyprus Trusts
Cyprus Sole Proprietorship
Relevant Laws:
Banking Business (Temporary Restrictions) Law of 1939 (banking licenses)
Banking Law 1997 (secrecy, confidentiality, offshore banking)
Capital Gains Tax (Amendment) Law No. N119(I) of 2002
Central Bank of Cyprus Law 37 of 1975 (secrecy)
Companies Law Chapter 113 (types of company)
Companies (Amendment) Law of 2000 (Law 2(I)/2000)
Companies (Amendment) (No. 3) Law of 2000 (151(I)/2000)
Companies (Amendment) Law of 2001, Law 76(I) of 2001
Customs and Excise Duties Law 34 of 1975
The Cyprus Mutual Fund Law 2002
Cyprus Trustee Law Chapter 193
Exchange Control Law Chapter 199
Income Tax (Amendment) Law 15 of 1977 (set up offshore regime)
Income Tax Law No. 118(I) of 2002
Insurance Companies Laws 1984-1990 (deals with captives)
Insurance Regulation 1995 (deals with captives)
International Collective Investment Schemes Law No. 47 (1)/99
International Trusts Law 69(I) of 1992
Legal Framework for Electronic Signatures and for Relevant Matters Law (N.188(I)/2004)
Liberalisation of Investment Laws 1997
Merchant Shipping (Registration of Ships, Sales and Mortgages) Law 45 of 1963
Merchant Shipping (Fees and Taxing Provisions) Law 38(I) of 1992
Partnership and Business Names Law Chapter 116
Prevention and Suppression of Money Laundering Law 1996
Regulation of Electronic Communications and Posts Law (112(I)/2004)
Banks in Cyprus are supervised by the Central bank of Cyprus. One of the primary objectives of the Central Bank of Cyprus is to ensure a safe and stable financial system that would preserve public confidence and foster economic stability and growth. This objective is satisfied by maintaining an effective mechanism of bank regulation and supervision.
Banking services in Cyprus go beyond the traditional and often include insurance, leasing, hire purchase finance, factoring, mutual fund management, investment and consulting as well as custody and asset management services.
Furthermore Cyprus financial institutions can provide (anonymous) debit cards, credit cards, internet banking and merchant accounts for offshore clients.
The banks operating in Cyprus include:
Local banks
Hellenic Bank
Bank of Cyprus
Laiki Bank
Alpha Bank
International banks
Barclays Bank
BNP Paribas
Societe Generale
Hellenic Bank is well known banks in Cyprus who both provide high quality services. Hellenic Bank distinguishes itself as a international experienced bank with solutions for offshore clients.
Hellenic bank is one of the leading financial institutions of Cyprus, whose success is based on an excellent customer service and professionalism.
We do not advice FBME bank.
Confidentiality
Cyprus has very strict bank confidentiality laws. However, as part of the global anti-terrorism and anti-money laundering policy, the banks require to know the identity of the beneficial owner of the bank account.
