As part of the accession process to the EU and in compliance with the OECD requirements against harmful tax practices, the Cyprus Tax Legislation has undergone major reforms. These reforms greatly enhance Cyprus’ competitiveness and make it an even more attractive jurisdiction through which to conduct international business. The new legislation came into effect on 1 January 2003. Cyprus accession to the EU offering enhanced business opportunities in an enlarged European Common Market and the New Taxation System renders Cyprus one of the most attractive International business centres.
Corporate tax rate
A uniform corporate tax rate of 12.5% is introduced for all Cyprus tax resident companies. This is the lowest corporate tax rate in Europe.
The Cyprus Holding Company
Dividend income is exempt from tax irrespective of its source, provided that the holding in the non-resident paying company is at least 1%. This exemption does not apply if the non resident company paying the dividend carries on more than 50% investment activities which give rise to investment income and the overseas tax burden on its income is significantly lower than the Cyprus tax burden.
Cyprus holding companies having interest in European subsidiaries will enjoy the benefits emanating from the provisions of the parent/subsidiary directive. Cyprus Holding Companies having subsidiaries in other EU member States will receive dividends without suffering withholding tax at source in accordance with the provisions of the parent/subsidiary directive. Furthermore, Cyprus holding companies benefit from the double taxation treaty network with non-EU member states.
Trading in securities
Any profit, received from trading securities, regardless of whether this profit forms part of a company’s trading activity or is of a capital nature, is exempt from tax.
Company, managed and controlled outside Cyprus, is considered to be non-resident. The use of such Company is following: effectively not taxed for its non-Cyprus income in Cyprus – but, as a “non-resident” it cannot enjoy the benefits of the Cyprus Double Taxation Treaties. Further, the Company may register for VAT in the EU and receive the status of a company registered in the EU.
No withholding taxes
Dividends paid to non-resident shareholders are not subject to any withholding tax in Cyprus, irrespective of the existence of a double tax treaty with their country of residence. Interest derived from Cyprus is also not subject to withholding taxes.
Exemption of capital gains
No capital gains tax is payable, except on the disposal of immovable property which is situated in Cyprus, or of shares in a company which owns immovable property situated in Cyprus. Therefore, Cyprus companies can be used to hold real estate outside Cyprus with no capital gains tax implications in Cyprus on their disposal.
A Cyprus company acting as an intermediary between a holding and an operating foreign company, can finance the latter via interest bearing loans using the Cyprus treaty network which provides for no or reduced rates of withholding tax on interest paid out of the treaty country.
A Cyprus company acting as an intermediary between an overseas licensor and an operating foreign company in a treaty location, can greatly reduce the taxable profits in the operating location. Benefits may also arise by using the Cyprus treaty network which generally provide for reduced withholding taxes on royalties paid out of treaty countries.
What distinguishes Cyprus from most other international business centres is its extensive network of double taxation treaties (currently with 40 countries). Cyprus companies may be used as investment vehicles or to provide finance and other financial services to third countries. Accordingly, the Interest and Dividend Articles of these agreements may be exploited to eliminate or reduce the withholding tax on outgoing interest and Dividend payments; that is to say that the Cyprus company may be used to extract dividends and/or interest payments from such countries with none or minimum withholding tax. The wide network of Double Taxation Treaties of Cyprus with the countries of Central and Eastern Europe in conjunction with the Treaties signed with Western European countries renders Cyprus as the most appropriate finance and investment vehicle for these countries. (More Information on the different Treaties of Cyprus can be provided on request).