Tax Environment in Cyprus

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 enhanced Cyprus competitiveness and make it an even more attractive jurisdiction through which to conduct international business. New tax legislation came into effect in 2003.

Cyprus accession offers enhanced business opportunities in an enlarged European Common Market and the New Taxation System renders Cyprus one of the most attractive international business centers.

Cyprus is a signatory to the treaty for the Prevention of Double Taxation with many countries all over the world which in principle enables offsetting tax paid in one of two countries against the tax payable in the other, preventing in this way, double taxation for businesses and individuals.

Tax costs play a significant role in investment decisions, investors’ aim, in maximizing after tax return on investment. Therefore, investment structures which have the least tax leakage are preferred by investors and are recommended by provisional advisors.

As such, a Cyprus investment vehicle can collect income which is a change against high tax income. Withholding tax is eliminated or reduced under double tax treaties or under EU Directives.

The rate of tax in Cyprus is low compared to the other EU countries. The income can then be repatriated in any form the investor wishes without withholding tax.

A Cyprus entity is suitable both for EU inbound and outbound investments. There are no investment activities which are inappropriate for the Cyprus tax environment. However, there are investment activities which are indeed ideally suited to the Cyprus tax environment such as:

  • Holding Companies
  • Investment Funds and Companies
  • Finance Companies
  • Royalty Companies
  • South Europe, Middle East, Russia, Central and Eastern Europe headquarter business activities.

Basis of taxation / The Cyprus Holding Company

The Cyprus Holding Company can be effectively utilised for the International Tax Planning purposes and at the same time enjoy the status of being located at a reputable business centre. All companies tax resident of Cyprus are taxed on their income accrued or direct from all sources in Cyprus and abroad.

A non-Cyprus tax resident company is taxed on income accrued or direct from a business activity which is carried out through a permanent establishment in Cyprus.

A company is resident of Cyprus if it is managed and controlled in Cyprus. Corporate tax for resident companies is imposed at the rate of 10% (percent) for each year of assessment upon the taxable income derived from sources both within and outside Cyprus.

A company is considered to be tax-resident in Cyprus if its management and control are exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the tax authorities, such as the make up of the Board of Directors, the place where major decisions are taken and where major contracts are signed.

Tax residency is required in order for a company to be taxed under the Cyprus tax laws and also for taking advantage of all European Directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.

Benefits of introducing Cyprus entities (for Holding, Financing, Royalty and other Activities)

1. Very attractive tax regime for Holding activities

  • Capital gains exempt for taxation in Cyprus under domestic law
  • Dividend income exempt from taxation in Cyprus (with minor limitations)
  • Attractive Double Tax Treaty (DTT) network, reducing withholding tax (WHT) on dividend income
  • No WHT on payment of dividends paid abroad at all times
  • EU Parent – Subsidiary Directive applies as from 1 May 2004, thus eliminating WHT on dividend payments from all EU countries (under Directive conditions)
  • No CFC rules in Cyprus
  • Very simple and tax-efficient exit strategies available – no exchange controls

2. Group Financing Company can be taxed efficiently located in Cyprus

  • No thin capitalization rules
  • Back to back financing through Cyprus company
  • Taxed at 10% on thin spread only
  • No withholding tax on payment of interest abroad at all times
  • Attractive DTT network, reducing withholding taxes on interest income
  • EU Interest and Royalties Directive applies as from 1 May 2004, thus eliminating WHT on payments from all EU countries (under Directive conditions)