General Traits, Legal System & the Cyprus Tax Regime
Cyprus has a stable democratic government and social system, and has historically followed a non-aligned foreign policy. The country has been a member of the European Union since 2004, adopted the Euro as its unit of currency in 2008 and held the presidency of the Council of the European Union in the second half of 2012.
Legal System in Cyprus
Although several laws and amendments have been enacted since the island gained its independence in 1960, the basic corpus of the law is still English Law as introduced and applied before that date. Practically the whole of the business and commercial legislation of Cyprus dates back to the time when Cyprus was a British colony.
The legal system in Cyprus is based on English statute and English common law, with the UK 1948 Companies Act forming the basis of the Company law in Cyprus.
The Cyprus Tax System
A company is considered to be a tax resident of Cyprus if the management and control of the company is exercised in or from Cyprus.
To satisfy the test of “Management and control”, it should be shown that the ‘effective management’ of the company as well as all important decisions and Board meetings are held in Cyprus.
Cyprus tax resident companies are taxed on their worldwide income. On the contrary, a non-Cyprus tax resident company is taxed on income accrued or derived from a business activity carried out through a permanent establishment in Cyprus.
Formation & uses of Cyprus companies
The Cypriot company
A Cypriot company can either be a private company established by one or more persons or a public company established by any seven or more persons who cooperate for any legal purpose and form a limited liability company, by signing the Memorandum of Association (MOA) and by complying with the provisions of the Cyprus Companies Law Cap.113.
There are no minimum requirements with regards to the issued and paid up capital for a private company.
The investment holding company
Cyprus has molded itself into a highly advantageous venue for international business activity, and is considered to be an ideal platform for multinational companies seeking to exploit the Cypriot and European market via a Cyprus holding Company.
A Cyprus holding company serves as a perfect gateway to the EU, through which shareholders may receive dividends without deduction of withholding tax. Cyprus registered entities are widely used to mitigate or even completely eliminate the overall tax liability of international companies whose business activities are held outside Cyprus.
Cyprus registered entities are considered onshore, enhancing further Cyprus’ position as a credible platform for investments, tax planning, and international banking.
Below are some of the island’s most notable features that have made Cyprus an acknowledged prime Holding Company jurisdiction:
- The island’s flat corporate income tax rate of 12.5% is one of the lowest corporate tax rates in the European Union.
- The provisions of the EU Parent – Subsidiary Directive and the Interest and Royalties Directive have full application in Cyprus, and therefore enable a tax-paying company in the European Union to receive dividends from its EU subsidiary while being exempt from having to pay withholding tax.
- If a non-EU country is involved, and therefore the EU Parent – Subsidiary Directive may not apply, it is imperative that a network of Double Tax Treaties is in place to reduce the applicable withholding tax-rates. It should be noted that Cyprus maintains an extensive network of double tax treaties with over 50 countries.
- Irrespective of the existence of a Double Taxation Treaty or the applicability of the EU Parent Subsidiary Directive, dividends being paid by the Cyprus Holding company to the non-Cyprus tax resident shareholders are exempt from any withholding taxes.
- No capital gains tax is applied on the distribution of profit arising from the sale of securities (shares, securities and debentures), except on gains accruing from the disposal of immovable property which is located in Cyprus or profits arising from the disposal of shares of a company that owns immovable property in Cyprus.
- No capital gains tax or income tax on the liquidation of a Cypriot Holding Company;
- No capital gains or income tax on the liquidation of participations;
- The Cyprus Holding Company can be re-domiciled to a third country (provided it is allowed by that country’s law)
- No thin capitalization rules and no minimum holding period
- Cyprus tax resident Companies and individuals should pay Special Defense Contribution tax at the rate of 17% on dividends, and 30% on Interest. Special Defense Contribution tax is not applicable on dividends payable to non-resident individuals.
- Dividend Income Tax
Dividend Income from a subsidiary non-Cyprus tax-resident company is exempt abroad. The holding company should hold at least 1% of the share capital of the overseas subsidiary company. The exemption does not apply if:
- the subsidiary company engages in more than 50% of its activities in producing investment income. In that case it would be taxed at 12.50%) or
- the tax burden on the subsidiary company’s income is lower than 6.25%. Dividends are not considered to be sourced from investment income if they are derived directly or indirectly from trading subsidiaries.
Disclaimer: The above is intended to provide a brief guide only. It is therefore essential that appropriate professional advise is obtained. N.V. Panayiotou Legal LLC is happy to assist you in this respect.