Cyprus

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The Republic of Cyprus is a sovereign state island with a presidential government system located in the Eastern Mediterranean. On 1 May 2004 the Republic joined the European Union. Tourism is one of the main sources of income for the country.

An offshore regime for International Business Companies was operational in the Republic of Cyprus after 1 January 1977 but it ceased to exist the moment the Republic entered the EU on May 01, 2004.

Despite the fact that Cyprus is not now an offshore jurisdiction, Cypriot companies are very attractive for tax planning purposes, as the country has favourable tax laws. This is due to the fact that Cyprus has one the lowest rate of corporate taxation at 12,5% in EU. In addition, Cyprus has an extensive network of double taxation treaties with regard to such types of income as royalties, interest and dividends.

Royalties

There are three main schemes of royalty payments. The first involves the use of resident companies — those that are managed directly from Cyprus; the second — working via non-resident companies managed outside the Republic; the third option involves the use of a resident company as a transit tool.

The use of a resident company is taxed at the rate of 10%. At the same time Cyprus does not levy a withholding tax on royalties paid.

A non-resident company, used to obtain royalties, is not due for taxation because the income was derived outside of Cyprus. However, Cyprus does levy a withholding tax on royalties paid at the rate of 10%.

The third option is used when a resident company acts as a transit element. In this case, the company from an offshore jurisdiction (such as the British Virgin Islands), passes to the Cyprus resident company the right to grant, for example, a sub-licence to use intellectual property (such as a trademark or a patent). As for taxes, only the difference between the received and the paid royalty is subject to taxation at the rate of 10%, which may be 1-3%. The resulting amount of tax in this case will work out to be tenths of a per cent.

Interest

Cypriot legislation imposes tax on interest in two ways:

The most important question is if the interest was received either from a common business activity or from an activity that is closely related to a common business activity.

The definition of a common business activity includes:

  • Banking;
  • Funding;
  • Leasing.

The definition of an activity that is closely related to a common business activity includes:

  • Trade and/or reclamation of land;
  • Sales of new cars;
  • Insurance.

If the interest was obtained from a common business activity or an activity that is closely related to a common business activity, the company pays income tax at the rate of 10% and is exempt from the Special Defence Contribution Tax.

If the activity is not a common business activity or is not related to a common business activity, then this income is taxed under Special Contribution for Defense at the rate of 15%.

Dividends

According to Cypriot legislation, dividends are not liable to taxation, although they are subject to the Special Defence Contribution Tax charged at 15% of the amount of dividends received. Dividends are exempt from the Special Defence Contribution Tax only if they are received by the resident company from another resident company.

A resident company receiving dividends from a non-resident company is exempt from the Special Defence Contribution Tax only if it holds not less than 1% of the share capital of the non-resident company.

Thus, owing to flexible tax legislation, Cyprus companies are an effective tool for tax planning and tax payment minimisation.