Published Article on LinkedIn, on January 14, 2021 by John Joannides
Experienced Corporate Lawyer in Cyprus specialising in Cross-Border Transactions | Wealth Structuring | Maritime Law
As the pandemic continues to asphyxiate many businesses, Cyprus’ legal and tax framework continues to offer a complete business proposition worth considering.
Redomiciliation of Companies to Cyprus
As traditional “tax havens” begin to sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Base Erosion Profit Shifting) and introduce “economic substance” in their national legislation, the uncertainty surrounding the shift from 0% tax and close to zero compliance requirements has led to an influx of business to OECD compliant low tax holding jurisdictions.
On 6 July, 2007 Cyprus enacted regulations which enable the redomiciliation of companies to and from Cyprus. Provided that the national legislation of the jurisdiction of incorporation allows for a redomiciliation an overseas company may redomicile to the Republic of Cyprus and “continue in the Republic” thereafter.
Reasons for Headquartering your Business in Cyprus
True to both, Cyprus’ simple and certain tax and legislative framework, and its flexibility in adapting to global regulatory changes, this pro-business jurisdiction facilitates the decision of any EU or Non-EU business to relocate to its shores through different incentives. These incentives are both complimentary and mutually exclusive, depending on the needs and requirements of each business.
I. Cyprus Non-Domiciled Tax Residency
Any foreign citizens, including EU Nationals, who seek to avail themselves of the benefits of the Cypriot legislative and tax systems by relocating to Cyprus for a minimum of 60 days per annum will obtain the tax status of a Non-Domicile individual and will therefore be able to enjoy significant tax benefits, as follows:
• 0% Tax on dividends received
• 0% Tax on dividends paid by the individual in Cyprus
• 0% Tax on interest in fixed deposits/savings in Cyprus
• The Individual will only be taxed in Cyprus on their worldwide income • Reduced tax on rental income
• 50% exemption on employment income exceeding €100,000 per annum for non-residents managers and employees taking up employment in Cyprus upon registration of a Cyprus Foreign Interest Company in Cyprus, which the Firm forms and registers in Cyprus for its clients.
II. Cyprus Permanent Residency
Further to the provisions of Regulation 6(2) of the Aliens & Immigration Law 1972, Third Country Nationals (Non-EU) may apply for a permit in cases where the following conditions are satisfied:
1. A minimum capital deposit of at least EUR30,000 in a Cyprus bank account, which will be encumbered for a period of at least three (3) years. It must be proved that the requisite amount has been transferred to Cyprus from abroad.
2. Proof of a secure annual income of at least EUR30,000, the base annual income increases by EUR5,000 for every dependent of the applicant and by EUR8,000 for every dependent parent or parent-in-law of the applicant.
3. Proof of purchase of real estate that equates to a total market value of at least EUR300,000 (excluding VAT). The applicant may opt to purchase one or two properties amounting to the required amount, for example, a residential property and an office space. The full amount to be used to purchase the real estate should be deposited in an account in a financial institution in Cyprus at the time of application.
4. The holder of such a permit, as well as his/her dependent persons who are included in his/her permit are obliged to visit Cyprus once every two (2) years.
Cyprus Foreign Interest Companies
A Cyprus company which has a foreign interest may employ Non-EU nationals upon satisfying the condition that it has a strict ownership structure and transparent capital sources, it has a fully operative administrative office in Cyprus and it has stable financial growth confirmed by annual Financial Statements. As well as the benefits to the owners of a Cyprus Foreign Interest Company under the Cyprus Non-Domicile Tax Residency scheme, tax exemptions on the salaries of executive managers and middle management have been introduced, to further enhance the tax attractiveness of relocating to Cyprus.
Conclusions: Cyprus a Complete Business Proposition
The synergy created by Cyprus’ modern, simple and attractive tax regime coupled with its stable, developed and flexible English Common Law legal system create a world class, efficient, effective and above all, certain tax and legal regime. Cyprus offers businesses and investors an attractive and complete proposition for their affairs:
• Full Member of the European Union 2004 | Eurozone 2008 Access to and application of the benefits of all EU Directives, e.g. Parent-Subsidiary Directive.
• Access to 40+ EU trade agreements.
• 12.5% Uniform Corporation. Corporation Tax is levied only on net profits. Profits from overseas permanent establishments are exempt from corporation tax. Non-resident entities are only taxed on income sourced in Cyprus.
• 0% Tax on Group Restructuring. Company reorganisation rules are based on the EU Mergers Directive.
• 0% Tax on Dividends Received Dividends received by Cypriot tax resident companies are exempt from Cyprus tax (subject to minor exceptions). The extensive network of Double Tax Treaties (“DTTs”) allows beneficial treatment in respect of withholding taxes (“WHTs”) in the source country.
• 0% Withholding Tax on Dividend Payments Dividends paid by a Cyprus tax resident company to its non-Cyprus resident shareholder/s are not subject to any withholding tax in Cyprus. Thus the non-Cyprus resident shareholder of a Cyprus tax resident company receives the dividends free of any WHT.
• 0% Tax on trading/sale of titles or shares The disposal or transfer of titles is exempt from all taxes. Titles are described as shares, bonds, debentures and similar titles as well as rights thereon (options, futures etc). Cyprus is, therefore, the jurisdiction of choice in respect to M&A transactions.
• 0% Capital Gains Tax is paid in Cyprus on the transfer of immovable property owned by a Cyprus tax resident company outside Cyprus. Equally, there is no Capital Gains tax on the sale of securities.
• 0% Estate Duty is payable on the inheritance/transmission of shares in case of the death of a shareholder.
• 0% Inheritance Tax | Succession Tax
• 0% Net Wealth Tax
• 0% Property Tax
• 0% Luxury Tax
• 0% Tax on Reduction of Capital & Reduction of Share Premium Account.
• 0% Withholding Taxes on Interest and Royalties. There are no WHTs on interest payments made by a Cyprus tax resident company. There is also no WHT on royalties arising from sources outside Cyprus.
• Unilateral Tax Credit Relief. Unilateral tax credits are granted on any tax paid abroad to any foreign country, irrespective of whether Cyprus has a DTT or not. In such a case the income is not taxed twice but only once.
• 65+ Double Tax Treaties (“DTTs”) Cyprus has an impressive and continually growing network of DTTs, a Cyprus company can benefit from the EU Directives to eliminate WHTs when collecting income from the EU. Unilateral tax credit on foreign taxes withheld at source is also available.
• Losses can be carried forward and set off against future profits for the next five years.
• Group Relief. Setting off the loss of one company with the profit of another is allowed provided both companies of the group are tax resident in Cyprus.
• No Thin Capitalisation Rules. There are no provisions in the Law requiring companies to maintain a particular debt to equity ratio. Consequently, a Cyprus holding company may be capitalised with loans without any risk that interest paid at arms’ length to the parent company will not be deductible.
• 0% VAT for Holding Companies. Holding activities fall outside the scope of VAT in Cyprus and a Cyprus holding company engaged exclusively in holding activities is not entitled or obliged to register for VAT purposes.
• 0% Tax on Liquidation. A Cypriot holding company held by non-resident shareholders can cease operations in Cyprus and distribute assets to its shareholders in any form (dividends etc.) without any tax cost to the shareholders.
• 2.5% Corporation Tax under the “IP Box” regime where effectively a Cyprus company receives a deduction of up to 80% of the income received from qualifying assets. These qualifying assets are patents as defined in the Patents Law, computer software or other IP assets which are legally protected and specifically defined in the legislation. The effective tax rate in Cyprus for companies meeting the IP Box criteria and are therefore eligible for the complete 80% deduction is below 2.5%.
• Advance Tax Rulings. In line with certainty created by Cyprus’ progressive and simple tax and legislative framework the tax authorities are investor friendly thereby allowing advance tax rulings.
• Notional Interest Deduction. This measure, which is fully aligned with EU Directives, supports the promotion of economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing thereby encouraging the creation of business substance by offering attractive advantages to individuals.
• Tax Neutrality on foreign exchange differences unless they arise from trading in currencies or currency derivatives.
• Tax Exemption on gains from trading in securities.
