On this Page:
- Cyprus Forms of Offshore Operation
- Cyprus Tax Treatment of Offshore Operations
- Cyprus Tax Treatment of Foreign Employees of
Offshore Operations
- Cprus Exchange Control
- Cyprus Offshore Activities in Cyprus
- Cyprus Employment and Residence
The offshore regime in Cyprus has changed
as part of the island's accession to the EU,
and as a result of agreements with the Organisation
for Economic Cooperation and Development (OECD).
Cyprus was excluded from the OECD's June 2000
'harmful' tax haven blacklist in return for
pledging a commitment to amend its tax practices.
In April 2009, Cyprus was placed on the OECD
'white list' of territories which have 'substantially
implemented' the internationally agreed standard
in tax transparency.
In July, 2002, as part of the Income Tax
Act No. 118(I) of 2002, Parliament approved
a uniform 10% corporate tax rate, to apply
to both onshore and offshore companies, plus
a 2% levy on wage bills (meant to subsidise
pensioners), and a 'Special Contribution'
related to defence which in effect applies
the 10% corporate tax rate to inter-company
dividend and interest payments. However, the
rules are complex.
The 10% corporate tax gives Cyprus one of
the lowest rates in the EU, alongside Ireland
(12.5%), with the exception of the Isle of
Man, Jersey and Guernsey, which have all announced
a nil rate - but these islands are not in
the EU anyway for most purposes.
The new regime introduced a 'residence'-based
system of taxation, and was in operation from
1st January 2003.
Further proposals included the exchange
of tax and finance information, as well as
the signing of double tax treaties, between
Cyprus and additional OECD member countries.
Cyprus proposed to maintain its company and
trust management regime, although the identity
of the beneficiaries has to be disclosed to
the tax authorities when a company is registered
or when a change of ownership takes place.
The new rules came into effect from December
31, 2003 for new companies registering in
Cyprus, while those that are already registered
on the island had until December 31, 2005
to comply with the new requirements.
After the EU finally agreed its Tax Directive
in June, 2003, the Commission said it intended
to give the ten acceding states, of which
Cyprus was one, until 2007 to implement the
Directive, which included a 'Code of Conduct'
on 'harmful tax practices' and rules to avoid
the double taxation of royalty and interest
payments. However, a statement released by
the Cypriot Ministry of Finance at the time
said that Cyprus would adopt the new code
in full in 2004. The royalties and company
interest directive was in place from January
2004, according to the ministry, which pointed
out that it was already compliant with the
Code of Conduct rules as a result of its recent
tax reforms.
A new tonnage tax system was approved by
the European Commission on March 24, 2010
under state aid rules for maritime transport.
The simplified tonnage tax system extends
the favourable benefits available to owners
of Cyprus flag vessels and ship managers to
owners of foreign flag vessels and charterers.
It also extends the tax benefits that previously
only covered profits from the operation of
vessels in shipping activities, to cover profits
on the sale of vessels, interest earned on
funds used other than for investment purposes
and dividends paid directly or indirectly
from shipping-related profits.
The remainder of this section describes
the offshore regime prior to implementation
of the changes outlined above. As far as taxation
is concerned, it is now mostly of historical
interest, except that offshore companies in
existence before the end of 2002 were allowed
to continue to make use of the 4.25% corporation
tax rate until 2006 if they so chose.
For further information about the taxation
of companies in Cyprus, see Direct
Corporate Taxation.
Cyprus Forms of Offshore Operation
Offshore entities took the following forms:
NB: See above for new rules applying
to Cyprus companies from 2003.
Checks are made to exclude undesirable operations,
and conditions are usually imposed:
-
The entity must be entirely foreign-owned
-
The objects of the business and sources
of income must be outside Cyprus
-
No local borrowing is permitted
-
Audited annual accounts must be filed
with the Central Bank
-
Local payments must be recorded and
reported
Anonymity may be achieved by using nominee
shareholders; the beneficial owners must be
made known to the Central Bank, which is then
statute-bound to non-disclosure. NB There
is no provision under the law for migration
or re-domiciliation.
The expression 'International Business Company'
(IBC) simply refers to a duly authorised offshore
Limited Liability Company. There are no formal
requirements in addition to those in standard
Cyprus company law, but the Central Bank recommends
a minimum authorised share capital of CY£10,000.
This does not have to be paid up, unless the
company concerned wants to make use of the
import duty concessions described in Tax Treatment of Offshore Operations.
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Cyprus Tax Treatment of Offshore Operations
See Domestic Corporate Taxes for the general principles of
Cyprus corporate taxation, which also apply
to offshore entities.
NB: See above for new rules applying
to Cyprus companies from 2003.
All offshore companies are taxed at 4.25%
of profits; offshore branches of foreign companies
with management and control in Cyprus are
also taxed at 4.25%; branches with management
and control outside Cyprus are exempt from
tax on profits derived from sources outside
Cyprus.
Offshore partnerships are not taxed on profits
originating outside Cyprus.
There is no withholding tax on dividends
paid by offshore companies; but no tax credit
either on any tax paid.
Interest or royalties paid by an offshore
company to another person or company outside
Cyprus are not subject to withholding tax.
Estate duty is not charged on inheritance
of shares in offshore companies, and the sale
of or transfer of their assets (other than
Cyprus real estate) is exempt from capital
gains and other taxes.
Offshore entities (and their expatriate
staff) may import various goods duty-free:
- Motor vehicles (not buses, motor-bicycles,
coaches or caravans)
- Office equipment (not air conditioners
and consumables)
- Household effects (not furniture and air
conditioners)
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Cyprus Taxation of Foreign Employees of
Offshore Operations
This section refers to the taxation of foreign
employees of offshore operations, see Domestic Personal Taxes for the general principles
of individual taxation in Cyprus, which also
apply to the resident employees of offshore
entities.
Salaries from services provided from outside
Cyprus for more than 90 days to a non Cypriot
resident employer or in the permanent establishment
of a Cypriot resident employer are not taxed
in Cyprus.
Expatriate employees who at the start of
their employment were non-residents of Cyprus,
for the first three years of their employment
will be exempted from tax on 20% of their
salary or CYP5,000 (prior to the introduction
of the Euro in Cyprus) whichever is the lowest.
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Cyprus Exchange Control
Once Central Bank consent has been received
for offshore status, the entity is non-resident
with complete freedom from Cyprus exchange
control restrictions; thus it may maintain
bank accounts inside or outside Cyprus in
any currency and use its funds as it chooses.
By 2004, almost exchange control restrictions
had been removed by the Central Bank as part
of EU accession.
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Cyprus Offshore Activities
Offshore entities may not carry out any
trading activities in Cyprus with Cypriot
residents. The only permissible activities
within Cyprus are those compatible with the
exercise of management and control.
NB: See above for new rules applying
to Cyprus companies from 2003.
Certain borderline activities may be carried
on with express Central Bank permission, such
as:
- Transit trade through Cyprus
- Repackaging for re-export, within a tariff
classification
- Printing of foreign-language magazines
or books for distribution abroad
- Storage, repair or maintenance of goods
to be used or sold outside Cyprus
- Establishment of a private bonded warehouse
for the display of foreign-made goods intended
for re-export.
- Sales activities, provided these do not
result in sales in Cyprus or to Cypriot
companies.
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Cyprus Employment & Residence
NB: Following Cyprus's accession to the EU,
citizens of EU Member States are evidently
exempt from local Work Permit rules, although
it is taking some time for the bureaucracy
to get used to this new situation. The rules
outlined below now apply only to non-EU citizens.
The employees of offshore entities in Cyprus
require 'Temporary Work and Residence (TRE)
Permits', which are issued by the Central
Bank. For this purpose, employees are categorized
either as Executives or Non-Executives.
In effect, Executives are defined as senior
management, and three only of them are permitted
unless the Central Bank can be persuaded otherwise.
The minimum age for an Executive is 24, and
the minimum salary is CYP12,000 pa.
Non-Executives are those foreigners employed
in managerial, professional, administrative,
technical and clerical positions. The employer
must make an effort to recruit suitable local
personnel. Permits are issued by the Ministry
of Labour.
In both cases, a fair amount of documentation
is required by the authorities. Permits are
normally issued for 2 years, renewable for
a further three years.
Under a law implemented in July 2000, foreigners
to Cyprus must either have a five-year work
permit or have worked on the island for five
years or have a combination of worked time
and work permit totalling a minimum of five
years before their spouses can join them.
But in November 2000, the Cyprus government
introduced new regulations designed to make
it easier for some foreigners to have their
loved ones live with them. However, this solely
applies to those EU nationals and non-Cypriots
who work in certain sectors which are: offshore
workers, reporters, foreign correspondents,
accountants with big firms, lecturers, teachers
and those who have invested more than £100,000
in local businesses.
The five-year permits will be automatically
granted to new foreign entrants into these
sectors and those renewing permits will be
given extensions long enough to enable them
to meet the 'five years in total' clause.
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