A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 13, Issue 2 April 2011

Offshore Update

Cyprus – holding promise

Calling Cyprus a tax haven or an offshore location might be a misnomer in its current avatar. However, as a location for incorporating holding, trading or even step down subsidiaries/ intermediary companies it still remains a popular and ideal place, due to its geographical location, European Union (EU) membership, stable economy and access to a large network of double tax treaties.

Cyprus has the lowest rate of corporate tax in the EU at 10%. Cyprus is also placed on the “white list” of Organization for Economic Cooperation and Development’s (OECD) tax compliant jurisdictions and has a formidable reputation when compared to some of its offshore competitors.

Cyprus has the lowest rate of corporate tax in the EU at 10% and this tax rate applies to both ‘offshore’ and ‘onshore’ companies

The 10% corporate tax rate applies to both ‘offshore’ and ‘onshore’ companies. International Business Companies (IBCs) are now allowed to trade inside Cyprus. Cypriot companies also pay a 2% levy on wage bills (meant to subsidize 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, profits from activities of a permanent establishment (PE) situated outside Cyprus are completely exempt.

This exemption will not apply to a Cyprus company if:

  • Its foreign PE directly or indirectly engages in more than fifty per cent (50%) of its activities in producing investment income, and
  • The foreign tax burden is substantially lower than that in Cyprus. The term “Permanent Establishment” has the same meaning as defined in the OECD Model Tax Convention on Income and on Capital with the exemption of “a building site or construction or installation project”, which constitutes a permanent establishment only if it lasts more than three months.

A substantial number of companies involved in the trading or distribution of consumer goods, use Cyprus as a trading base for the Mediterranean and the MENA region. Non-resident enterprises are allowed to store, maintain, break bulk or re-package their own transit goods in bonded warehouses, providing the handling doesn’t result in any change of customs’ tariff classification. They are also permitted to conduct sales activities on the island, as long as no local deliveries result, and no permanent establishment is created.

Not only are the Cyprus treaty withholding tax rates normally lower than those in other countries’ treaties, but there will be no local taxation as long as no permanent establishment is created. Even if a PE is created, a 10% tax rate on company profits is in itself quite low.

Cyprus has more than 40 double-tax agreements and the favourable taxation regime makes it a suitable place in which to locate an intermediary company to handle payments streams which might otherwise be highly-taxed in the receiving country

A frequent feature of international trade and investment is the transfer of technology or ‘brand’ or intellectual property in return for license, franchise or royalty payments. Due to its network of double-tax treaties (unusually for a ‘low tax jurisdiction, Cyprus has more than 40 double-tax agreements) and favourable taxation regime, Cyprus is a suitable place in which to locate an intermediary company to handle payments streams which might otherwise be highly-taxed in the receiving country.

Such payments would normally be deductible expenses in the originating country, and under the tax treaties will be subject to low or zero withholding tax (Central and Eastern Europe, China, India, South Africa and a number of MENA countries). At the very worst, the income received in Cyprus will be taxed after deduction of expenses at 10%.

There are a number of company forms available in Cyprus, but the most commonly used for a Cypriot holding company is the private limited liability company. When 100% foreign-owned, a private company used to be referred to as an ‘offshore company’, although the expression International Business Company (IBC) subsequently came into favour to describe such companies.

Cypriot companies are formed under the Cyprus Companies Law, which is virtually similar to the English 1948 Companies Act. A holding company using the private limited company form will need at least one shareholder and the minimum share capital is EUR1,000, with share capital of between EUR5,000 and EUR10,000 the norm. A Cypriot private company must have at least one director which can be a natural person or a body corporate of any nationality.

Under amendments to the Cyprus Company Law in 2003, every company must prepare a full set of financial statements in accordance with International Financial Reporting Standards, and every parent company that has one or more subsidiaries, other than a company which is itself a wholly owned subsidiary, should present consolidated financial statements. Every company must complete an annual return within a period of 42 days from the date of its Annual General Meeting and must file immediately with the Registrar of Companies a copy of the annual return, signed by a director and the company secretary. The annual return filed with the Registrar of Companies must be accompanied by the full set of financial statements.

In summary, due to the island’s combination of tax treaties and low-tax regime, its membership of the EU and economic stability, many international investors choose Cyprus as a location for financial holding and investment companies as channels for investment to and from Eastern Europe, the Middle East, and Africa.

(This article is contributed by Mr. Chaitanya Kirtikar, Asst. Manager – Offshore Department.)