Cyprus is a member of the European Union since 2004. It is also known as the beautiful island of Aphrodite, providing a fascinating combination of the deep blue waters of the sea and its mountains. It is the third largest Mediterranean island and is situated at the crossroads of three continents, Europe, Asia and Africa and close to the busy routes linking Western Europe with the Arab World and the Far East. The capital of Cyprus is Nicosia and the main industrial and commercial centre is Limassol.
Cyprus has a presidential system of government which is modeled on western democratic systems where human rights, political and private property are safeguarded. The legal system is based on the same principles applicable in the United Kingdom.
The island has an open economy with emphasis on tourism and services. Cyprus accounting profession follows the international accounting and auditing standards. The accounting members of the local institute of Certified Public accountants of Cyprus are members of The Institute of Certified Public Accountants, USA (CPAs), The Institute of Chartered Accountants in England and Wales and the Chartered Association of Certified Accountants in UK.
The Island has excellent transportation and telecommunication infrastructure. There are modern ports linking a wide range of destinations due to the island’s key geographical position and two international airports, one at Larnaca and one at Paphos, with frequent flights to the majority of the leading business centers. The road network is of dual carriage-ways linking all the towns and with respect to telecommunications.
The Cyprus Company
The Cyprus Company is ideally used for holding and trading purposes. The Corporate tax is at the rate of 12.5% being one of the lowest in the European Union. Corporate tax is calculated after considering the incomes minus the expenses incurred wholly and exclusively for the production of the income; various generous deductibility rules apply.
Tax exemption on disposal of securities
The profit arising on the disposal of securities in a private or public company by a Cyprus tax resident company is tax exempt from any tax in Cyprus, provided that securities refer to shares, debentures, government bonds, founder’s shares and other securities of companies or legal persons incorporated in Cyprus or abroad and rights thereon. Full exemption from income tax on the liquidation of participations held by the Cyprus holding company or on the disposal of the shares of the holding company.
Dividends received by a Cyprus tax resident company from a foreign subsidiary are exempt from corporation tax. They are also exempt from special contribution of Defence. The exemption from special contribution of defence is subject to the conditions that the overseas company paying the dividend does not engage directly or indirectly by more than 50% in activities which give rise to investment income and that the foreign tax burden on the income of the paying company is not significantly lower than the Cyprus tax burden of the company receiving the dividend.
Tax on profit from royalties in Cyprus is 2% on the net amount of the royalty income i.e Tax on profit 10% in Cyprus – charged only on the 20% of the net amount of the royalty income, after deducting all direct expenses. The Royalty is deducted from taxable profit in paying company and no WHT on royalty from Cyprus to the parent co or another franchisor apply. If the Royalty is paid by EU Company or lower or even zero if paid from Treaty country depending on the DTT, then no WHT applies.
Extensive network of agreements
The extensive network of double tax treaties that Cyprus has with more than 45 countries, lowers the withholding tax rates on dividends remitted to Cyprus from the subsidiary’s jurisdiction, as the terms of the double tax treaty supercede the national law. Moreover, dividends between associated enterprises which are both situated in the European Union are paid without any withholding tax, based on the provisions of the Parent- Subsidiary EU Directive.
Repatriation of dividends from Cyprus
Cyprus does not impose any withholding tax on dividends and other profit distributions paid by a Cyprus company to non resident shareholders including individuals and corporations irrespective of country of residence.
Foreign Tax Credit on income Received
Income received by a Cypriot company from abroad may have been liable to a withholding tax on payment in the country of origin. If this income is liable to tax in Cyprus, the tax paid abroad can be credited against the tax payable in Cyprus.
Tax Treatment of Losses
Losses can be carried forward indefinitely against future profits. Losses incurred abroad can be set off against the company’s profits as long as they belong to the same group of companies. Companies part of a group (with minimum participation of 75% for the whole fiscal year) can consolidate their results, thus allowing losses of one company to be set off against the profit of another company.
Full exemption from capital gains tax
There is full exemption from Capital gains tax that arises from the disposal of immovable property held outside Cyprus or shares in companies which may include immovable property held outside Cyprus. Therefore, Cyprus companies can be used to hold real estate outside Cyprus with no capital gains tax implications in Cyprus on their disposal.
In the light of the above tax benefits, Cyprus Company is most commonly used as an intermediate holding company especially in cases where investors invest in EU countries or in countries with which Cyprus has a double tax treaty. Tax benefits arise to the investors who aim at dividend income as well as significant capital appreciation from the disposal of the shares.