Under the agreements with the Organization for Economic Cooperation and Development (OECD) Cyprus is obliged to amend its laws enabling reduced taxation scheme. In July, 2002 Parliament approved a uniform 10% corporation tax rate on profits, to apply to both local and non-resident companies. Thus the distinction between the Cyprus locally based companies and offshore entities are no longer valid. The term International Business companies is currently used for offshore entities. An IBC is subject to certain restrictions implemented from time to time by the Central Bank of Cyprus.
However the Offshore (non-resident) companies which were incorporated prior to 31 December 2001 can enjoy the low tax rate of 4.25% up to the end of 2005. The corporate rate of taxation 10%, is still the lowest in Europe.
Personal Income Tax of Foreign Employees
- Residing and exercising their business in Cyprus:
Foreign employees of an International company residing and exercising their business in Cyprus are taxed at 1/2; of the local normal Personal Income tax rates. The present range of tax rate for a foreign International business employee is between 0% and a maximum of 20%.
- Residing and exercising their business abroad:
International Business employees living and working abroad (outside of Cyprus) pay tax only 1/10th of the normal tax rate (i.e. 0 – 4%). However, there is no tax at all if the employee’s salary is paid through a local bank.
Tax Free Deposits
Interest received from foreign capital investment that is deposited to a local bank is exempted from income tax. Additionally, interest received on borrowed foreign money capital that is invested in local bank in Cyprus may be exempted from tax. This will take place if the Minister of Finance considers it to contribute towards the economic development of Cyprus.
Capital Gains Tax on disposal of Company Shares
In case of sale or transfer of shares in an IBC no capital gains tax is payable. No estate duty is payable on the inheritance of shares in such a company.
VAT Optional registration
International entities are exempted from value added tax (VAT) however they may register for VAT Returns purposes if they wish to do so. The current VAT rate is 15%.
Additional tax Benefits
- Dividends paid by the International Business companies are not taxed.
- No social insurance contributions are paid by the International Companies unless they employ local manpower.
- No estate duty on the inheritance of shares of an International company.
- No stamp duty is paid by the International entities.
Double Tax Treaties
Cyprus has entered into a considerable number of double-tax treaties (unusually for a low-tax jurisdiction). The general effect of these treaties is that Cyprus-registered offshore entities that have tax exemptions in Cyprus will have the same exemptions in the treaty countries. In May 2001, Cyprus announced that it had entered into double tax negotiations with Iran, the Seychelles, Lebanon and Armenia. Talks have been concluded with Indonesia and it is expected that the two countries will sign a treaty in the very near future. In February, 2003, the Cypriot government said it had signed an agreement for the avoidance of double taxation with Lebanon. According to a government statement, the agreement was signed in Beirut by Cyprus' Finance Minister, Takes Chlorides, and his Lebanese counterpart, Fad Senior, and is designed to prevent both double taxation and fiscal evasion with regard to taxes on income and capital.
Most treaties follow the OECD Model Convention, although the US Treaty follows the most recent model of United States Agreements. Normally speaking, therefore, the country of residence will give a credit for taxes paid in the other treaty country. The Cyprus offshore entity qualifies for treaty protection under all the extant treaties except those with Canada, France, the UK and the USA, and even in those cases the limitations apply only to flows of income to Cyprus, and not to income flows from Cyprus to the countries concerned. Cyprus has signed 27 treaties for the avoidance of double taxation. These are with the following countries:
Countries that ratified a Double Tax Treaty with Cyprus
Austria, Belgium, Bulgaria, Canada, China, Check Republic, C.I.S (Ex-USSR), Denmark, Egypt, Finland, France, Germany, Hungary, India, Ireland, Italy, Kuwait, Malta, Norway, Poland, Romania, Slovakia, Sweden, Syria, United Kingdom, United States, Former Yugoslavia.
The right advice to maximize profits and minimize taxation is the aim of any tax specialist. We continually assess the legal obligations and look at ways of reducing your exposure. Our business is to protect the interests of the shareholders and report to the directors we endeavor to provide comfort and security to all the parties concerned. Personal taxation of the directors is just as an important task to be addressed.