Cyprus Company Incorporation | Incentives

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• Cyprus International Trading Structures
• Cyprus Investment Holding Structures

The most common activities of Cyprus Legal Entities, which are currently being used, are set out below:

(The list of such activities is not exhaustive).

Cyprus Company Incorporation – Tax Incentives

Cyprus has a significantly upgraded image as a jurisdiction since its EU Accession on 1 May 2004.

With the enactment of its New Tax Legislation on 1 January 2003 (including 3 amending laws, the last one in November 2004) and the abolition of the “offshore regime”, Cyprus has put a simplified, effective and transparent tax system in place that is fully EU, OECD, FATF and FSF compliant.

The result is a stable EU, “non-offshore” tax-competitive jurisdiction with exciting tax planning potential for EU and non-EU clients alike.

• In summary, Cyprus is the “lowest-tax EU Jurisdiction” that is not offshore. The standard corporate tax rate of 12.5% (exemption for all direct taxes for shipping companies) is one of the lowest in the European Union. Cyprus is now a premier holding, finance, royalty and trading company jurisdiction.
• 80% exemption of the net profit from the exploitation of owned qualifying intangible assets as well as 80% of the net profit emanating from the disposal of intangible assets.
• However, Cyprus’ biggest asset is its friendly and investor-friendly Tax Authorities who achieved a long and stable history of always being keen to help foreign investors.
• Invoices from offshore companies are acceptable in Cyprus Companies’ books and payments to offshore companies bear no withholding tax.
• Dividend participation exemption
• No withholding taxes
• Possibility to obtain Advance Tax Rulings. From 16 May 2016, a fee of €1,000 is payable to the tax authorities by the taxpayer when applying for a ruling. Where the taxpayer requests the issue of ruling to be expedited, the fee increases to €2,000 and the tax authorities must issue the ruling within 21 working days from the date the application is submitted.
• Absence of strict transfer pricing rules
• In some structures real Economic Substance may be needed depending on the use of the structure, the activities and volumes involved.
• Interest deduction for borrowing costs provided.
• National interest deduction (NID) on new equity – Up to 80% of the taxable profit derived from assets financed by the new equity (as calculated prior to the NID deduction)
• There is added commercial value and monetary benefits due to the ability to register for EU VAT in Cyprus.
• Trading in securities is essentially a tax-exempt activity as any profit from the disposal of any type of security, irrespective of whether this profit forms part of a company’s trading activity or is of a capital nature.
  The foreign beneficial owners of Cyprus Companies, Branches and Partnerships are not liable to additional tax on dividends or profits over and above the amount paid or payable by the respective legal entities.
• The “out-of-Cyprus profits” of Cyprus Non-Resident Companies are not taxable – escape tax altogether in Cyprus – (Cyprus Companies with management & control exercised outside Cyprus) – in other words an “EU Offshore Vehicle”
• Shipping Companies are fully exempt from all direct taxes and are subject to taxation under the tonnage tax regime.
• Low personal tax rates that reach a maximum of 35% for income over 19.500 EURO and substantial relief for overseas employment and for non-residents taking up employment in Cyprus for the first time.
• Significant exemptions for non-domiciled individuals taking up tax residence in Cyprus with no tax on dividends and interest.
• 50% exemption on income from employment in Cyprus of a person who was not previously resident in Cyprus. The exemption applies for ten years, provided that the income from employment in Cyprus exceeds 100.00 Euro per annum.
• 20% exemption with a maximum amount of 8.550 annually on income from employment in Cyprus of a person who was not previously resident in Cyprus. For employments commencing during or after 2012 the exemption applies for a period of 5 years starting from the tax year following the year of commencement of the employment with the last eligible tax year being 2020.
• Low social insurance contributions (7.8% of gross salary) – total employer contributions to various funds amount to 11.5% of gross salary and total employee contributions to 7.8%.
• No capital gains tax or net worth taxes except with respect to Real Estate situated in Cyprus.
• Beneficial use of EU Directives that have been implemented into the Cyprus Tax Legislation.
• Providing access to an extensive network of more than 60 beneficial Double Tax Treaty Network.
• Attractive Permanent Establishment (PE) rules and generous PE provisions available in the DTT Network.
• Mergers, Takeovers and other Re-Organizations can take place within groups without tax consequence.
• Unilateral tax-relief is granted to all Cyprus Companies for foreign tax suffered irrespective of the absence of a double tax treaty.
• Tax losses are carried forward and are set off against the profits of the next five years.
  Losses, subject to conditions, can be surrendered as group relief to other Cyprus tax resident companies of the same group.
• As from 01 January 2015, a Cyprus tax resident company may also claim the tax losses of a group company which is tax resident in another EU country, provided such EU company firstly exhausts all possibilities available to utilize its losses in its country of residence or in the country of any intermediary EU holding company.
• Low duties – taxes on the establishment of companies.
• Very low expense level (fees) for financial and professional service provision compared to other EU Jurisdictions. The difference is more evident in the case of professional service recurring costs (administration, accounting & tax compliance) are estimated to be at 35- 40% of Western European rates! Note: One could very easily be misled by the low quoted start up costs for major European Jurisdictions as to the final total costs which can be considerable if one calculates recurring costs!

EU Directives, Cyprus’ Double Tax Treaty Network

• The Netherlands, Luxembourg and other classic Holding Company Jurisdictions now face a new outstanding competitor. As we are moving forward in time from EU Accession, we are seeing more and more clients preferring Cyprus as a holding jurisdiction to other traditional jurisdictions. However, sometimes, best results can be achieved by combining Cyprus with other jurisdictions such as The Netherlands and Luxembourg, rather than by substitution.
• Beneficial use of EU Directives enacted into Cyprus Law (effectively “copied” – transposed into Cyprus Law and their benefits extended to residents of Third Countries):

1. Parent / Subsidiary Directive (no withholding tax on payment of dividends, no transitional period [immediate effect], 10% minimum participation [shareholding limits], 2 years holding period, dividend exempt subject to conditions, tax credit for tax withheld abroad).
2. Interest / Royalties Directive (no withholding tax on interest paid to non-residents, no transitional period [immediate effect], 25% minimum participation [shareholding] required only in the case of royalties, no minimum holding period, interest taxed depending on nature, royalties subject to corporation tax, tax credit for tax withheld abroad).
3. Merger Directive (involves resident and Non-Resident Companies, leads to elimination of the tax consequence of any reorganization, merger, division, transfer of assets, and exchange of shares).

• Cyprus has a wide and beneficial Double-Tax Treaty (DTT) Network. There are currently 58 DTTs in force and 25 others being negotiated. It has to be noted here that Cyprus has fewer DTTs than some competing EU Jurisdictions, but in many cases more beneficial than its competitors’ treaties such as those with Russia, Romania, Yugoslavia and the whole of Eastern Europe; and the Middle East. The existence of these treaties, combined with the low overall tax paid by Cyprus Companies, offer significant possibilities for international tax planning through the island.
• A significant number of double tax treaties concluded by Cyprus, lowers or eliminates foreign withholding taxes on dividends, interest and royalties or capital gains paid out from or arising in the contracting states, some also include particularly beneficial tax sparing credit provisions for dividends, interest and royalties. A “tax sparing credit” is a tax credit available to the recipient, which is higher than the actual tax paid in Cyprus. Tax Sparing Credit provisions can be found in the treaties concluded with Canada, China, Czech and Slovak Republics, Denmark, Egypt, Germany, Greece, India, Ireland, Italy, Malta, Mauritius, Poland, Romania, Russia, Syria, Thailand, UK and former Yugoslavia.

Cyprus Holding Companies

Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Cyprus Holding Companies are the following:

• Participation Exemption:

1. Foreign dividends are tax-exempt (This exemption does not apply if: more than 50% of the paying company’s activities result directly or indirectly in investment income AND the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6,25% on the profit distributed.). However the exemption does not apply and the dividend is taxed as other income at 12.5% if the dividend is treated as a tax deductible expense in calculating the tax liability of the paying company.
2. No capital gains tax is payable on the sale or transfer of securities and the gains are exempt from Income Tax (except gains from disposal of shares in companies owning Real Estate situated in Cyprus – only to the extent that the gain relates to the particular Cyprus Real Estate). Also, profits from a Permanent Establishment (PE) outside Cyprus are tax-exempt and its losses can be set-off against Cyprus Income (this exemption also does not apply if the PE carries on more than 50% of investment activities – passive income – AND the overseas tax burden is significantly lower than the Cyprus tax burden). This exemption (PE) in conjunction with the use of some of Cyprus’ DTTs can result in PE profits avoiding tax altogether.

• Low or no withholding taxes on outgoing dividends, interest and royalties (no withholding tax on dividends and interest irrespective of the country or residence of the recipient (even offshore jurisdictions) or the existence of a Double Tax Treaty; no withholding tax on royalty payments for use of the rights outside Cyprus, 10% if the rights will be used in Cyprus (subject to DTT & EU Directives) and 5% on films (subject to DTT & EU Directives).
• We note here that, compared to other “key” Holding Company Jurisdictions, only Cyprus and the UK have 0% dividend withholding tax (DWT), so no need for complex and expensive “structuring out” of DWT. THIS IS AN IMPORTANT COMPETITIVE ADVANTAGE OF CYPRUS compared to other Holding Company Jurisdictions.
• No capital gains or income tax on the liquidation of participations or the liquidation of the Cypriot Holding Company itself.
• No net worth taxes (as mentioned before no capital gains taxes) during the life of the Cypriot Holding Company.
• Tax losses are carried forward and are set off against the profits of the next five years.
• Losses, subject to conditions, can be surrendered as group relief to other Cyprus tax resident companies of the same group.
• As from 01 January 2015, a Cyprus tax resident company may also claim the tax losses of a group company which is tax resident in another EU country, provided such EU Company firstly exhausts all possibilities available to utilize its losses in its country of residence or in the country of any intermediary EU holding company.
• Mergers, takeovers and other re-organizations can take place within groups with no tax consequence.
• Unilateral tax-relief is granted to all Cyprus Companies for foreign tax suffered irrespective of the absence of a double tax treaty. For dividends received from EU member states, the underlying tax credit is also available.
• No thin capitalization rules.
• Limited anti-avoidance provisions.
• Interest deduction for borrowing costs is provided.
• Absence of strict CFC Legislation.
• Attractive Permanent Establishment (PE) rules and generous PE provisions available in the DTT Network.
• Real Physical and Economic substance needs to be added in a Holding Company in order to obtain tax residency certificate by the Cyprus Tax Authorities and to meet the Active Conduct of Business test and be entitled to Treaty benefits.
• No obligation for the Holding Company (or right) for VAT registration & compliance.
• Low duties – taxes on the establishment of companies.
• Absence of “strict” transfer pricing rules, other than a provision in the Income Tax Law which requires transactions between ‘related parties’ to be in accordance with the ‘arm’s length principle’.
• Possibility to obtain Advance Tax Rulings.
• Low expense level for professional / financial fees.

In conclusion, the Cyprus Tax System Enables:

• The extraction of foreign sourced dividends, at mitigated or zero rates of foreign withholding tax (owing to the use of the Parent Subsidiary Directive or the Use of Double Tax Treaties if the Directive is not applicable).
• The receipt of foreign dividends at zero rates of corporation tax or special defense contribution (local withholding tax) or any other local taxes (subject to conditions – anti avoidance provisions that are easy to satisfy), i.e. “an EU Holding Company with no domestic tax leakage on holding activities”.
• The distribution of available profits to non-resident shareholders at zero rates of dividend withholding tax, irrespective of jurisdiction or the absence of a DTT (even to offshore jurisdictions).
• Allows for the realization of capital gains from the disposal of shares in foreign companies at zero rates of corporation and capital gains tax on the gains”, irrespective of holding period and shareholder percentage and no capital gains tax on the liquidation of the Holding Company itself.

However, in such structures where the holding company is established in a low tax jurisdiction like Cyprus and the subsidiaries are in high tax countries then substance has become a crucial consideration. Many countries given the OECD BEPS project have already incorporated anti abuse provisions in their domestic tax legislation and others will follow in order to counter the use of purely tax driven conduit companies and the phenomenon of treaty shopping. The OECD has also developed a multilateral instrument that all countries participating in the BEPS project can use, to amend their existing double taxation agreements to avoid again treaty shopping and the use of conduit companies with main purposes of avoiding withholding tax on dividend payments.

So in our experience and in accordance with the above, a holding company should have separate, genuine offices and employ separate staff and directors that have the knowledge and expertise of the company’s activities and actually take part in the decision making process of the company.

Cyprus (Group) Finance & Royalty Companies

Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Cyprus (Group) Finance & Royalty Companies are the following:

Important Features of Cyprus (Group) Finance Companies:

• Absence (under a Double Tax Treaty or the Interest and Royalty Directive) of interest withholding tax.
  Low overall tax burden.
• Possibility of deducting interest expenses from taxable income.
• Absence of thin capitalization rules or their inapplicability in the case of “back to back” financing.
• Absence of interest withholding tax in connection with interest paid on loan financing irrespective of jurisdiction or the absence of a DTT (even for interest payments to offshore jurisdictions).
• Reasonable level of “margin” required by tax authorities.
• Low expense level for professional / financial fees.

Important Features of Cyprus Royalty Companies:

• Absence or reduction (under a Double Tax Treaty or the Interest and Royalty Directive) of withholding tax on royalties paid to Cyprus Company.
• Low overall tax burden.
• Tax deduction of royalty payments.
• Effective tax depreciation of investments in intellectual property.
• Absence of withholding tax on royalty payments irrespective of jurisdiction or the absence of a DTT (including to offshore companies) for rights used outside Cyprus – the usual case Neutral VAT treatment.
• Reasonable level of “margin” required by tax authorities.
• Effective protection of intellectual property rights by Legislation and the participation of Cyprus in international agreements.
• Low expense level for professional / financial fees.