Tax Advantages of Cyprus Companies

Last updated on June 9th, 2022 at 07:46 am

Following the recent tax reforms and the reform of the Exchange Control Law all citizens of the European Union (EU) can register a company in Cyprus as any other Cypriot.

The permit from the Central Bank that was previously a precondition for owning shares in a Cyprus company, is no longer required.

In addition all companies are the same and are taxed at the same rate i.e. 12.5%.

It is no exaggeration to say that the accession of Cyprus to the European Union (EU) – as of the 1st of May 2004 and the enactment of the new Cyprus tax legislation, which is now compatible with the acquis communautaire, have made Cyprus one of the most attractive locations for the incorporation of International Business Companies (IBCs).

Following the recent tax reform a company is taxed in Cyprus if it is “resident in the Republic”. A company is only ‘resident in the Republic’ if its business is centrally managed and controlled in Cyprus. Therefore, under the new rules, a resident corporation is taxable on its worldwide income accrued or arising from sources both within and outside Cyprus if it is managed and controlled from Cyprus. The IBCs incorporated in Cyprus can perform many functions e.g. that of a holding company, and give to its shareholders valuable tax advantages.

Holding Companies.

The business vehicle of the Holding Company, has become very popular after the accession of Cyprus to the European Union (EU) and the enactment of the new Cyprus tax legislation which is now compatible with the acquis communautaire. It important to note that the laws and practices of Cyprus are now harmonised with the EU Laws and Directives, the Code of Conduct and the Organization for Economic Cooperation and Development’s recommendation on Harmful Tax Corporation.

Minimum Shareholding.

Unlike other countries in Europe, a Cyprus Holding Company must only hold at least 1% of the share capital of a foreign subsidiary in order to receive the tax benefits awarded by the new tax reform.

The Benefits.

A uniform 12.5% corporate tax rate, applicable to the worldwide income, is now levied on all resident companies.  This is the lowest corporate tax rate in the European Union and thus the most advantageous standard rate of corporation tax for Cyprus.

In view of the new tax legislation, the Holding International Business Companies operating from Cyprus are now in a much more beneficial position because they can enjoy the benefits deriving from the tax exceptions as well as the corporate tax benefits by virtue of the new tax legislation.

Tax Exemptions – 50% of interest receivable. In view of the new tax legislation 50% of interest received by corporation is tax exempt, excluding interest received from the recipient’s ordinary course of business or closely connected with the recipient’s ordinary business.

Dividends – received Dividends received from abroad are now totally exempt from corporation tax by virtue of the new tax legislation. Furthermore, they are also exempt from the 15% defence contribution provided that the direct holding is at least 1% of the share capital of the overseas company.

Restructuring provisions – In view of the incorporation of the EC Merger Directive 90/434/EEC into the new tax law, there are tax exemptions on the transfer of assets (including shares) under a reorganisation (merger / de-merger / transfer of assets).

Gains on shares and Capital Gains Tax – Profits from buying and selling shares are exempt from tax. Furthermore, there is no capital gains tax except for the 20% capital gains tax applying on gains accruing from disposal of immovable property held in Cyprus and shares in non-listed companies, which own immovable property in Cyprus.

The profits from a permanent establishment abroad are exempt from taxation. The exemption does not apply if (i) the Permanent establishment directly or indirectly engages in more than fifty per cent (50%) in activities that produce investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus.

Distributions by Cyprus Holding Companies Dividends paid to non-resident shareholders are exempt from withholding tax. In fact, Cyprus does not impose withholding taxes on payments of dividend, interest and royalties (provided the intellectual property rights are not used in Cyprus) to non-resident recipients.

Corporate Tax Benefits – Carry forward of Losses Tax losses for the year 2000 onwards may be carried forward indefinitely. Losses incurred abroad by a permanent establishment of a Cyprus company can be offset against profits of the Cyprus Company.

Group relief – The Group relief rules are now enacted, providing for group relief of tax losses between a holding Company and its subsidiaries in the event where the Holding Company owns at least 75% of the Subsidiary directly or indirectly and/or otherwise among companies of the same group for the whole year. However, losses brought forward will not be available for Group Relief.

By virtue of the said rules a company is considered as a member of a group if it is at least a 75% subsidiary of the other, or both companies are at least the 75% subsidiaries of a third company.

Net of Double Tax Treaties – Cyprus combines a low-tax regime with a network of double tax treaties. It has concluded the highest number of double tax treaties compared to any other offshore jurisdiction, particularly with Central and Eastern European Countries and a number of Middle Eastern countries. Most of the Treaties follow the OECD model and all of them have the impact of reducing or eliminating the normal withholding taxes imposed by the Contracting states on dividends, interest and royalty payments. This is beneficial for trade with certain Eastern European Countries and Russia because foreign investors investing in Eastern Europe have the opportunity to channel their investments through a country, such as Cyprus, which has a treaty with the investment recipient country allowing for a reduction and in some cases elimination of the withholding taxes.