Cyprus is located at the crossroad of Europe, Asia and Africa and is an excellent location for the worldwide multinational corporations. As of 1st of May 2004 is a member of the European Union. Cyprus, a Former British Colony follows the common Law system and the UK legal system has an immense influence on the island.
Following the country’s accession to the European Union the Tax regime of the country has undergone substantial changes. Due to this changes Cyprus is now considered a “Tax incentive” country having the most favourable regime in the enlarged Union.
The aim of this article is to examine and provide a brief outline in relation to the provisions of Tax law ad International Trust regime.
THE NEW TAX REGIME
Income Tax Law
1) Physical Persons
The law provides that an individual is a resident if he / she lives in Cyprus for one or more periods which exceed the total of 183 days per year. Days in and out of Cyprus are calculated as follows:
- The day of departure from Cyprus counts as a day of residence outside Cyprus
- The day of arrival in Cyprus counts as a day of Residence in Cyprus
- Arrival and departure form Cyprus in the same day counts as one day of residence in Cyprus
- Departure and arrival in Cyprus in the same day counts as one day of residence outside Cyprus
Individuals and resident employees of companies are taxed at the following Tax rates:
CHARGEABLE INCOME (€)
TAX RATE (%)
Up to 19,500
19,501 – 28,000
28,001 – 36,300
TAXATION ON FOREIGN PENSIONS
The taxation of retired persons received from abroad is subject at 5% on income exceeding €3,420 per year.
An annual exemption of €3,420 is granted.
2) Legal Entities
A legal entity is considered to be resident of Cyprus for Tax purposes if the “management and control” is exercised in Cyprus.
The law does not provide us with a definition of the management and control concept, however one can safely assume that this condition is satisfied in those cases where the majority of the members of the Board of Directors and the company secretary are tax residents of the republic and where important decisions in relation to the company are taken in Cyprus.
Permanent establishment (P.E) has the same meaning as defined in the O.E.C.D 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 3 months”.
There is no longer a distinction between local companies and International Business companies (IBC’s). The taxable profit of all Cypriot companies is at the rate of 10%, which is the lowest corporate rate among the members of the European Union. Here is worth noting that companies that are not managed or have failed to prove that their management and control is exercised in Cyprus are not subject to tax in Cyprus. However such companies may not take advantage of the extensive Double Tax Treaty network of Cyprus.
Under the provisions of the law fifty per cent of income from interest derived by a company will be exempt from corporate Tax but the whole interest received or credited will be subject to the Special Contribution for Defense Tax. Interest derived from ordinary trading activities, including interest closely connected with the ordinary carrying of business will only be subject to income Tax law. (PLEASE note that the Special Contribution for Defense Tax should be taken into consideration)
Moreover income Tax law exempts the Taxation on any profit income deriving from the disposal of Securities. These are defined in Section 2 of the income Tax law as “Shares, Bonds, Debentures, founder’s shares and other securities of companies and other legal persons incorporated under the law in the republic or options thereon”
a) Dividends under Income Tax law
There is no Taxation of Dividends under income Tax law. The mentioned provision provides great incentives for the establishment of Holding Companies in Cyprus. However one should bear in mind that dividends are taxed under Special contribution for defence Taxed. This of course is subject to exemptions that can have the Tax completely eliminated.
b) Interest under Income Tax Law.
Interest income is exempt from income Tax law for individuals, whereas a 50% exemption applies for interest income in the case of companies. Under the same section often law any interest accruing from the ordinary or closely connected business activities will not be treated as interest for the purposes of the law and thus will be taxed as income at 10%.
c) Special Contribution for Defence Tax.
The special Contribution for Defence Tax 223(I)/2002 (SCDT) incorporates the parent subsidiary Directive even further being far more generous in the non-Taxation of dividends subject to certain conditions.
One could suggest that SCDT is comparable to withholding Tax Laws that other jurisdictions would impose. The main provisions not falling under the scope of this article are the 15 % tax on Dividends and the 10% Tax on interest imposed by SCDT to all residents of the Republic of Cyprus. However as was repeatedly mentioned there are exceptions to this rules but these are not for this article to examine.
d) Stamp Duty (Amendment) Law 121 I /2002
Stamp duty is paid upon incorporation of a company in Cyprus as well as on execute of documents which relate to any property situated in the Republic, or to any matter or thing to be performed or done in the republic irrespective of the execution place.
The stamp duty for the incorporation of a Cypriot company is 190 Euro.
The stamp duty payable varies according to the authorized share capital of the company. For up to 10.0000 Shares authorized capital the stamp duty is 250 Euro.
Cyprus has concluded an impressive number of treaties (34) for the avoidance of double Taxation and has a very well organized services provision infrastructure. Its recent accession to the European Union and the measures taken for Anti- Money laundering purpose have established Cyprus into the top list of multinational corporations.
It is also a great alternative for Tax planning purposes since it provides the lowest corporate Tax rate in Europe and is certainly a low Tax jurisdiction that every tax advisor should consider.
More than a decade has passed since the enactment of the International Trust Law and one could argue that Cyprus is now well placed on the Trust map. The highly respected judiciary, the efficiency of the legal system in Cyprus, the clarity of the relevant legislation along with the incentives an International Trust provides and finally the high standard of services offered in Cyprus makes the Cypriot International Trust a significant tax-planning tool.
The Cypriot International Trust has no disadvantages if compared with other jurisdictions were Trusts are also created. On the contrary Cyprus, a member of the European Union as of May 1st 2004 is a reputable jurisdiction worth considering when it comes to international tax planning and asset protection.