Changes
in the tax laws in Cyprus effective on 1 January 2003 have abolished
the distinction between local companies and international business
companies. A uniform corporation tax rate of 10% will apply to all
companies resident in Cyprus. Whether companies are classed as resident
or non-resident is dependent upon the location of the management
and control of the company. There is no legal definition of 'management
and control' but it is generally taken to mean where the board meetings
take place or the majority of board members reside.
Resident companies are now taxed at 10% on their
worldwide income and non-resident companies are only taxed on profits
arising out of a permanent establishment on Cyprus. 'Permanent establishment'
includes an office, a branch, a factory and a construction site
for a project exceeding three months. Companies, whose management
and control is outside of Cyprus and having activities outside Cyprus,
only, will not therefore pay any tax in Cyprus.
Cyprus resident companies can take advantage of
the double tax treaty network.
[The anti-avoidance provisions will no longer apply under the new
regime]. In addition once Cyprus joins the EU in May 2004 resident
companies will enjoy the lowest corporate tax rates in Europe.
Dividends paid to non-resident shareholders of
Cyprus companies will not be subject to withholding taxes. In addition
dividends received by Cyprus companies are exempt from corporation
tax. Cyprus resident companies receiving dividends from a foreign
company are not liable to withholding tax provided the company receiving
the dividend holds more than 1% of the share capital of the foreign
company paying the dividend. (Other conditions are that not more
than 50% of the paying company's activities result in investment
income and the tax paid in the jurisdiction in which the foreign
company is registered is not significantly lower than the tax paid
in Cyprus). These provisions make Cyprus a good location in which
to incorporate a holding company. If a subsidiary were incorporated
in a jurisdiction other than Cyprus with 0% tax e.g. BVI and the
holding company were a Cyprus resident company it would enjoy double-tax
treaty benefits and subsequently minimize the taxable profit in
Cyprus.
Non-resident companies may be best used where there
is no intention to make use of the double-tax treaty network or
to repatriate profits, e.g. where monies are transferred to a foreign
ban account or left in a foreign currently account in Cyprus.
Clients wishing to benefit from
the favourable tax regime in Cyprus are requested to contact our
Cyprus or London
offices.
Operational Case Study
Mr. Dokic from Romania is a buyer of sports wear
from Taiwan and sells to European Companies and has considered using
an offshore company to mitigate his tax exposure on his profits,
however on research Mr. Dokic has accepted that he requires to establish
a company in a tax paying location that has a good image within
the European Union, where his buyers are from.
Mr Dokic decides to establish a Cyprus resident
company that will acquire the goods from Taiwan and sell within
the EU.
The goods are shipped from Taiwan to the order
of the Cyprus Company to a port of the client’s choice for
example the United Kingdom. On arrival, the goods are trans-shipped
without being imported and the documentation from Taiwan is replaced
with new documents reflecting the Cyprus Company and if needs be
the origin can be changed on the shipping documents from China to
UK, even though the goods have not been imported.
The Cyprus Company, registered for VAT in Cyprus, will be obliged
to quote their VAT number on their invoice to the European buying
party, as well as the European buyers VAT number which will enable
the Cyprus Company to zero rate the supply to buyer. The buyer will
account for VAT on the supply in the usual manner within it’s
own country.
The profits accrued within the Cyprus are subject to 10% taxation
within Cyprus, however there are ways to mitigate and reduce this
amount. Should this be of interest please do not hesitate to contact
one of our consultants.
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