International Business Entities

A Cyprus holding company is a normal company that can participate in domestic and/or foreign companies. If the company is managed and controlled in Cyprus, then it will be liable to be taxed in Cyprus on its worldwide income at a competitively low tax rate.

Cyprus has become the most popular holding company jurisdiction in Europe and amongst the most popular in the world. A Cypriot holding company enjoys the following tax advantages:

• Dividends received from other Cyprus tax resident companies are exempt from all taxes, subject to certain anti-avoidance provisions.

Dividends earned from foreign investments are exempt from Cyprus income tax in Cyprus, with the exception of dividends that are deductible for tax purposes for the paying company.

Such deductible foreign dividends are subject to Cyprus income tax and are exempt from SDC.

Other (i.e. non-deductible) foreign dividend income is also exempt (participation exemption) from special defence contribution unless: 1) more than 50% of the foreign paying company’s activities directly or indirectly result in investment income, and 2) the foreign tax is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25%).

• There is also no withholding tax on the dividends paid by a Cyprus company to its non-Cyprus residents shareholders irrespective of whether the recipient is a body corporate or individual, its country of residence or the existence of a double tax treaty. Dividends paid by a Cyprus company to Cyprus residents are subject to 17% defence tax and 2,65% GHS.
• Profits from a permanent establishment outside Cyprus are exempt from Cyprus tax laws
• Profits realized by a Cyprus holding company from the sale of shares and other securities are exempt from income tax except of gains from disposal shares in companies owning Cyprus real Therefore, there is no tax on the disposal / liquidation of participations held by the Cyprus holding company or the disposal of the shares of the Cyprus holding company or the liquidation of the Cyprus holding company owned by non-residents.
• Where the main business activity of a Cyprus holding company is the acquisition and holding of shares in other companies without taking part directly or indirectly in the management of these companies, Cyprus holding company has no obligation to register for VAT and may have the advantage of not applying the VAT reverse charge
• Use of the wide double tax treaty network which provide for reduced withholding taxes on dividends received from treaty countries;
• No minimum holding period and no thin capitalization rules;

For the above tax reasons, companies may wish to operate a holding company in Cyprus and exercise management and control of their group in Cyprus.

A Cyprus trading IBC is placed between a buyer and a seller. Goods are delivered directly to their destination and is not necessary to be physically delivered to Cyprus. Purchases/sales invoices will be raised to/from the Cyprus trading IBC. Transactions with Cyprus trading IBC must be on terms and conditions which could be obtained on an arm’s length basis from independent third parties.

Cyprus companies can be used efficiently in trading activities either in the form of purchasing and selling goods or receiving and providing services. Any profit realised by the Cypriot company after deducting all relevant expenses would be taxable at the rate of 12.5% with no further corporate tax implications. The Cypriot company conducting the trading activities would be able to obtain a VAT registration number but the physical delivery of the goods in Cyprus is not a requirement.

Royalties are the payment of license fees or commissions by one individual or entity to another for the use of intellectual property. Common types of intellectual property include:

• Patents
• Trademarks
• Copyright

Tax benefits of Cypriot IP companies

The provisions provide exemptions from tax of income related to IP. More specifically:

• 80% of worldwide royalty income generated from IP owned by Cypriot resident companies (net of any direct expenses) is exempt from income tax
• 80% of profit generated from the disposal of IP owned by Cypriot resident companies (net of any direct expenses) is exempt from income tax
• Any expenditure of a capital nature for the acquisition or development of IP is claimed as a tax deduction in the year in which it was incurred and the immediate four following years on a straight-line
• All the above exemptions are also available for IPs acquired or developed before January 2012

The Cyprus finance IBC usually borrows money from the parent company and lend money to subsidiary companies operating in countries which signed Tax Treaties with Cyprus. Such companies may take advantage of the Cyprus Double Tax Treaties by providing loans in treaty countries or other countries where withholding tax on interest is low or nil.

Interest income of Cyprus finance IBC is considered to arise from the ordinary activities of the company and net interest income will be subject to corporation tax in Cyprus at 12.5%.

Cyprus companies can be used very efficiently for group financing activities as Cyprus has no thin capitalization rules. A Cyprus financing company can provide subsidiaries interest bearing loans using the wide double tax treaty network of Cyprus. This can result in a double dip effect provided the financing is undertaken from a tax efficient location i.e., the interest will be tax deductible in the operating location and will be tax free in the recipient jurisdiction.

As per the general provisions of the Cyprus tax legislation, transactions between related parties should be carried out on an arm’s-length basis.

Cyprus Tonnage Tax System

Cyprus has an EU-approved regime with a very wide and legally endorsed Tonnage Tax System (“TTS”) introduced in 2010 under the Merchant Shipping Law.

Owners of Cyprus Flag ships fall automatically under the tonnage tax regime.

Option for ship owners of foreign flag ships, charterers and ship-managers to be taxed under the TTS, subject to certain conditions.

Cyprus has a competitive advantage in the following areas:

• Registration process is quick and with low costs
• No crew / officers nationality restrictions;
• More than 28 Merchant Shipping Bilateral Agreements;
• No tax on qualifying shipping activities other than the “Tonnage Tax”
• No tax on dividends paid out of profits made from qualifying shipping activities
• No tax on wages or benefits of seafarers on qualifying Cyprus Flag ships
• Allows mixed activities within a company/ group of companies (shipping subject to TT and the other activity is subject to 12,5% corporation tax)

Cyprus Tonnage Tax System – Ship ownership

The TTS relates to any ship-owner of a qualifying vessel that carries out qualifying activities.

Under TT regime, the qualifying ship owners are exempt from Income tax on the below:

• Profits from the use of a qualifying vessel
• Profits from the disposal of shares in a ship-owning company
• Profits from the disposal of the qualifying ship
• Dividends paid out of the above referred to profits at all distribution levels
• Interest income received on funds used as working capital, or on income from shipping operations

Cyprus Tonnage Tax System – Ship chartering

The option applies for ALL vessels (Cyprus/ EU/ EEA/ fleet) chartered under bareboat, demise time, voyage charter, provided the charterer is a legal person and a tax resident in Cyprus.

If the election is not made, profits are taxable under 12,5% corporation tax.

The fleet qualifying criteria are the same as for ship-owners and so is the minimum 10-year duration that should be applicable.

The below types of income is tax exempt for Ship Charterers:

• Dividends paid out of the above profits at all distributions levels
• Interest income related to the working capital/qualifying activity as well as any interest on capital that was used for investments
• Profits from the use of a qualifying vessel

Cyprus Tonnage Tax System – Ship management

The rates applicable to ship managers are 25% of those applied for ship owners and charterers. If the choice is not made, profits are taxable under 12,5% corporation tax.

Tax exemptions for ship managers cover the following:

• Dividends paid out of the above referred to income, at all levels of distribution
• Interest income in relation to working capital/qualifying activity, as long as such income was used for business purposes. Interest income on capital that was used for investments is not included.
• Profits from technical/crew management

The International Trusts Law 69(I) was enacted in 1992, and subsequently amended on 23 March 2012, the Law regulates the establishment and administration of trusts and is designed to complete the spectrum of services the island offers as financial center.

Cyprus International Trusts enjoy important tax advantages and they provide significant tax planning possibilities:

Anonymity
Anyone wishes to keep the ownership of a company anonymous and confidential, can do this by setting up a Discretionary Cyprus Trust to own the shares in the company;

Maintaining funds overseas
An individual, who wishes to invest in business overseas and want to ensure that the profits received are not remitted to the country of his residence may create a Cyprus International Trusts to invest in overseas business

Favourable legal system
Strong legal system based on English Common law

No exchange control
Cyprus International Trusts are not subject to exchange control. The absence of exchange control restrictions and the availability of professional international banking services, make Cyprus a convenient base for the remittance and transfer of funds

Confidentiality
Trusts are set-up in full discretion and anonymity. Any information regarding the trust will only be disclosed in the event of a court order.

Relocation of Cyprus International Trust
International Trusts Law allows the removal of an International trust from Cyprus and vice versa

Global Estate Planning
An individual, through the use of a trust, can arrange for it to be inherited by persons, who due to the legislation of the individual’s country, would otherwise be excluded from the inheritance

Estate duty
There is no estate duty or inheritance tax in Cyprus.

Asset protection
A Cyprus International Trust may be used to protect assets and will not be void or voidable in the event of the settlor’s bankruptcy or liquidation. The Cyprus International Trust may be set aside by the settlor’s creditors if it is proven to the satisfaction of a Cyprus court that the Cyprus International Trust was made by the settlor with the intent to defraud his/her creditors

Stability and Management services
Cyprus offer political and economic stability and high quality services provided for the operation of a trust;

Taxation
Income, gains and profits from sources outside of Cyprus are exempt in Cyprus from income tax, Capital Gains Tax (CGT), Special Defence Contribution (SDC) or any other taxes.

Worldwide income, profit and gains are taxable in Cyprus only where the Beneficiary is a tax resident of Cyprus. Beneficiaries who are non-residents of Cyprus are taxed only on the income derived in Cyprus.

Dividends, interest or royalties received by a trust from a Cyprus international business company are not taxable and not subject to withholding tax.

Capital gain Gains on the disposal of assets of an International Cyprus Trust are not subject to capital gains tax in Cyprus.

Because of its favourable tax regime and its wide network of double treaties, Cyprus holds an important position in international tax planning.

Our firm is prepared to explain advantages enjoyed by Cyprus International Business Companies (IBCs) and to describe how such entities may be incorporated and operate in Cyprus.