I am pleased to introduce our guide to the international tax and business environment in Cyprus.
Cyprus is well placed literally and metaphorically as the gateway between Europe and the rest of the world. The geographic location of Cyprus at the eastern-most point of Europe, bordering three continents, as well as the Cypriot tax and business environment make Cyprus the ultimate country for investors and businesses moving into Europe and for European business expanding internationally. Cyprus offers many key benefits that contribute to the success of business and investments and Deloitte in Cyprus is well placed to ensure this success.
Deloitte is known for its values of ethos, integrity, specialized knowledge and professionalism. Our ongoing commitment to continuous investment in our people and our deliverables is the key to our success and our ability to look at business issues from every angle is what sets us apart.
Deloitte in Cyprus can coordinate with the Deloitte member firms around the world and other advisers to assist entrepreneurs and groups investing and operating through companies incorporated and tax resident in Cyprus. In addition to intermediary holding and finance companies, our Tax Services team can assist with establishing Cypriot companies to perform other functions which can benefit from the favorable tax system and business environment in Cyprus, such as financial companies, investment trading companies, intellectual property holding companies, shipping companies and companies for oil & gas exploration as well as Cypriot fund management companies and collective investment funds.
Deloitte in Cyprus has the ability to offer practical solutions that are adapted to the needs of all businesses. Whether considering establishment in new markets, acquisitions or rationalization of current operations, our professionals can assist in the planning and implementation. Deloitte in Cyprus will ensure that investors and businesses will achieve significant benefits in these cross-border transactions and investments.
We at Deloitte Cyprus look forward to working with you.
Christis M. Christoforou
Chief Executive Officer
The Cyprus business Environment
In recent years Cyprus has been voted the most attractive European tax regime by major business organizations across Europe. Cyprus has been commended for the stability of its tax law, the consistency in interpreting its tax legislation and its low tax rates. This accolade shows how the Cyprus tax system, combined with its first-rate infrastructure, highly skilled workforce and membership of the European Union has made Cyprus the international business hub it is today.
Reputation and stability
Cyprus joined the European Union in 2004, resulting in an economy offering a great number of advantages within a common European market. The Euro was adopted by Cyprus as its unit of currency on 1 January 2008, further confirming the country's macro-economic stability and its commitment to low inflation, low interest rates and high growth.
Cyprus participates in the European Union's internal market where there is free movement of goods, services and capital. European citizens are able to conduct business, travel to, and live in Cyprus with no legal restrictions.
Demonstrating a stable financial and business-friendly environment since the 1970s, Cyprus has attracted foreign investment and capital flows for decades. The country's financial and regulatory environment is harmonized with that of the European Union and the Cyprus tax system is aligned with European principles of equality within the framework of the European Union Code of Conduct for business taxation and demonstrates a commitment by Cyprus to the OECD against harmful tax practices.
In April 2009 the OECD included Cyprus on its original white list as one of only 40 countries in the world that have substantially implemented internationally agreed tax standards, being the highest categorization possible. Being on this OECD white list supports Cyprus's position as a sound and reputable environment from which international business operates.
The island of Cyprus is situated in the eastern Mediterranean at the hub of three continents, linking Europe with the Middle East, Africa and Asia.
Cyprus is one hour by air from Athens, Egypt and Israel, three hours from Dubai and Moscow and four hours from London.
Cyprus is two hours ahead of Greenwich Mean Time (GMT).
Banking & financial regulation
Commercial banking follows the British and European Union models and is of a very high standard. There are currently over 45 Cypriot and international banks operating in Cyprus and, of course, no exchange controls.
The banking system conforms to EC Directives, under the regulation of the constitutionally independent Central Bank of Cyprus, as integrated with the Eurosystem. The Bank's governance is compatible with the provisions of the Treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank.
The Cyprus Securities and Exchange Commission (CySEC) supervises and controls the operation of the Cyprus Stock Exchange and the issuers of securities listed on the Exchange.
The Central Bank and CySEC supervise and licence the growing number of investment services companies, collective investment schemes, brokerage firms, investment consultants and mutual fund management companies.
Cyprus has a well-functioning common law legal system based on principles established through historical links with the United Kingdom.
The origin of Cyprus company law and other laws regulating business is the laws of the UK, updated for 21st century business practice and harmonised with EC Directives.
The familiarity of the legal and commercial systems assists international business people in working within the Cypriot commercial environment. English is spoken universally and is the accepted language of business. Political respectability Cyprus has excellent diplomatic and economic relations with the rest of Europe as well as, China, Russia, India, North America and the countries of the Middle East. As a result, Cypriot entities enjoy great respectability around the world.
Cyprus has a highly advanced telecommunications infrastructure system with a number of companies providing modern telecommunication products and solutions.
The two international airports in Cyprus are served by over 35 international airlines. There are daily flights to other European countries, Russia and the Middle East including major hubs for onward and long haul international destinations. New airport terminals were completed at both airports during 2008 and 2009 that can serve up to 10 million passengers per annum.
Cyprus has an open-market economy with the private sector comprising the backbone of economic activity. Private enterprise is greatly promoted and supported by decades of consistent government policy.
Cyprus ranks amongst the top half of EU countries in terms of GDP per capita (currently €22,000 per annum). In recent years up to 2009 the economy has been growing at an average rate of 4% in real terms and the unemployment rate is in the region of 5% of the labour force. In addition, inflation has been relatively modest with increases in the consumer price index in the region of 2.5% per annum in recent years.
High standard of living – low cost base centre and skilled workforce
Economic indicators place Cyprus amongst the few international financial centres with low operational costs. At the same time, the island offers a high standard of living with an enjoyable climate and a very low crime rate making it an ideal place to live and conduct business.
The costs of setting-up and maintaining a structure in Cyprus are low when it comes to incorporation costs and fees for meeting Cypriot tax and company law compliance obligations.
The cost of labour, rents and other infrastructure are highly competitive and often lower than in other European countries.
Cyprus has a young and flexible work force, with university education obtained predominantly in the UK and the USA. The island ranks among the leading countries in the world and the highest in the European Union in respect of university graduates in proportion to its population, with the percentage of graduates from tertiary institutions being the highest in the EU.
The Cyprus tax system
Cyprus has become a favored location for international commerce as well as for reputable multinationals seeking a legitimate tax efficient jurisdiction – raising Cyprus to a new level of international business.
Cyprus's advantageous tax system
Cyprus has all the tax attributes expected from an international financial centre
The Cyprus tax legislation and its regulation is predictable and straight forward in nature. Relations between the business community and the tax authorities are excellent and ensure the efficient taxation of the commercial and financial sector. By providing a transparent and efficient environment, the tax system enhances Cyprus's competitiveness and contributes to making Cyprus an attractive jurisdiction in which to structure international operations.
Corporate tax rate
Cyprus has a corporate income tax rate of 10%. This is the lowest corporate tax rate in the European Union.
Exemption from tax on dividend income
Dividend income is exempt from tax irrespective of its source provided that the company paying the dividend either engages directly or indirectly in more than 50% of activities that give rise to non-investment income or the tax burden on the dividend paying company's income is not lower than 5%.
Dividends are not considered to be sourced from investment income if they are derived directly or indirectly from trading subsidiaries.
No withholding taxes
Dividends paid to non-resident shareholders are exempt from withholding tax in Cyprus. Also, no withholding tax is imposed on interest paid from Cyprus as well as on royalties paid from Cyprus in respect of intellectual property exploited outside Cyprus. The nil withholding tax rates apply irrespective of whether the recipient is a body corporate or an individual, the country of residence of the recipient or whether a relevant tax treaty exists.
Capital gains and income tax exemption for securities
Cyprus does not impose income or capital gains tax on the profits and gains derived from the disposal of securities, irrespective of whether the profits and gains are considered to be of a revenue or capital nature. Securities, as defined in the law, include shares, bonds, debentures, founder's shares and other securities of companies or other legal persons and options over such securities. Capital gains and income tax exemption for real estate Cypriot companies can be used to hold real estate or other assets outside Cyprus with no Cypriot capital gains tax implications on disposal of the assets as capital gains tax only applies to gains on the disposal of immovable property which is situated in Cyprus or unlisted shares in a company which owns immovable property situated in Cyprus.
Permanent establishment abroad
Profits from a permanent establishment maintained abroad are generally exempt from tax in Cyprus.
Interest incurred by a Cypriot company is generally deductible if incurred in respect of funding the acquisition of assets used in a business which derives taxable income. Practice statements and case law provide further guidance on deductibility of interest.
Cyprus does not have any thin capitalization rules or minimum capitalization requirements.
A wide network of tax treaties
Cyprus boasts an extensive network of tax treaties, currently with more than 45 countries, including countries in North America, Western and Eastern Europe as well as emerging markets such as China, India and Russia.
Generally, most treaties provide for reduced or nil rates of withholding tax on dividends, interest and royalties paid from the treaty country and the avoidance of double taxation in the case where a resident in one of the treaty countries derives income from the other treaty country.
Unilateral tax credit relief
Relief for taxes paid abroad is in the form of a tax credit if the respective income is subject to tax in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty. Where a treaty is in force, the treaty provisions apply if more beneficial. Where dividend income is received from a company resident in the European Union or if a tax treaty provides, an underlying tax credit is also allowed to the Cypriot recipient of the dividend against any tax payable on that income.
Advance rulings and prior approvals
The Cyprus tax authorities provide advance interpretations of the law under a ruling system.
The headline Cypriot VAT rate is 15%, the lowest in the European Union. Depending on its activity, a Cypriot company may be able to register for VAT in Cyprus and recover VAT suffered.
Capital & net worth taxes, capital & stamp duties
Cyprus does not have any annual capital taxes and net worth taxes and there are no significant capital and stamp duties.
Cyprus has fully adopted the EC Merger Directive and therefore where a transaction is a "reorganization", it is exempt from corporate income tax, capital gains tax, stamp duties and property transfer fees.
A reorganization generally includes a merger, division, part-division, transfer of assets and exchange of shares involving companies which are resident in Cyprus and/or companies which are not resident in Cyprus.
Cross border mergers and re-domiciliation of companies
Cyprus legislation allows for the merger of two or more EU member companies, whether a merger of Cypriot or Cypriot and non-Cypriot EU member companies and whether the Cypriot company is the surviving company or not.
Non-Cypriot companies which are allowed by their jurisdiction of incorporation to deregister in that jurisdiction and register elsewhere are able to become domiciled in Cyprus. Cypriot companies are also permitted to deregister from the Cypriot Register of Companies and become domiciled in another jurisdiction.
Cross-border and domestic mergers, as well as the redomiciliation and change in jurisdiction of tax residency are generally tax neutral, there being no Cypriot "exit taxation" applied to such restructures.
Liquidation of a Cypriot company
No capital gains tax, income tax or any other taxes arise on the liquidation of a Cypriot company owned by nonresident shareholders, irrespective of the method of liquidation.
Personal tax rates
The personal tax rates are progressive and reach a top marginal tax rate of 30% on income in excess of €36,300 per annum.
Relief for overseas employment
A Cypriot resident working outside Cyprus for a non- Cypriot employer is exempt from taxation on their salary that is attributable to their overseas duties if these duties result in spending more than 90 days outside Cyprus in a calendar year.
Relief for non-residents taking up employment in Cyprus
Individuals physically present in Cyprus for less than 184 days in a calendar year are taxable in Cyprus only on income derived from sources within, and employment exercised in Cyprus.
A non-resident taking up employment and becoming resident in Cyprus will be given a 20% tax-fee allowance (capped at €8,550) on employment income for the three years following the year of becoming resident in Cyprus.
The formation & uses of Cyprus companies
Formation of companies
The Cypriot company
A Cypriot company can either be a private company established by one or more persons or a public company established by any seven or more persons who cooperate for any legal purpose and form a limited liability company, by signing the Memorandum of Association and by complying with the provisions of the Cyprus Companies Law.
A company's constitutional documents are its Memorandum and Articles of Association which specify the activities in which the company may engage and the means by which it will govern its affairs.
There is no minimum required issued and paid up capital for a private company, however it is common to have share capital of at least €1,000.
Every company must have a company secretary and a registered office address in Cyprus which may also be used as the business address of the company. Although not a requirement, it is common practice for the majority of the directors to be Cypriot residents.
Every Cypriot company is required to maintain proper books of account and to prepare audited financial statements in accordance with IFRS.
In accordance with Cypriot tax law, every company is required to submit an annual corporate income tax return.
There is also the requirement for annual financial statements prepared in Greek and a company annual return to be submitted to the Registrar of Companies. The translations are often undertaken by the local advisers at minimal cost.
Deloitte can assist with all aspects of conducting business in Cyprus including arranging for the formation of a Cypriot company, partnership or trust and the ongoing administration and management of an entity.
Deloitte can co-ordinate audit, payroll and bookkeeping services and Deloitte Human Capital Services can provide assistance with recruitment of personnel as well as obtaining work and residence visas, if required.
Common Cypriot companies
The equity holding company
A Cypriot holding company serves as a perfect gateway to the EU, receiving dividends suffering no withholding tax and paying dividends to shareholders without deduction of withholding tax.
A Cypriot holding company serves as a perfect gateway to the following countries with which Cyprus has advantageous tax treaties, receiving dividends suffering no or little withholding tax and paying dividends without deduction of withholding tax:
1. Russia – 1/3rd of all capital investment into Russia flows through Cyprus.
2. Ukraine – the best treaty in force with Ukraine.
3. India – Cyprus has the sole right to tax capital gains on sale of shares in a company that owns Indian property, although Cyprus does not tax foreign capital gains.
The oil and gas exploration & extraction company
Combined with Cyprus's permanent establishment exemption, exploration and extraction activity can be undertaken free of Cypriot tax.
The finance and/or treasury company
A Cypriot company can receive interest on loans to EU group companies with no withholding tax and can pay interest without deduction of withholding tax. Other key jurisdictions with no withholding tax on interest include Russia and Ukraine.
A Cyprus company trading in securities (e.g. shares, bonds, repos) will have no tax liability as income & gains on disposal of such securities are exempt from Cypriot tax.
Ship owning & management
Cyprus has the 10th largest merchant fleet in the world by registrations. Specific tax exemptions apply to companies owning ships or managing and employing crews working in international waters. Cyprus has a very competitive tonnage tax regime.
Regional employment company
Minimal Cypriot compliance obligations allow offshore employees to be paid from Cyprus without Cypriot tax, social security or other obligations.
Cyprus investment funds
The Cyprus fund industry
Investment funds are one of the up and coming sectors within the Cyprus financial services industry.
There are two types of funds that can be set up in Cyprus: UCITS and non-UCITS, the latter known in Cyprus as ICIS – International Collective Investment Schemes.
In addition there is the possibility to distribute foreign UCITS and foreign non-UCITS in Cyprus.
UCITS may take the form of a:
- variable capital company; and
- mutual fund.
The International Collective Investment Schemes (ICIS) may take the form of a:
- variable capital company;
- fixed capital company;
- unit trust; and
- limited partnership.
An ICIS may be established with a limited or unlimited duration and are designated as an:
- Experienced Investor Fund; or
- Private Investment Fund; or
- Retail Fund.
The ICIS fund offers plenty of advantages for the experienced investor. While UCITS must comply with specific investment and other restrictions, non-UCITS collective investment schemes do not have any restrictions on the percentage of assets held in particular securities issued by a single issuer and have flexible requirements for the appointment of a custodian, fund administrator or management company.
Taxation of investors
- There are no Cypriot taxes for investors in a Cypriot fund on the disposal or redemption of fund units/shares.
- There are no withholding taxes on distributions made to non-Cypriot investors by a Cypriot fund.
Taxation of funds
- A fund is exempt from tax on the disposal of its investments in fund units, shares, other equity securities and bonds.
- A fund is exempt from tax on distributions received from investments in funds and shares held either directly or via special purpose vehicles.
- Interest income derived by a fund is subject to 10% income tax (net of deductible expenses and foreign tax credits available).
The Cyprus shipping industry
Deloitte is the leader in providing professional services to the Shipping Community in Cyprus and has an excellent reputation in shipping worldwide. Our clients include the world's largest ship management and shipping companies operating through Cyprus as well as leading shipping lines, cruise lines, ferries, ports and port authorities.
The development of Cyprus into an international maritime centre began in 1963 when the government offered the first incentives aimed at the encouragement of ship ownership and the registration of vessels under the Cyprus flag.
The accession of Cyprus to the European Union in 2004 boosted further the registration of vessels in the Cyprus Registry as Cyprus is one of only two countries in the European Union with an "Open Registry".
Today Cyprus ranks 10th in the world with over 1,000 ships exceeding 20 million gross tonnage. In addition to the country's excellent geographical position, this achievement is due to the cost competitiveness of the Cypriot Ship Registry, the island's well-developed maritime infrastructure, its excellent international relations as well as the high standard of services offered to international shipping.
Registration fees in Cyprus are low, and compare favorably with those in other registries. A substantial percentage of the vessels in the Cyprus registry is currently managed from specialized ship-management companies.
In summary, advantages of the Cyprus shipping legislation include: no income tax, estate duty or capital gains tax; taxation under the tonnage tax system; no income tax in Cyprus for foreign crew; no stamp duty on documents or mortgage deeds.
For further details on the shipping industry in Cyprus, please refer to our publication Shipping in Cyprus. All our publications are available at www.deloitte.com/cy.
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Deloitte tax professionals can arrange for the formation of a Cypriot company, partnership or trust as well as the provision of corporate and secretarial services ensuring that these fully comply with their statutory obligations. We can coordinate the undertaking of increases in company share capital, statutory reductions in capital, mergers and demergers as well as other corporate restructuring and voluntary liquidations of companies.
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