Cyprus, officially the Republic of Cyprus, is a Eurasian island country in the Eastern Mediterranean, east of Greece, south of Turkey, west of Syria and north of Egypt. It is the third largest island in the Mediterranean Sea and one of its most popular tourist destinations. An advanced, high-income economy with a very high Human Development Index, the Republic of Cyprus was a founding member of the Non-Aligned Movement until it joined the European Union on 1 May 2004.

The earliest known human activity on the island dates back to around the 10th millennium BC. Archaeological remains from this period include the well-preserved Neolithic village of Khirokitia, which has been declared a World Heritage Site by UNESCO, along with the Tombs of the Kings. Cyprus is home to some of the oldest water wells in the world, and is the site of the earliest known example of feline domestication. At a strategic location in the Middle East, Cyprus has been occupied by several major powers, including the empires of the Hittites, Assyrians, Egyptians, Persians, Rashiduns, Umayyads, Lusignans, Venetians and Ottomans. Settled by Mycenean Greeks in the 2nd millennium BC, the island also experienced long periods of Greek rule under the Ptolemies and the Byzantines. In 333 B.C., Alexander of Macedon conquered the island from the Persians. The Ottoman Empire conquered the island in 1571 and it remained under Ottoman control for over three centuries. It was placed under British administration in 1878 until it was granted independence in 1960, becoming a member of the Commonwealth the following year.

In 1974, following 11 years of intercommunal violence, using an attempted coup d'état by Greek Cypriot nationalists and elements of the Greek military junta with the aim of achieving enosis (union of the island with Greece) as a pretext, Turkey invaded and occupied the northern portion of the island, resulting in the partition of the island, Turkey's objective since 1955. The intercommunal violence and subsequent Turkish invasion led to the displacement of hundreds of thousands of Cypriots and the establishment of a separate Turkish Cypriot political entity in the north. These events and the resulting political situation are matters of ongoing dispute.

The Republic of Cyprus has de jure sovereignty over the entire island of Cyprus and its surrounding waters except small portions, Akrotiri and Dhekelia, that are allocated by treaty to the United Kingdom as sovereign military bases. The Republic of Cyprus is de facto partitioned into two main parts; the area under the effective control of the Republic of Cyprus, comprising about 59% of the island's area, and the Turkish-controlled area in the north, calling itself the Turkish Republic of Northern Cyprus, covering about 36% of the island's area and recognized only by Turkey.

With the enactment of its New Tax Legislation on 1 January 2003 (including 3 amending laws, the last one in November 2004) and the abolition of the “offshore regime”, Cyprus has put a simplified, effective and transparent tax system in place that is fully EU, OECD, FATF and FSF compliant. The result is a stable EU, “non-offshore” tax-competitive jurisdiction with exciting tax planning potential for EU and non-EU clients alike.

In summary, Cyprus is the “lowest-tax EU Jurisdiction” that is not offshore. The standard corporate tax rate of 10% (0% for shipping companies, 4.25% for maritime management companies) is the lowest in the European Union, and the lowest “non-offshore jurisdiction corporate tax rate” in the world. Cyprus is now a premier holding, finance, royalty and trading company jurisdiction.

However, sometimes, best results can be achieved by combining Cyprus with other jurisdictions such as The Netherlands and Luxembourg.

Beneficial use of EU Directives enacted into Cyprus Law (effectively “copied” - transposed into Cyprus Law and their benefits extended to residents of Third Countries):

  1. Parent / Subsidiary Directive (no withholding tax on payment of dividends, no transitional period [immediate effect], no minimum participation (shareholding limits), no minimum holding period, dividend exempt subject to conditions, tax credit for tax withheld abroad).
  2. Interest / Royalties Directive (no withholding tax on interest paid to non-residents, no transitional period [immediate effect], 25% minimum participation [shareholding] required only in the case of royalties, no minimum holding period, interest taxed depending on nature, royalties subject to corporation tax, tax credit for tax withheld abroad).
  3. Merger Directive (involves resident and Non-Resident Companies, leads to elimination of the tax consequence of any reorganization, merger, division, transfer of assets, and exchange of shares).

Cyprus has a wide and beneficial Double-Tax Treaty (DTT) Network. There are currently 40 DTTs in force and 39 others being negotiated. It has to be noted here that Cyprus has fewer DTTs than some competing EU Jurisdictions, but in many cases more beneficial than its competitors’ treaties such as those with Russia, Romania, Yugoslavia and the whole of Eastern Europe; and the Middle East. The existence of these treaties, combined with the low overall tax paid by Cyprus Companies, offer significant possibilities for international tax planning through the island. The double tax treaties concluded by Cyprus, lowers or eliminates foreign withholding taxes on dividends, interest and royalties or capital gains paid out from or arising in the contracting states, some also include particularly beneficial tax sparing credit provisions for dividends, interest and royalties. A "tax sparing credit" is a tax credit available to the recipient, which is higher than the actual tax paid in Cyprus. Tax Sparing Credit provisions can be found in the treaties concluded with Canada, China, Czech and Slovak Republics, Denmark, Egypt, Germany, Greece, India, Ireland, Italy, Malta, Mauritius, Poland, Romania, Russia, Syria, Thailand, UK and former Yugoslavia.

Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Cyprus Holding Companies are the following:

  • Participation Exemption:
  1. Foreign dividends are tax-exempt (provided that a minimum 1% holding in the company paying the dividend is maintained. Also note that this exemption does not apply if the non-resident company paying the dividend carries on, directly or indirectly, more than 50% of investment activities - passive income - AND the overseas tax burden is significantly lower than the Cyprus Tax Burden [(practically interpreted by the Tax Authorities to mean less than 5% “headline tax”] and NO other rules, minimum holding period, minimum investment thresholds etc.).
  2. No capital gains tax is payable on the sale or transfer of securities and the gains are exempt from Income Tax (except gains from disposal of shares in companies owning Real Estate situated in Cyprus - only to the extent that the gain relates to the particular Cyprus Real Estate). Also, profits from a Permanent Establishment (PE) outside Cyprus are tax-exempt and its losses can be set-off against Cyprus Income (this exemption also does not apply if the PE carries on more than 50% of investment activities - passive income - AND the overseas tax burden is significantly lower than the Cyprus tax burden). This exemption (PE) in conjunction with the use of some of Cyprus’ DTTs can result in PE profits avoiding tax altogether.
  • Low or no withholding taxes on outgoing dividends, interest and royalties (no withholding tax on dividends and interest irrespective of the country or residence of the recipient (even offshore jurisdictions) or the existence of a Double Tax Treat; no withholding tax on royalty payments for use of the rights outside Cyprus, 10% if the rights will be used in Cyprus (subject to DTT & EU Directives) and 5% on films (subject to DTT & EU Directives).
  • No capital gains or income tax on the liquidation of participations or the liquidation of the Cypriot Holding Company itself.
  • Tax losses are carried forward indefinitely and can also be surrendered as group relief.

Our Cyprus office was opened in July 2006.