Cyprus as an International Financial Centre (IFC)

European enlargement and the accession of Cyprus opened up a new gate to investors.
Inbound Investments

Cyprus is an attractive place for direct investment. The strategic location of the island, its excellent climate, the well developed infrastructure and the plentiful supply of high quality, well trained labour are some of the advantages Cyprus has to offer. In addition to these, the favourable tax regime makes Cyprus an ideal location for manufacturers, especially those with Middle East/North African export activities. As a consequence of the Government’s general policy of non-intervention in business operations, in July 2003 a new investment law was passed by the House of Representatives. The official government policy is welcoming to foreign investment provided that this does not have adverse environmental effects.

Holding International Investments

Tax costs play a significant role in investment decisions. Investors aim in maximizing after tax return on investment. Therefore investment structures, which have the least tax leakage, are preferred by investors and are recommended by the advisors.
As such, a Cypriot investment vehicle can in many cases collect income, which is a charge against high tax income. Foreign withholding tax is eliminated or reduced under double tax treaties or under EU directives. Rate of tax in Cyprus is low. The income can then be repatriated in any form the investor wishes without any Cyprus withholding tax.
This investment vehicle is suitable both for EU inbound or outbound investments. There are no investment activities that are inappropriate for the Cypriot tax environment.
However there are investment activities which are indeed ideally suited to Cypriot tax environment such as:
• Holding Companies
• Finance Companies
• Royalty Companies
• Investment funds
• South Europe, Middle East, Russia and Central and Eastern Europe
• Head office operations European enlargement and the accession of Cyprus opened up a new gate to investors. Cyprus is no longer just the traditionally strong link of investments in and out of Central and Eastern Europe and Russia, but it is also a strong connecting link of investments in or out of the EU.

The tax climate offers to the investors:
• low taxation – the lowest rate in EU
• extensive double tax treaties network
• exemption from tax in most cases on dividend received
• exemption from tax of profit generated from transactions in securities as defined
• exemption from withholding tax on the repatriation of income either of dividends, interest and on almost all royalties
• access to EU directives

Tax System Reformed Because of its EU accession Cyprus reformed its tax system to bring it in line with EU requirements and also within the OECD requirements against harmful tax practices. Thus the reformed tax system is in full compliance with EU and OECD. As from 1 January 2003 the main features of the tax system of Cyprus are as follows:
Scope of Tax Tax is imposed on all Cypriot resident persons (individuals and corporations) on their worldwide income. A corporation is tax resident in Cyprus when its management and control is exercised in Cyprus. An individual is tax resident in Cyprus when he/she spends more than 183 days in Cyprus, in a calendar year.

Corporation Tax The Corporation Tax rate is 10% and is the lowest standard rate in the EU.

Dividend Income Corporations do not pay any tax on dividends received from other Cypriot tax resident companies.
Dividends received by Cypriot tax resident corporations from foreign corporations are exempt from tax when the following requirements are met. The dividend receiving company must own at least 1% of the share capital of the paying company. The exemption will not be granted only if:

1 Directly or indirectly more than 50% of the activities of the paying company result in investment income, and
2 The paying company is subject to tax at a rate substantially lower than the Cypriot rate.

The exemption from tax also applies to profits of a permanent establishment the Cypriot Company has in another jurisdiction. The conditions to be satisfied are the same as the conditions for dividends. When dividend income is not exempt there is a 15% defense tax contribution. Tax credits for taxes paid abroad are available.

Interest Income When interest income is the result of the ordinary activities of the company or is closely connected to the ordinary activities of the company, it is subject to tax like any other ”active” trading income. If the interest income fails the test of “active” trading income then it is subject to tax both for corporation tax and defense tax contribution purposes. The special provisions governing “passive” interest income result in a combined tax burden at a rate of 15%. Group finance interest income is considered as trading income.

Other Significant Provisions Losses can be carried forward indefinitely. Companies part of a group, as defined under law, can consolidate their results, thus allowing losses of one company to be set off against profit of another company. Mergers, acquisitions and spin offs, as per the same rules as the relevant EU directive, can be effected without tax cost.

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Withholding Taxes Cyprus does not impose any withholding tax on dividend, interest and royalty payments made to non-Cypriot resident recipients. In the case of royalties the exemption applies for royalty payments when the right/asset is used outside of Cyprus. When the royalties are connected with the use of the right/asset within Cyprus there is a 10% withholding tax, subject to treaty provisions.

Expense Deductibility Under Cypriot law all expenses incurred for the production of the income are deducted before arriving at the taxable income.

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