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The Cypriot tax system was harmonized with that of the EU through a general tax reform that took place in 2002. The features of the Cypriot tax system are especially beneficial to those who want to use Cyprus to locate a holding company, or an international investment fund, as well as to those who would like to use Cyprus as an intermediate for business operations in Central and Eastern Europe, Russia and South East Asia.
Attractive Features for Holding Companies
Cyprus is an especially attractive jurisdiction for holding companies. First, a Cypriot holding company may receive dividends from a foreign operating company free of withholding tax, or at a lower rate of withholding tax, by virtue of the extensive network of double taxation treaties Cyprus has, or in the case of other EU countries, by virtue of the EU Parent-Subsidiary Directive. Second, it permits the Cypriot holding company to enjoy the tax exemption of these dividends; in other words, the Cypriot holding company pays no tax on the dividends. Finally, it allows the Cyprus holding company to pay out dividends, and interest, to non-residents without any withholding tax, or without giving rise to any tax charge. In short, Cyprus law makes it possible in many cases to pass on dividends from a foreign operating company to a Cypriot holding company, or to non-resident shareholders, or a non-resident parent company, without incurring virtually any tax along the way.
International Investment Funds
Some of these same benefits also make Cyprus an ideal location for the establishment of international investment funds, and other collective investment instruments. Profits from the trading of shares and stocks are exempt from income tax. There is no capital gains tax on the disposal of shares listed on any recognized exchange, or on the sale of immovable property held outside Cyprus, nor on the sale of the shares of companies whose property consists of immovable property outside of Cyprus.
Mergers and Acquisitions
Cypriot law creates a very favorable environment for mergers and acquisitions. There are no taxes on the transfer of a business, no taxes on the transfer of assets, no taxes on the exchange of shares, and no stamp duties are payable on documents to effect the merger. Moreover, losses incurred prior to the merger can be carried forward.
Shipping Tax Regime
There is a special tonnage tax regime applicable for ship-owners, charterers and ship managers based in Cyprus. The regime is approved by the European commission and Cyprus is the first EU member state to apply such a regime. The tonnage tax is calculated on the net tonnage of the ship according to a broad range of bands and rates prescribed within the Law. All non-Cyprus shipping operations may, provided certain criteria are met, choose between a corporate tax at 4.25%, or the tonnage tax regime.
Intellectuall Property
Cyprus has adopted an Intellectual Property (IP) Regime which provide favourable taxation of a wide range of IP related income. The regime provides for an 80% deduction on income derived from IP rights such as trademarks, patents and copyrights, making the effective tax rate on IP related income 2.5%.
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Basic Tax Facts
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Both local and international companies are subject to a uniform corporate tax rate of 12.5%;
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Dividends received by a Cyprus holding company are tax exempt, provided that the company paying the dividends does not engage, either directly or indirectly, more than 50% in activities which produce passive income; or, if the foreign tax burden on the income of the company paying the dividends is substantially lower than the Cypriot tax burden (defined by Cypriot tax authority as not less than 5%), at source. Dividends received which does not fall under this exemption is subject to 17% Special Defense Contribution tax.
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Profits from a permanent establishment located outside of Cyprus are tax exempt, as long as not more than 50% of the income of such a permanent establishment is investment income (dividends and interest). In the event that it is investment income, such income is again not taxable in Cyprus, provided that the said permanent establishment paid "substantial tax" (not less than 5%) at source. Dividends received which does not fall under this exemption is subject to 17% Special Defense Contribution tax.
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Interest income which is deemed to be closely connected to the ordinary course of business, including interest earned by an open-end or closed-end collective investment scheme, is defined as "trading profit" under the law, and is taxed at 12.5%. Any other interest earned is subject to special contribution tax at 30% without deductions.
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Profits from the sale of securities, including the redemption of units or other ownership interests in an open-end or closed-end collective investment scheme, are fully tax exempt.
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