The country is looking to expand its financial services business, building on EU membership and its traditional ties with Eastern European states such as Russia
Throughout the world, capital is becoming ever more mobile and responsive to changes in economic and social conditions. Barriers to capital movements are fast disappearing and this has led to a worldwide trend towards lower tax rates. Tax differences have become a very significant factor in commercial decisions and hence the development of numerous financial centres in the world.
Cyprus has succeeded in differentiating itself from other financial centres. It has a favourable tax system with a wide network of double tax treaties. As a result, Cyprus today is firmly established as a reputable international business, financial and commercial centre.
In the past decade, Cyprus emerged as the main financial centre for inward investment in Russia, Central and Eastern Europe. This is due to the excellent infrastructure of Cyprus, its geographic location, the strong cultural and political ties it has with this region and its comprehensive treaty network with all the major countries in the region.
Since 1 May 2004 Cyprus has been a member of the European Union (EU), the tax system has been reformed and the tax legislation is EU and OECD compatible. Cyprus has the lowest corporation tax rate in the EU. The favourable tax regime makes Cyprus the ideal location for investors who wish to invest into Europe or investors who wish to invest from Europe.
Some of the main features of the Cyprus tax system are as follows:
Scope of tax
Tax is imposed on all Cyprus 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 they spend more than 183 days in Cyprus, in a calendar year.
From 1 January 2005, the corporation rate of tax is 10% on corporate profits.
Corporations do not pay any tax on dividends received from other Cyprus resident companies.
Dividends received by Cyprus resident corporations from foreign corporations are exempt from tax (with minor limitations as set out in the law).
When dividend income is not exempt there is a 15% defence tax contribution. Tax credits for taxes paid abroad are available.
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 defence tax contribution purposes. The special provisions governing 'passive' interest income result in an effective tax burden of approximately 15%.
Other significant provisions
• Exemption from tax of profit generated from transactions in securities, as defined in the law.
• Losses can be carried forward indefinitely.
• Companies part of a group, as defined under the 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.
Cyprus does not impose any withholding tax on dividend, interest and royalty payments made to non-Cyprus 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.
Under Cyprus law all expenses incurred for the production of the income are deducted before arriving at the taxable income.
A Cyprus investment vehicle is suitable both for EU inbound or outbound investments. However, there are types of investment activities which are indeed ideally suited to the Cyprus tax environment such as:
• International Collective Investment Schemes (ICIS)
• Cypriot Investment Firms (CIF)
The International Collective Investment Schemes Law, 1999 has provided the required legal framework for the registration, regulation of operations and supervision of ICISs. An ICIS can take the following legal forms:
• International fixed capital company
• International variable capital company
• International unit trust scheme
• International investment limited partnership
ICIS schemes cannot be marketed to the general public. Such schemes can be marketed to experienced investors or as private schemes, with the number of investors not exceeding 100.
ICISs are subject to tax like any other entity. The tax system is described above. In a nutshell. what is significant for ICISs is:
• Exemption from tax on foreign dividends.
• Exemption from tax on profit from sale of securities as defined.
• No withholding tax on income repatriation by the ICISs.
ICISs must be approved by the Central Bank of Cyprus which is the regulatory and supervising authority for the schemes, for their managers and their trustees.
In order to recognise the scheme, the Central Bank must be satisfied, among other things, as to the honesty and competence of the directors, promoters, managers and trustee of the scheme.
The Ucits law 20(I) 2004 provides the legal framework for the registration, regulation and marketing of local and foreign funds in Cyprus. Under this law, local Ucits may take the following legal forms:
• Mutual funds.
• Variable capital investment companies.
Ucits are subject to tax like any other entity. In a nutshell, what is significant for Ucits is the exemption from tax on foreign dividends, exemption from tax on profit from sale of securities as defined and no withholding tax on income repatriation by the Ucits.
To set up and operate a mutual fund in Cyprus the permission of the Cyprus Securities and Exchange Commission (CySEC) is required. The application needs to meet certain criteria:
• Both the fund manager and the custodian (one must be independent of the other) of the mutual fund need to meet the criteria set out by the CySEC.
• Fund rules need to be approved by the CySEC.
• The name and information memorandum of the fund needs to be approved by the CySEC.
• The minimum capital is CYP1m, which must be deposited within three months of the granting of the licence.
To set up and operate a variable capital investment company the permission of the CySEC is required. As such, the application needs to meet criteria similar to those required for a mutual fund and in addition:
• There are special rules for the constitutional documents of the company.
• Custody of the assets is normally assigned to an approved custodian.
• Management of assets is usually assigned to a CySEC-licensed fund manager.
The CySEC requires all foreign Ucits which qualify under the EU Directive 85/611/EEC and which are based in another EU member state which wish to market their units/shares in Cyprus to apply to the CySEC for registration.
In this respect a written notification to the CySEC must be submitted by the foreign Ucits along with backing documents, such as attestation by the competent authority in the state of domicile, fund rules, latest prospectus and accounts etc.
Cypriot Investment Firms (CIFs)
The Investment Firms Act of 2002 provides the legal framework for the provision of investment services as well as for the registration, regulation of operations and supervision of CIFs.
• Reception and transmission, on behalf of investors, of orders; execution of orders.
• Dealing for own account.
• Managing of investment portfolios.
• Safekeeping services
• Safe custody services.
• Granting of credits or loans to clients
• Financial advice.
• Services connected to underwriting.
• Investment advice.
• Foreign-exchange services.
• Granting CIF authorisation.
Granting CIF authorisation
CIFs must be licensed by the CySEC, which is the relevant regulatory and supervisory authority. In this respect, a written application to the CySEC must be submitted and accompanied by a number of documents. Some key documents that should accompany the application include:
• Business plan.
• Articles of Association.
• An excerpt of the criminal record, certificates of non-bankruptcy and resumes of the members of the board of directors, the executives and shareholders possessing a qualifying holding, as well as their answers to a questionnaire issued by CySEC.
• Internal regulation (operations manual),
• Organisational structure.
• Description of the computer network and electronic infrastructure.
• Draft regulation for the prevention of the legalisation of the proceeds of criminal activities.
After the granting of the authorisation, the CIF must comply with the ongoing obligations provided in the law and the relevant CySEC directives.
Cyprus has the lowest rate of corporation tax in the EU at 10%.
The country established ICIS funds in 1999 that are aimed only at experienced investors.
Group of companies can use consolidated results, allowing gains to be offset against losses elsewhere in the organisation.
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