Tax publicatin 4.2014 Cyprus internatinal business envirnment and tax favrable system Cyprus Cyprus is strategically lcated between Eurpe, Asia and Africa and is recgnized as an internatinal center f excellence fr the prvisin f prfessinal services. A cmbinatin f its lw tax regime, duble taxatin treaties netwrk and legal system makes Cyprus a desirable lcatin fr the frmatin f varius types f cmpanies. Since 2004, Cyprus jined the Eurpean Unin (EU) resulting in a great number f advantages in the EU market. Cyprus has ne f the mst attractive tax systems in Eurpe which is effective, transparent and fully cmpliant with the EU laws and regulatins. Cyprus s legal system is based n the principles f the United Kingdm (UK) which assists internatinal business t be carried ut thrugh the cuntry. Other advantages High standard f living, English language is widely spken and accepted language f business, Infrastructure that supprts internatinal business. The csts fr incrprating and maintaining a Cyprus cmpany are lw cmpared t ther EU cuntries, High standard f prfessinal services prvided by lawyers, accuntants, auditrs, tax advisrs and bankers, High standard f educatin. The cuntry has been ranked ne f the tp cuntries in EU in respect f its university graduates in prprtin f its ppulatin, Internatinal airprts serving a high number f internatinal and Eurpean airlines, Sund banking sectr (lcal and ffshre bank crpratins) ffering nline banking services, Excellent telecmmunicatin systems with high end technlgy prducts and slutins. 1 P a g e
Tax publicatin 4.2014 Cmmnly used tax structures Hlding Cmpany Dividends received frm a cmpany resident in the Republic are nt taxable. Dividends received frm a cmpany nn-resident in the Republic are nt taxable (subject t certain cnditins). Dividends received withhlding tax n freign jurisdictin Cyprus has signed an extensive number f Duble Tax Treaties (DTTs). Based n these treaties a Cyprus cmpany has the ability t extract dividends at a zer r lw tax rates f freign withhlding tax. Dividends paid t nn-resident in the Republic sharehlders (whether cmpanies r individuals) are nt subject t any withhlding tax in Cyprus. Dividends paid by a Cyprus tax resident Cmpany t anther Cyprus tax resident Cmpany are exempt frm tax, prvided that the dividend is nt indirectly distributed after the expiry f a fur year perid frm the end f the year t which the prfits giving rise t the dividend relate. This prvisin is in frce as f 1 st January 2012. N withhlding taxes n utging dividends, interest and ryalties (with sme exceptins). N capital gains tax n the sale r transfer f securities and the gains are exempt frm the Incme Tax prvisins (except gains frm dispsal f shares in cmpanies wing immvable prperty situated in Cyprus). Tax lsses can be carried frward against taxable incme ver a perid f five years frm the end f the tax year in which they were incurred. Prfits frm a Permanent Establishment (PE) utside Cyprus are tax exempt and its lsses can be set ff against Cyprus Incme (under certain cnditins). Hwever, such lsses are recaptured when the verseas permanent establishment becmes prfitable. Unilateral tax relief is granted t all Cyprus Cmpanies fr freign tax suffered irrespective f the absence f a duble tax treaty. N bligatin fr the Hlding Cmpany (r right) fr VAT registratin & cmpliance prvided that there will be n Vatable activities. Tax free liquidatin. There are n inheritance r estate taxes. Cyprus impses n tax n wealth. 2 P a g e
Tax publicatin 4.2014 Financing Cmpany The use f a Cyprus cmpany fr grup finance is extremely attractive. Cyprus finance cmpanies can fulfill intra-cmpany financial management functins, such as granting f lans fr prject financing r wrking capital requirements. Cyprus cmpanies can be used fr grup financing activities as Cyprus has n thin capitalizatin rules r withhlding tax n interest. Hwever, special cautin must be exercised in relatin t interest deductins in respect f lans used fr the purchase f assets nt used in the business, as such interest expenses are disallwed fr tax purpses. A Cyprus financing cmpany can prvide subsidiaries interest bearing lans using the wide tax treaty netwrk f Cyprus. This can result in a duble dip effect prvided the financing is undertaken frm a tax efficient lcatin i.e., the interest will be tax deductible in the perating lcatin and will be tax free in the recipient jurisdictin. Any margin remaining in the Cyprus cmpany will be subject t incme tax at the rate f 12.5%. Intellectual Prperty (IP) wning Cmpany Cyprus IP Bx regime On 24 May 2012, fllwing amendments t the Incme Tax Law, Cyprus enacted a favrable tax regime fr cmpanies wning Intellectual Prperty (IP) falling within the belw categries as defined in the relevant laws: Patents Cpyrights Trademarks The purpse f the abve regime is t make Cyprus an attractive jurisdictin and als t prvide incentives fr research and develpment activities as well as t prmte innvatin and investment in new technlgy. The effective tax applicable fr cmpanies wning IP as frm 1 January 2012 will nt be higher than 2,5% (fr tax year 2012, 2%). General prvisins 80% f the net prfit generated frm the explitatin f the IP is exempt frm taxatin. Fr the purpse f determining the net prfit, the law allws the deductin frm the resulting IP incme f all expenses incurred whlly and exclusively fr the prductin f IP incme as well as a prprtin f indirect expenses incurred. Incme falling within the abve prvisin Incme frm the explitatin f IPs Incme frm the dispsal f IPs Cmpensatins received frm any illegal use f IPs 3 P a g e
Tax publicatin 4.2014 Direct expenses falling within the abve prvisin Amrtisatin f capital expenditure made n the acquisitin r develpment f IPs in the year incurred and in the fllwing 4 years. The cmpany will be able t receive capital allwances f 20% straight line starting frm the first year f the use f the asset as well as the subsequent fur years f usage. Interest incurred fr the acquisitin r develpment f IPs Direct expenses nt capitalized Other expenses directly related t IP activities (such as cnsulting expenses) The abve prvisins are applicable if the fllwing cnditins are met: The taxable persn must be the wner f the intellectual prperty which shuld be registered either in Cyprus r abrad The IPs must be used fr the prductin f taxable incme The IPs must fall within the definitins f the relevant laws: Patent Law Trademarks Law Prtectin f Intellectual Prperty Law Ship Owning and Management Cmpany There are specific exemptins fr ship management cmpanies, ship wning cmpanies and cmpanies managing and emplying crews wrking in internatinal waters. Cyprus has a very cmpetitive tnnage tax regime which in brief includes the fllwing advantages: N incme tax n shipping prfits including prfits frm the sale f ships, N tax n dividends paid frm shipping prfits, N estate duty r capital gains tax, N incme tax in Cyprus fr freign crew, N stamp duty n dcuments r mrtgage deeds. 4 P a g e
Tax publicatin 4.2014 Other cnsideratins Crpratin tax Cyprus crpratin tax is 12.5% which is ne f the lwest in the EU. Tax Residency A cmpany is cnsidered t be tax resident in Cyprus if the management and cntrl is exercised in Cyprus. Tax lsses and grup relief Tax lsses incurred in any ne year and which cannt be set ff against ther prfits f the same year, can be carried frward and set ff against future prfits fr an indefinite perid f time. This prvisin applies fr all unutilised tax lsses fr the years 1997 and after*. Relief in respect f grup trading lsses is allwed amng Cyprus tax resident cmpanies which are members f the same grup fr the whle year*. Grup is defined as either: One cmpany hlding directly r indirectly 75% f the shares f anther cmpany r One cmpany hlding directly r indirectly at least 75% f the vting shares f tw r mre cmpanies Only current year grup trading lsses can be surrendered frm ne cmpany f the grup t anther. Lsses f a sle trader r a partnership business cnverted int a limited liability cmpany can be set ff against future prfits f the cmpany. Lsses frm a permanent establishment abrad can be set ff with prfits f the cmpany in Cyprus. Subsequent prfits f an exempt permanent establishment abrad are taxable up t the amunt f lsses allwed. *On 24 May 2012, fllwing amendments t the Incme Tax Law, as frm 1 st January 2012, where a subsidiary cmpany is incrprated by parent cmpany during a specific tax year, the subsidiary cmpany will be cnsidered as being member f the grup fr the whle tax year and therefre will be able t claim grup relief fr that tax year. As frm tax year 2012, tax lsses may be carried frward and be set-ff against taxable incme fr a perid f 5 years. Acquisitin csts As frm 1 January 2012, any interest expense incurred fr the direct r indirect 100% acquisitin f shares in a cmpany, will be deductible fr tax purpses, prvided that the assets f the directly r indirectly acquired subsidiary d nt include any assets that are nt used in the business. 5 P a g e
Tax publicatin 4.2014 Extensive netwrk f tax treaties Cyprus has an extensive netwrk f tax treaties with mre than 50 cuntries, including Eurpean cuntries, the United States f America, Canada, India, China, Russia and the C.I.S cuntries. Mst f the treaties prvide reduced r nil rates f withhlding tax n dividends, interest and ryalties paid frm the treaty cuntry as well as the avidance f duble taxatin. EU Directives Cyprus has fully adpted all EU Directives including the Parent-Subsidiary, the Interest and Ryalties, the Merger Directive, and the Savings Directive amng thers. Advance rulings The Cyprus tax authrities prvide advance interpretatins f the law under a ruling system. Re-dmiciliatin f cmpanies Re-dmiciliatin and change f tax residency are nt subject t tax. Crss brders mergers and Rerganizatins Rerganizatins are exempted frm crpratin tax, capital gains tax, stamp duties and prperty transfer fees. Cyprus has fully adpted the prvisins f the EU Merger Directive t cver the dmestic and transbrder rerganisatins Cvers Mergers Divisins Transfer f business Exchange f shares CONTACT NZ Audit Limited will be at yur dispsal shuld yu require an independent tax advice. 23, Gergiu Nephytu 4006 Limassl Cyprus T:+357 25 336844 T: +357 25 250759 E: vasilis@nzaudit.cm E: demetris@nzaudit.cm W: www.nzaudit.cm Disclaimer This publicatin has been prepared as a general guide and fr infrmatin purpses nly. It is nt as substitutin f a prfessinal advice. One must n rely n it withut receiving independent advice based n the particular facts f his/her wn case. N respnsibility can be accepted by the authrs r the publishers fr any laws ccasined by acting r refraining frm acting n the basis f this publicatin. 6 P a g e