The main objectives of the tax reform, applicable as from 1st January 2003, were to conform to European Union and OECD requirements and as the same time to maintain the competitiveness of Cyprus as an international business centre and enhance its attractiveness as a suitable jurisdiction for holding companies.

Corporate Tax

A company is tax resident in Cyprus when its management and control is exercised in the Republic. Their taxable income includes both income earned in Cyprus and abroad. A non-Cyprus tax resident is taxed only on income earned in Cyprus.

Low Corporation Tax

All Companies are subject to a uniform tax rate of 10% except for semi-government organizations, which are taxed at 25%. A windfall tax of 5% is introduces for chargeable income in excess of CY£1 million for the year of assessment of 2004. The 10% tax is the lowest corporate tax rate in the European Union.

Tax On Dividends

Cyprus tax-residents companies are exempt in respect of dividends received from other Cyprus residents companies. The exemption is extended, subject to conditions to dividends from non-residents companies. Residents companies are obligated to have distributed 70% of their after-tax profits in the form of dividends at the ends of the two-year period since the end of the respective tax year. Thereon, the dividends account for defence contribution in the case that less than 70% has been distributed. In this way, tax avoidance, through the accumulation of profits and the creation of companies by individuals as a means of lowering their tax burden, is prevented. These mandatory distribution provisions do not apply to profits accruing to non-residents shareholders.

Tax On Interest

Interest income is taxed at the corporate tax rate of 10% arising from, or closely connected to, the ordinary activities of the company. Moreover, 50% of all other interest income is exempt from income tax and is subject to special defence contribution of 10%.

Tax Treatment of Losses

Subject to certain conditions, tax losses can be carried forward and set off against future profits indefinitely; applicable for losses incurred in 1997 and thereafter.

In addition, the loss of Cyprus tax resident company can be set off against the profit of another Cyprus tax resident company in case they belong to the same group of companies. Subject to certain conditions, companies belong to a group when one company holds shares at least 75% of the ordinary share capital and voting rights of another company. Losses from a permanent establishment abroad can be set off against profits earned by a company in Cyprus.

Profits of Permanent Establishments Abroad

The profits of permanent establishments abroad are not subject to income tax in Cyprus, given that less than 50% of their activities result in investment income, and that the foreign tax suffered is not significantly lower than the tax payable in Cyprus.

Double Tax Treaties

Cyprus has over 32 double tax treaties, covering 40 countries.

Disposal of Securities

Profits gained from the sale of securities are exempt from tax for all companies.

Transitional Period Rule

The existing international business entities can exercise the option to continue to be taxed at the rate of 4.25% until the end of the year of assessment 2005; provided that the income, during the tax year 2001, was derived from outside Cyprus-sources.

The following tax reform provisions do not apply to companies electing to be taxed under the transitional period rules:

• Exemption from tax on profit from disposal of securities
• Exemption from tax of dividend income from abroad
• Exemption from tax of profits from permanent establishment abroad
• Group relief of losses
• Exemption from tax on transfers of assets and liabilities in the case of mergers, demergers, transfer of activities, exchange of shares
• Tax credit of foreign taxes unless covered by a tax treaty
• 50% exemption from corporation tax of interest income

Reorganisations

Transfers of asset and liabilities between companies in the course of reorganizations, such as mergers, demergers, transfer of activities or exchange of shares, are not subject tax.

Foreign Tax Credit

Tax relief of foreign tax paid is granted in Cyprus even in the absence of a double-taxation treaty, provided sufficient evidence is submitted that foreign tax was indeed paid. Hence, Cyprus turns into a lucrative hub for establishing holding companies.

Personal Income Tax

Individual tax residents of Cyprus is an individual who stays in the Republic for 183 days in the year of assessment. Cyprus tax residents are taxed on income earned both in Cyprus and abroad. On the contrary, non-tax residents are taxed on income earned only from Cyprus sources.

Low Income Ttax

All individuals, who are non-tax residents, will be taxed only on income earned in Cyprus. 20% exemption of emoluments or CY£5.000, whichever is the lowest, is granted in the case of non-residents starting employment in the Republic, for a period of 3 years after the 1st of January following the year of commencement of the employment.

Tax on Dividends

Dividends are exempt from income tax. Dividends are subject to special contribution for the defence at the rate of 15%, applicable only to residents.

Tax on Interest

The total interest income derived by individuals is not subject to income tax in Cyprus. Interest income from saving bonds, development bonds, deposits with housing finance corporation, and provident fund is subject to special contribution for the defense.

Tax Treatment of Losses

The losses of current year, as well as that of previous years, are deducted from the taxable income, subject to certain conditions.

Profits of Permanent Establishment Abroad

The profits of permanent establishments abroad are exempt from tax under certain conditions.

Disposal of Securities

Profits gained from the sale of securities are exempt from tax for all companies. Securities include shares, bonds, debentures, founders/shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon.

Remuneration by Services Rendered Abroad

Salary earned abroad, by rendered services to a non-Cyprus resident employer or foreign permanent establishment of a Cyprus resident employer, for a period of more than 90 days in a tax year, is not subject to tax.

Other Income

Income received in the form of retiring gratuity, compensation for death or injuries, provident fund, pension fund, or other approved funds, is exempt from tax.

Deposit to Housing Finance Corporations

40% of the amount deposited to the Housing Finance Corporations is exempt from tax; given that the deposit amount does not exceed the 25% of the individual’s total income.

Special Tax Treatments

Taxation of Shipping Companies

it is also considered to be among the most competitive shipping centres in the world in terms of registration fees and taxes. These fees are comparatively lower than those of Cyprus’ main competitors.

Profits from the operation of Cypriot registered vessels, or on dividends received from a ship-owning company, are subject to zero corporation tax. The term “ship management services” includes crew recruitment, plus services in relation to technical and financial management of the ship, under certain conditions.

Ship and crew management businesses have the option to be taxed:

• either at the rate of 4,25% on their profits
• at a rate equal to 25% of tonnage tax rates of vessels under management. The tonnage tax is not levied in respect of ships under Cypriot flag, for which a tonnage tax has already been paid.

It must be noted that the special tax regime of ship managers operating in the Republic of Cyprus, offers now the possibility for the ship managers to be exempted from the relevant tax in respect also of any Community ship to which the provision of shipmanagement services in relation to its crewing and technical management is entirely contracted to a Cyprus or a Community shipmanagement company, which has an office in Cyprus staffed with a sufficient in number and qualifications personnel, for technical, administration and accounting matters relating to ships.

International Trusts

The use of Cyprus International Trusts is constantly becoming popular as a vehicle for international tax planning and business structuring. Income and gains of a Cyprus International Trust, derived from sources outside Cyprus are exempt from any tax imposed in Cyprus. Under the International Trusts Law of 1992, a trust qualifies for a Cyprus International Trust on condition that:

• The settlor is not a permanent resident in Cyprus.
• At least one trustee is a permanent resident in Cyprus, for the whole duration of the trust’s life.
• No beneficiaries, with the sole exception of a charitable institution, are permanent residents in Cyprus.
• The trust property does not include any immovable property in Cyprus.

Cyprus International Trusts provide a variety of significant tax planning opportunities. The following advantages are indicative of the possible opportunities for tax minimization:

• All income, whether trading or otherwise, of an International Trust (i.e. Trust whose property is located and income is derived from outside Cyprus) is not taxable in Cyprus.
• Dividends, interest or other income received by a Trust from a Cyprus International Business Company are not subject to tax nor are they are subject to withholding tax.
• No capital gains tax is charged on the disposal of assets of an international Trust.
• Exemption from taxation in the case of an alien who creates an International Trust in Cyprus and retires in Cyprus, on condition that all the property settled and the income earned is abroad, even if the individual is beneficiary.
• No estate duty is applicable on international trusts in Cyprus

Holding Companies’ Jurisdiction Incentives

A Cyprus holding company can be effectively utilized for international tax planning purposes, and at the same time it may enjoy the status of being located at a reputable business centre within the European Union.

In summary, a Cyprus Holding company offers the following advantages in relation to the major tax considerations:

• No withholding tax on dividend income received from subsidiary companies abroad, provided the direct holding is at least 1% of the share capital of the overseas company; the exemption does not apply if the subsidiary company engages in more 50% of its activities in producing investment income and the foreign tax burden on its income is substantially lower than that in Cyprus.
• Double tax treaties with over 40 countries, enabling lower withholding tax rates on dividend or other income received from the subsidiaries abroad.
• Being an EU member State, holding companies registered in Cyprus may also enjoy no withholding tax on dividends received from EU subsidiaries as a result of the utilization of the EU Parent Subsidiary Directive.
• No withholding tax on capital gains or income on the liquidation of the Cyprus holding company.
• No withholding tax on distribution of profits.
• Outwards dividends by the Cyprus Holding company to its non-resident shareholders are exempt from any withholding taxes.
• Profits earned from a permanent establishment abroad are fully exempt from Cypriot tax, subject to certain conditions
• A diversified group of Cyprus companies belonging to a Cyprus holding company can set Group relief for the utilization of tax losses.
• No minimum holding period.