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Cyprus As An International Business Center

By Peter G. Economides FCCA - Email Editor

Date : March 25th, 2008

Effective as of 1 January 2003, Cyprus introduced a new EU-compliant and OECD-approved tax legislation in view of its accession to the European family 16 months later. The new regime has not only boosted the popularity of Cyprus for the consolidation of underlying subsidiaries, but has also served to complement the tax regimes of existing holding jurisdictions by providing an effective exit route for non EU-destined dividends.

As will be demonstrated in the article below, significant tax advantages accrue to companies that choose to structure their holdings via a Cyprus company rather than directly. The new regime has not only boosted the popularity of Cyprus as a jurisdiction for holding companies at the expense of traditional rivals such as Denmark and the Benelux, but also complemented the holding regimes of these jurisdictions by providing an effective solution for the exit route of dividends from these jurisdictions.

At the same time, accession to the EU helped eradicate the island's somewhat unfavorable reputation in the shipping sector and also further boosted its popularity in the fiduciary services sector.

Last but not least, the all-important tourism sector continues to recover at a steady pace and forecasts for 2008 are optimistic.

In terms of numbers, the Cypriot economy continues to outperform the EU average by a substantial margin and is forecast to grow by an impressive 4% in 2008.

Cyprus at a Glance

Cyprus is the third largest island in the Mediterranean after Sicily and Sardinia, and covers an area of 9,251 square kilometers. It is located in the east Mediterranean basin, 75 km south of Turkey and 380 km east of Rhodes. Cyprus is a widely-used communication node with the major international airlines offering frequent services to and from the island.

Cyprus has always enjoyed strong political, cultural and historical ties with Europe. The Republic joined the Council of Europe in 1961 and has been an active member since. An Association Agreement was concluded with the then European Economic Community in 1972 which led to a Customs Union Agreement in 1987. In July 1990 the Republic applied for full European Community membership. Procedures have since progressed and it has been decided by the European Council at Copenhagen that the next phase of enlargement will include Cyprus. The island has been a full member of the European Union since 2004 and adopted the Euro on January 1 of this year.

Cyprus is a natural choice for international business for a number of reasons. Apart from the tax incentives which will be discussed below, Cyprus has a number of competitive advantages for the foreign investor. First, it is located at strategic cross points and has excellent international connections. The island is serviced by two international airports and more than 1,000 scheduled flights to and from Europe, Africa and the Middle East each week. Cyprus furthermore has excellent telecommunications, a relatively low cost of living, bonded and warehouse facilities and a service-oriented economy which is highly skilled and internationally reputable. Last but certainly not least, Cyprus enjoys an extensive Double Tax Treaty network both with capital exporting countries and emerging markets. All in all, Cyprus has to date concluded Double Tax Treaties with 34 countries, including all Central European countries. One of its most popular Double Tax Treaties is with Russia, which has earned Cyprus the distinction of being the largest direct investor into the country.

The Cyprus Holding Company

Effective as of 1 January 2003, Cyprus has introduced a new tax legislation in order to comply with the acquis communautaire of the European Union. The new holding regime of Cyprus signals the advent of the zero tax Cyprus holding since it is now possible to achieve zero taxation through a Cyprus corporate holding structure. Here is how:

•  Firstly, the Cyprus company can extract dividends from foreign subsidiaries at zero foreign withholding tax if such subsidiaries are within the EU and the Parent/Subsidiary Directive provisions are met. Where the provisions of the Parent/Subsidiary Directive are not met or where anti-avoidance provisions are in place, the ability of a holding company to rely on a reasonably extensive network of double taxation treaties plays a significant part in choosing a holding jurisdiction. To its credit, Cyprus has concluded 34 Double Tax Treaties to date with very attractive rates particularly as far as Eastern Europe is concerned where withholding tax rates are often zero-rated.

•  Secondly, Cyprus can receive incoming dividends and benefit from an exemption on taxation on such dividends subject to the fulfillment of a couple of easily satisfied requirements. Specifically, the Cyprus company must own at least 1% of the share capital of the paying subsidiary, and this exemption does not apply if a) more than fifty per cent (50%) of the paying company's activities result directly or indirectly in investment income and b) the foreign tax burden on the income of the company paying the dividends is substantially lower than the Cypriot tax burden. The conjunction “and” implies that both criteria have to be met in conjunction which the 1% holding (which is a constant) for the exemption to not apply.

•  Thirdly, there is no withholding tax on dividends paid from a Cyprus company to non-resident shareholders.

•  And finally, there is no capital gains tax in Cyprus other than on the disposal of immoveable property situated in Cyprus or on the disposal of shares representing immoveable property situated in Cyprus.

The holding regime should be viewed in conjunction with the rest of the “perks” introduced by the recent tax changes. The recently introduced legislation still retains the tax rate at an attractive European low of 10%, and cancels limitation of benefit articles introduced into certain treaties in countries such as the UK and the US. At the same time, the new legislation abolishes the five year limit for carrying forward losses, and losses from the year 1997 and onwards can be carried forward and set off against future profits indefinitely. Group Relief rules have also been enacted which provide for group relief of tax losses among companies of the same group.

Fiduciary Services

After the introduction of the International Trusts Law of 1992, yet another landmark in the trust business in Cyprus is expected to boost the role of Cyprus in another increasingly important sector, that of Fiduciary Services.

It was recently revealed that trust and company service providers in Cyprus will be regulated, and the proposed legislation has already been distributed for comments from the island's professional bodies.

The relevant draft bill titled, “The Regulation of Fiduciaries, Company Directors and Corporate Services Consultants Bill of 2007,” is expected to be passed by the House of Representatives sometime this year.

The bill establishes minimum criteria for licensing, making sure that fiduciary services are administered by “fit and proper persons.”

The draft bill is a comprehensive piece of legislation aiming at mainly regulating the following:

•  Formation, management and administration of Trusts whether established under Cyprus or Foreign law (including acting as or providing corporate/individual trustee(s) or protector).

•  Formation, management and administration of companies, partnerships or other unincorporated bodies whether established under Cyprus or foreign law (including the provision of corporate/individual directors, or secretaries, nominee services and registered offices).

The Central Bank of Cyprus will have the power to issue and remove the relevant license for administering the aforementioned services. It also empowered to appoint inspectors to investigate the affairs of any Licensed Fiduciary or any other person who is reportedly offering Fiduciary Services and make sure the provisions of the law are applied. The proposed legislation provides for fines not exceeding €2,562 or imprisonment for a term not exceeding three months or both.

Certain qualified professionals are exempt from licensing such as lawyers, certified accountants, and Cyprus banks.

This development will instill more confidence into the minds of interested people, especially professionals, and further strengthen the island's already robust reputation of being an established business center.

The establishment of internationally endorsed criteria for administering fiduciary services will boost the island's competitiveness and further increase its influx of related business. The security it offers to clients and the guarantee that their interests will be protected by law, eliminates even the slightest reservations of doing business in Cyprus.

Shipping

The Cyprus flag has born the blemish of being a “flag of convenience” for many years. Specifically with regard to the inspection of Cyprus ships, a relatively large number was often kept in foreign ports because of serious deficiencies. Since 1995, the Cypriot government, prior to launching negotiations to join the European Union, it moved to “clean up the home-flag fleet”, to upgrade in this way the Department of Merchant Shipping. Since then, it followed a progressive route, resulting in the Cyprus Registry today being accepted by the European Union as “an open registry” and not a “flag of convenience”.

With this in mind, the Cypriot government harmonized completely the shipping legislation by ratifying all important international shipping conventions and by implementing all relative directives of the European Union.

The increase of the staff of the Department of Merchant Shipping, the appointment of independent surveyors, full computerization, constant inspections of the ships as well as the implementation of the ISM Code on the vessels, have greatly contributed in upgrading the image of the Cypriot flag and in promoting the Cypriot shipping community.

Less than four years after the island's full entry to the EU, the results of the efforts are evident and the long-time efforts have flourished. Cyprus is now attracting more and better ships and the local shipping industry is growing. The Cyprus flag has long been removed from the ‘black list' and ships are no longer seized at ports. Cyprus is now taking full advantage of the bilateral and multilateral agreements concluded by the European Union with third countries except for Turkey which still refuses to allow ships bearing the Cyprus flag to enter its ports, despite EU directives.

Tourism

Tourism has always played a leading role in the island's economy. Following a spectacular decade in the 1980s, the 1990s proved disastrous. A combination of the Gulf War in 1991 and an ageing tourism product led to slumping numbers in terms of both travelers and revenues.

The present decade however saw a new tourism strategy being implemented and numbers have started to rise.

According the Statistical Service of the Republic of Cyprus, for the period January - December 2007 arrivals of tourists totaled 2.416 million compared to 2.401 million in the corresponding period of 2006, recording an increase of 0.6%.

Revenue from tourism for the period January-December 2007, is estimated to over €1.8 million compared to €1.7 million in the corresponding period of 2006, recording an increase just short of 6%.

Conclusion

In conclusion, it can be said that Cyprus has achieved to remove discriminatory practices and ring fencing of the local market, thus complying with its EU obligations, whilst retaining and in certain instances, such as in the case of tax-exempted dividend income, increasing its attractiveness as an international business centre.

All of the above developments have already instilled more confidence into the minds of interested people, especially professionals, and are further strengthening the island's already robust reputation of being an attractive international business center.

The island has an important role to play in the EU and world. Being a stepping stone to three continents, it acts as a bridge between Europe and the Middle East. At the same time, its extensive network of Double Taxation Treaties makes the island an obvious link between Europe, the Balkans and Eastern European countries.

Last but not least, Cyprus has managed to regain and further fortify its reputation of being a beautiful, fun, safe and friendly place to visit.

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