Introduction

Cyprus is an island in the Eastern Mediterranean, at the hub of three continents, Europe, Asia and Africa. It was once a British colony, but since 1986 the island is independent. The island of Cyprus is the third largest in the Mediterranean (9,250 sq km).

The majority of the Cyprus population is of Greek nationality, living in the southern part of the island. Cyprus has a populace of approximately 800.000, from that number; about 200,000 are Turkish Cypriots and Turkish immigrants which live in the northern part of the island, separated from the south by a UN-supervised buffer zone and one of best tax havens.

The formal languages in the two districts are Greek and Turkish, but most Cypriots speak English, which is used in business and trade.

Cyprus is an independent and autonomous republic with a presidential system of government, which is modeled on example of western democratic systems. Executive authority is entrusted in the President, who is also the Head of State. The President is directly elected for a five-year term of office and is entitled for re-election.

Cyprus is a member of the United Nations, the European Union and the Commonwealth. It maintains diplomatically and economically viable relations with Arab countries, as well as considerable trade with Eastern European countries and holds position as one of European best tax havens.

Nicosia, the capital city, is home to nearly one third of the population and is the business and administrative center of the island. Limassol, the second major city, is the island’s main port, industrial and commercial center and an important tourist route. Larnaca and Paphos are also important tourist resorts with international airports.

Cyprus Company operating within the Free Zone is subject to minimal rules and regulations; they may import machines, equipment and raw materials tax-free, while their foreign employees are liable to only 50% of income tax.

As a result of connection with Great Britain, Cyprus is a common law country with its companies regulations modeled after Britain’s.

Business Environment

There are many requisites that contribute into making Cyprus an attractive location for investment and business operations. These include the strategic position, the urbane infrastructure, the highly-educated labor force, investment, the advantageous tax system, and the modern banking and insurance systems. All these, combined with the relatively low operating costs, the highlife standard and many other advantages make Cyprus one of best tax havens and the perfect place for today’s financiers and corporate investors.

Cyprus is ranked 29th in the world and 1st in the region of Southern Europe, according to the 2005 Human Development Report, with a Human Development Index value of 0,891.

Presently, there are 30 foreign banks and over 1200 Cyprus Company and International Business Companies (IBCs) with independent offices in Cyprus. The successful integration of the modern technology into the economy, the continuous improvement of the island’s infrastructure and the high quality of the Cyprus Company work force, have turned Cyprus into a center of investment and intercontinental business, contributing significantly to the economic growth of the region.

International business environment kept its confidence in Cyprus, building a strong existence in the country’s economy.

Economic Environment

Cyprus has a record of effective economic structure; reflected in quick growth, investment, full employment environments, external and internal strength etc.

This can be mainly credited to the complete macro-economic policies of straight governments, the acceptance of a market-oriented financial system, and highly-educated, dynamic and flexible workforce. The product is a successful and steady economy, with extraordinary development rate, low inflation rate and low unemployment level.

Cypriots have high-life standard. In terms of per capita income, Cyprus is classified by the World Bank as one of the high-income economies.

Cyprus has progressed up in the Global Competitiveness Index, emerging as the world’s 34th most competitive economy in 2005, With a score of 4.54 points, Cyprus outdid eight fellow EU member states, including Italy, Czech Republic, Malta, Hungary, in the 117 strong Global Competitive Index.

The tertiary sector of services is reflected as the mainstream of the Cyprus economy, regarding about 76, 7% of GDP in 2005. This mirrors the ongoing development of the economy from an exporter of mineral deposits (mainly copper and asbestos) and agricultural products during 1960-73, an exporter of industrial products (mainly clothing) at the end of the 1970s, to an international business and facility center in the 1980s until nowadays.

Offshore Environment

In 1975 the Cyprus Government began to make a friendly regime for offshore companies, and more than 54,000 offshore corporations were registered. In 2007, there were more than 137,650 companies in the companies register. Due to Cyprus’s principally favorable tax treaties with Russia, the CIS and the countries of Eastern Europe, the island is chosen by great percentage of firms that need to set up an offshore base as a holding, Investment Corporation, or trading subsidiary. Among evolving markets there are also favorable tax treaties with China, India, South Africa and a number of Middle Eastern countries. Cyprus limited is one of the favorite legal entities for business practices.

The 10% corporate tax gives Cyprus the lowest rate in the EU, after Ireland (12.5%), with the exception of non-European countries such as of the Isle of Man, Jersey and Guernsey, which have all declared a zero rate tax policy.

Many international business corporation and international financiers choose Cyprus as a place for company formation Cyprus, Cyprus Company, financial holding and investment companies, due to the mixture of tax treaties and low-tax regime.

In latest years Cyprus has developed a nautical policy which is highly favorable for ship owners. From 32nd place among marine nations in 1980, Cyprus managed to take 5th place with nearly 3,000 ships totaling nearly 30m gross tons, but in modern times Cyprus slipped to 9th place, with 1,800 ships.

Taxation

Cyprus offshore has a very attractive tax climate for international business corporation and both onshore and offshore business. With the lowest taxes within the European Union, no withholding taxes on dividends and interests, and many other incentives Cyprus has committed itself in retaining and augment Cyprus’s attraction as an international business center.

Based on the Standard & Poor’s Fiscal Flexibility Index and Rankings 2006, Cyprus leads the scores representing the highest degree of taxation flexibility among the 28 countries tested.

Official and legal entities are considered resident in Cyprus for taxation purposes if they are managed and controlled from Cyprus. A resident Cyprus Company is liable to pay tax in Cyprus offshore on its worldwide income and more specifically on all income accumulating or rising from bases within and outside the Cyprus. On the other hand, Cyprus Company nonresident is accountable on paying taxes in Cyprus on income accruing or arising from sources within Cyprus only.

The fiscal year in Cyprus is the calendar year. For financial accounts covering bookkeeping periods other than the calendar year, taxation income is allocated to the relevant year’s pro-rata. Every company must file a provisional tax return before 1 August during the year of valuation and, on basis of this return, pay the taxes due in 3 installments.

The Companies act requires that every company has to keep ‘proper accounting documentation’, which gives a correct and just view of the company’s affairs and gives insight into transactions. All limited liability companies with the exclusion of ‘exempt private companies’ must file a copy of the financial statements, auditor’s report and directors’ report with the Registrar of Companies. A copy of financial statements and the annual report must be placed before the company executives in general meeting within nine months from the end of the financial year or twelve months in case of a company partaking interests abroad.

The European Union has allowed Cyprus to use the International Financial reporting Standards, provided it would present the requests included in the 4th and 7th directives, which are not covered by IFRS.

The taxation rate on corporate profit is 10%. It applies on every international business corporation.

There are no withholding taxes obligatory on expenses of royalties when the royalty is paid for use and actions conducted out of Cyprus. If the payment is made outside Cyprus but the royalty is to be used in Cyprus offshore, then a 10% withholding taxes rule applies.

The above applies only in the lack of a double tax treaty and provided that the Cypriot legislation implementing the EU Interest and Royalties Directive 2003/49/EC doesn’t apply.

Capital Gains Tax is obligatory on profits from the discarding of immovable property located in Cyprus, or shares in companies which are related to immovable property positioned in Cyprus when shares are not listed in any stock market. Capital Gains Tax is imposed on the net profit at a rate of 20%. The net profit is calculated as the disposal precedes less the greater of the cost or market value on 1 January 1980, adjusted for inflation. Inflation is calculated using the official Retail Price Index.

The sale of shares in a company (other than one holding immovable property in Cyprus) is exempt from Capital Gains Tax.

Cyprus Income Tax Law, exempts dividends from taxation. However, those may be taxed under the Special Contribution for Defense Tax (SCDT) Every resident individual who receives any dividend from a company is liable to SCDT at the rate of 15%, apart from the following:

Dividends paid from one local Cyprus Company to another.

Dividends received from an overseas company by a resident company of Cyprus, or by a company which is not resident of Cyprus but has a permanent founding in Cyprus, holding directly at least 1% of the share capital of the overseas company. This exclusion doesn’t apply if the company is paying the dividend that involves more than 50% of its activities that produce investment income, and if the foreign taxation on the income of the company paying the dividends is significantly lower than the Cypriot tax load.

Participation exemption is not essential to evade double taxation of profits.

Deemed distribution of dividends If a Cyprus resident company doesn’t distribute a dividend within two years from the end of the tax year then: 70% of accounting profits (after adjustments) are supposed to have been distributed. 15% special influence for security is imposed on deemed dividend distribution related to shareholders who are residents of Cyprus. Deemed distribution is reduced with payments of actual dividends, which have already been paid throughout the two years following the year in which the profits relate to.

Capital Gains

Profits from the sale of securities are fully tax relieved. Capital gains on tax at the rate of 20% is imposed on gains from the disposal of fixed property situated in Cyprus and on gains from the disposal of shares in an unlisted company that owns immovable property situated in Cyprus.

Tax losses can be carried onward and set off alongside with taxation income of following years without any time limit. The limit of five years for carrying losses forward has been abolished. Withholding taxes and Double tax Treaties of best tax havens-Cyprus

Dividends paid to nonresidents (Cyprus limited companies or individuals) are not subject to withholding tax. Dividends paid to resident companies are not subject to withholding tax but dividends paid to resident individuals are subject to a special defense contribution at the rate of 15%, which is applied as a withholding tax.

There is no withholding tax on interest payments made to Cyprus Company nonresidents. Interest paid to residents is subject to a 10% special defense contribution deducted at foundation of Cyprus limited.

Royalties paid to nonresidents for the use of privileges in Cyprus are subject to final withholding taxes of 5% on film royalties, and 10% on all other royalties. These rates may be reduced under a tax treaty or eliminated under the EC interest and royalties directive. Royalties paid to nonresidents for the use of rights outer of Cyprus are exempt from withholding taxes. There are no withholding taxes on the payment of royalties by a resident company to another resident company.

Cyprus has over 40 double taxation agreements for the avoidance of double taxation of income. The Cyprus double tax treaties have been enlisted very closely to the Organization of Economic Cooperation and Development (OECD) Model Treaty. The treaties target to avoid double taxation of income produced in these countries. This is accomplished usually by either exempting the income from tax, by providing a tax credit for the amount of tax paid in other country or by reduced withholding taxes.

The transfer pricing principle requires that transactions between associated parties be carried out at market prices and on standard profitable terms. Provisions have been presented, according to which any reduction in taxable income develops as a result of transactions between associated persons or companies. Any transfer prices that were not agreed upon shall be ignored and income shall be taxed as if such transactions had taken place at accurate market prices and values.

Client has to propose a company name, which will then be submitted to the Registrar of Companies for authorization.

The central actions of the company must be delivered so that the Memorandum and Articles of Association can be drawn up for approval.

A bank reference is required for each favorable owner/shareholder/director. This is basically a letter from the bank affirming that you have been a client for some time and that they have a solid reputation. We can send you a customary bank letter in English for you to use as template.

Act-offshore needs a certified passport copy of the international business corporation and Cyprus limited beneficial owners / shareholders / directors, and data such as: date of birth, address, profession, etc.

Act-offshore needs a latest original utility bill (ie. electricity, water, telephone, gas bill, etc.) as proof of the address of the Cyprus limited owners / directors / shareholders. Bill shouldn’t be more than 3 months old.

For more information on forming a company in Cyprus, one of the best tax havens in the world, order NOW using our Order Form or contact us at support@act-offshore.com