Cyprus, officially the Republic of Cyprus, is an island country in the northeast corner of the Eastern Mediterranean, strategically located at the crossroads of three continents: Europe, Asia and Africa.
Cyprus is the third largest and third most populous island in the Mediterranean.
Cyprus has been inhabited since the Prehistoric period dating back to the 10th millennium BC.
Cyprus was settled by Mycenaean Greeks in the 2nd millennium BC. As a strategic location between Europe, Africa and the Middle East, it was subsequently occupied by several major powers, including the Assyrians, Egyptians, Persians, Romans, the Eastern Roman Empire, Arab caliphates, the French Lusignan dynasty, the Venetians, the Ottoman Turks and the British, until finally achieving independence from the UK in 1960.
In large part due to its favorable tax climate and low tax rates, since the 1970s Cyprus has developed into a premier offshore financial center, offering the incorporation of offshore and onshore companies and trusts and offshore banking services among others.
The official languages are Greek and Turkish, but being a former British colony and a common law country, English is widely used in business and government, signs are typically bilingual, many Cypriots attended higher education in the U.K., and nearly everybody speaks fluent English.
Government and legal system
Cyprus is a unitary presidential republic with a written constitution which safeguards the rule of law, political stability and human and property rights. The Republic of Cyprus is a member of the Eurozone and a member state of the European Union. Before 1960, Cyprus was part of the British Empire and adopted the U.K.’s legal and judicial system. As a result, the Cyprus legal system is still modeled after English common law, and also its company law is based on English company law. Cyprus’ legislation, including employment law, is fully aligned and compliant with European Union legislation. European Union directives are fully implemented into local legislation and European Union regulations have direct effect and application in Cyprus.
Taxes in Cyprus
Cyprus hardly suffers from a tax haven stigma because of its very diverse and flourishing economy, its full membership of the EU and Eurozone, because it does not appear on any tax haven black lists, and it has many of the same taxes that high-tax countries levy, such as a personal and corporate income tax, a value added tax, and a capital gains tax. However, at the same time, Cyprus has no inheritance taxes or gift taxes, a large number of very generous exemptions, very low tax rates, especially by EU standards, and a very favorable holding regime, which helped Cyprus become one of the premier financial centers of Europe.
When Cyprus joined the EU in 2004, it immediately became a top EU holding company jurisdiction because of its favorable tax climate and holding regime, which now could be combined with benefiting from the EU’s treaty freedoms and the favorable decisions in tax matters by the European Court of Justice.
Corporate income tax
A company is tax resident for the corporate income tax in Cyprus if it is managed and controlled from Cyprus. A company which is tax resident in Cyprus is taxed on income accruing or arising from sources both within and outside of Cyprus. A company which is not tax resident in Cyprus is taxed only on income accruing or arising from sources within Cyprus. The tax rate is 12.5 percent. Many exemptions apply. Most dividend and interest income, foreign exchange gains and gains from the disposal of securities are exempt from corporate income tax, as are profits from a permanent establishment maintained outside of Cyprus.
IP box regime Cyprus
The Income Tax Law in Cyprus provides for an intellectual property (IP) rights box regime. Qualifying taxpayers are eligible to claim a tax deduction equaling 80 percent of qualifying profits resulting from the business use of the qualifying assets, resulting in an effective tax rate of 2.5 percent.
Introduction of notional interest deduction (NID) on equity
Corporate entities are entitled to NID on equity as of Jan. 1, 2015. The NID equals the product of the reference interest rate and the new equity held and used by a company in the carrying on of its business activities.
Capital gains tax
Cyprus has a capital gains tax of 20 percent. It is only levied on transactions directly or indirectly involving immovable property in Cyprus.
Value added tax
Cyprus has a value added tax with a regular rate of 19 percent and reduced rates of 5 percent and 9 percent for transportation, tourism, catering, food, pharmaceuticals, books and similar products and services.
A zero percent rate applies to exported goods and services. In spite of EU harmonization, Cyprus has numerous indirect tax and VAT incentives to offer to current and prospective investors ranging from simplified procedures to favorable rates to user-friendly policy practice.
Personal income tax
In general an individual who spends more than 183 days in Cyprus is considered a tax resident. An individual who is not tax resident in Cyprus, is taxed only on income accruing or arising from sources within Cyprus.
The income tax rate is progressive from 0 percent on the first EUR19,500 to 35 percent on all income over EUR60,000. Many types of income are exempt, such as dividend and interest income, and most foreign exchange gains and gains arising from the disposal of securities.
Special defense contribution (SDC)
All Cyprus tax resident and domiciled individuals are subject to the special defense contribution (SDC) on the following types of income. Dividend income: 17 percent; interest income: 30 percent; interest from saving certificates and development stock issued by Cypriot government: 3 percent; and rental income (gross): 3 percent. An exemption is granted for individuals not domiciled in Cyprus. Non-resident individuals are not subject to the SDC.
The Government has recently introduced the “non-domicile” (non-dom) rules which state that a Cyprus tax resident individual who is not domiciled in Cyprus will effectively not be subject to SDC in Cyprus on any interest, rents or dividends (whether actual or deemed) regardless of whether such income is derived from sources within Cyprus and regardless of whether such income is remitted to a bank account or economically used in Cyprus.
Exemptions/deductions from PIT
The most lucrative incentive that Cyprus offers to individuals who have not been Cyprus tax residents before the commencement of their employment in the island is the exemption from PIT of 50 percent of their remuneration from any employment exercised in Cyprus which commenced as of Jan. 1, 2015.
This exemption is available for ten years and relates to remuneration in excess of EUR100,000 per annum. In cases where the remuneration is below EUR100,000, 20 percent of the remuneration or EUR8,550 (whichever is lower) can be claimed as a deduction for a period of five years starting from Jan. 1 following the year of commencement of the employment (provided the employment started during or after 2012). This exemption applies up to year 2020. Conditions apply.
Social insurance and payroll taxes
Social insurance and other contributions are payable on a gross income up to EUR55,000. The rates are 7.8 percent for both employer and employee. Additional contributions up to 3.7 percent of the income are paid by the employer. Similar taxes are paid by self-employed individuals.
Immovable property tax
As of 2017, the immovable property tax has been abolished.
Cyprus has no wealth tax.
Inheritance and gift taxes
Cyprus has no inheritance or gift taxes.
Cyprus has no withholding tax on dividends or interest, but does have a withholding tax on royalties paid to non-residents for the use of rights in Cyprus. This is subject to a withholding tax of 5 percent on film and television royalties, and 10 percent on all other royalties, although a tax treaty may apply and reduce the amount. Royalties paid to a non-resident for the use of rights outside Cyprus are not subject to any withholding tax.
Tax treaty network
Cyprus has conducted agreements for the avoidance of double taxation with 45 countries across the world. These tax treaties serve to protect taxpayers from double taxation by restricting the right to tax of the contracting states. Especially the tax treaties with countries in Eastern Europe (including Russia and Ukraine) are very attractive, which is why foreign investments into these countries are very often done via a Cyprus Holding Company.
Holding regime Cyprus
Cyprus is a member of the European Union and a member of the ‘whitelist’ of the OECD. Its tax system is OECD-approved and an EU compliant tax system. As an EU member it has implemented the EU Parent-Subsidiary Directive and is a part of the internal market. As such Cyprus is a jurisdiction that is an attractive financial center for investors to locate their holding companies in order to participate in subsidiaries in the EU and other countries with which tax treaties are in force.
Cyprus has one of the lowest corporate tax rates in the EU. It is possible to obtain tax rulings in advance from the tax authorities, which provides flexibility and minimization of tax risk. Tax treaties with 45 countries are in force. There is absolute freedom of movement of foreign currency which allows the maintenance of a bank account in any foreign currency. There is no tax on gains from sale of securities (i.e. shares, bonds, debentures etc.) There is no tax on dividends received as a shareholder for other subsidiary companies (Note that for dividends from abroad certain minor conditions apply). Dividends, interest or royalties (except for intellectual property utilized in Cyprus) paid by a Cyprus company to non-residents are not subject to any withholding tax.
There are no taxes on entry, reorganizations or exits. Company reorganization rules ensure tax neutrality for group restructuring transactions. There is no controlled foreign company (CFC) legislation. There are no detailed transfer pricing rules; only the arm’s length principle applies. Neither are thin capitalization rules or debt/equity ratios imposed. Foreign source income is generally tax exempt and a unilateral credit relief is given for foreign taxes. These combined benefits have made Cyprus’ tax climate more attractive in general than other European holding company jurisdictions.
Conducting business in Cyprus
The attractive tax system, along with a low burden of rules and regulations, makes Cyprus naturally attractive for entrepreneurs who want to minimize their tax and regulatory burden. By establishing a company in Cyprus, entrepreneurs can protect their assets against confiscatory taxes and other dangers. Cyprus has no exchange controls in place. This makes it easy for individuals and corporations to transfer funds in and out of the country. Import and export of capital, profits and wages are entirely free. A short summary of what Cyprus has to offer:
- EU member, thus benefiting from EU’s treaty freedoms and favorable ECJ decisions in tax matters
- Highly educated, qualified and multilingual personnel
- Extensive range of excellent legal and accounting services
- Cost-effective setting-up and on-going operational services
- Favorable EU and OECD-approved tax regime
- Access to an extensive network of double tax treaties allowing for tax efficient structuring of investments
- Collective investments can be listed on the Cyprus Stock Exchange and other recognized EU stock exchanges
- Cyprus-based funds and asset managers benefit from low tax burdens levied on Cyprus-based corporations
- Incentives and tax benefits for high-earning managers and high-net-worth individuals
Modern and efficient legal, accounting and banking services based on English practices
Sophisticated road, air and sea transport solutions and services
- Two multi-purpose deep sea ports are located in Limassol and Larnaca
Living in Cyprus
The island of Cyprus enjoys a Mediterranean climate with 340 days of sunshine and is a prosperous, safe and pleasant place to live. High quality health care and education, including international schools and colleges, are widely available. You will feel welcomed no matter what part of the world you are from. Over the past years Cyprus has become a home to many expatriates and it offers a friendly and vibrant environment. In Cyprus you will enjoy recreational centers, restaurants, bars, theatres, exhibitions and museums, sport events and festivals. Beautiful beaches and picturesque landscapes offer yet another opportunity to relax and enjoy your stay. The beautiful Troodos Mountains offer skiing in winter. All this contributed to Cyprus having become a major tourist destination in the Mediterranean.
Cyprus company law
Incorporation of a private Cypriot company is a relatively easy process which typically takes up to two weeks. Alternatively, shelf companies can be purchased easily. The ease of setting up a company in combination with one of the lowest corporation tax rates in the EU, an extensive double tax treaties network and the availability of special taxation regimes makes the operation of a business through a company a very popular option.
Cyprus investment funds
Since 2014, Cyprus has reformed its legislation governing investment funds and fund managers. Cyprus now has efficient and up-to-date regulation, fully harmonized with related EU directives.
Cyprus as an investment fund jurisdiction has a number of advantages:
- Choice between fully regulated investment fund/fund manager regime and regime with milder regulation
- Wide range of investment fund products offered within the new regulation
- No restrictions on types of investments
- EU member state with easy access to European investors through EU passporting
- Mature business center with highly qualified professionals and sophisticated infrastructure
- Most types of income earned by investment funds are not subject to tax in Cyprus
- Low tax rates levied on Cyprus-based corporations; tax incentives and benefits for high-earning managers and high net worth individuals
- Access to extensive network of double tax treaties
- Cost-effective setting-up and ongoing operational services
- Strategic geographical location between Europe, Middle East, Asia and Africa
The recent changes in the legislation and regulations have already proven to attract fund managers to use Cyprus as the jurisdiction for investment funds and the managers. The assets under management have grown to EUR3 billion. There are 17 licensed and 22 registered asset managers, over 80 licensed investment funds, and many more managers and funds are underway of registration with the regulator.
Shipping has been one of the driving forces of the Cyprus economy, with the sector contributing around EUR1 billion to the island’s GDP per annum. In recent years, Cyprus has become one of the leading ship management centers and currently hosts the 10th largest merchant fleet in the world and third largest in Europe.
The country is most certainly at the forefront of world shipping and, as such, offers sound maritime infrastructure, a business friendly tax regime, competitive ship registration and annual tonnage tax rates. At a time when the shipping industry is experiencing a considerably large supply of tonnage and uncertainties from sovereign debt, Cyprus offers competitive advantages to shipping sector participants and continues to play a prominent role as a leader in shipping and as a ship management hub.
- Key benefits of Cyprus’ shipping:
- 10th largest fleet worldwide
- 1st third party ship management center in the whole EU
- 25 percent of the whole EU fleet
- Liberal Foreign Direct Investment Regime allowing up to 100% foreign participation in most sectors of the economy
- No exchange control and freedom of movement of foreign currency
- Favorable tonnage tax scheme approved by the EU
- Bilateral agreements of cooperation in merchant shipping with 23 countries including major labor supplying countries
Yacht and aircraft leasing scheme
In an effort to encourage the use of Cyprus as a host jurisdiction for yachts and aircrafts and to make Cyprus an even more attractive destination for yacht and private aircraft owners, Cyprus has introduced the “yacht leasing scheme” and the “aircraft leasing scheme.” The aim of the yacht and aircraft leasing schemes is to assist yacht and aircraft owners in deferring payment of VAT and paying a reduced VAT rate on their yachts and aircrafts calculated as a percentage of the time that the asset is deemed to sail/fly Marshall in EU waters/airspace.
Cyprus citizenship for investors
Cyprus citizenship may be granted to foreign investors and entrepreneurs through naturalization by exception under certain criteria and conditions. The process is an expedited procedure (around 6 months) and citizenship is also granted to the investor’s spouse, under age children and adult financially dependent children up to 28 years old. The investor and his/her family obtain a Cyprus Passport with full rights of an EU citizen (i.e. free travel, residence and investment in any EU country). The scheme requires, inter alia, the following from the applicant:
- Clean criminal record
- Ownership of a permanent private residence in Cyprus with a purchase price of at least EUR500,000 (plus VAT)
- Investment of at least EUR2m (plus VAT where applicable) in one of the qualifying categories.
Non-Cypriot investors, who purchase property in Cyprus of at least €300.000 (plus VAT where applicable) and have secured annual income are entitled to apply for Permanent Residence. The relevant Permit grants investors and their families visa free travel to Cyprus and the right of residence granted for life.
Politicians everywhere always create tax laws that are extremely complicated and riddled with conditions, exceptions, exceptions to exceptions, etc. Cyprus is not as bad as most countries, but still suffers from the same problem. This article only provides a very basic description of Cyprus tax laws. Always consult a qualified tax advisor before implementing any strategy discussed herein.