Doing business through a Cyprus Company
Many international businesses are relocating in Cyprus to setup a company, a branch, a holding company or other structure like partnerships and trusts. Cyprus Companies offer many competitive advantages when compared with other global business centers. The following factors make Cyprus one of the most attractive international business hubs in the world for doing international business activities.
- Strategic geographical location. Cyprus is located in the eastern Mediterranean Sea, at the crossroads of three continents, Europe, Asia and Africa
- Business friendly
- English language is widely used as the main business language but one of the biggest advantages of Cyprus is the legal system which is based to the English law making it very effective and suitable for entrepreneurs. Educated workforce
- EU Member State
- Low set up and operating costs
- Efficient business environment accomplished by simple administrative procedures
- Advanced transport and telecommunications network
- High Standard of Living
- A beautiful country with a mild climate, no crime rate, hospitable population, a fantastic cuisine and tasty fruits and vegetables
- The favorable tax system
Cyprus today constitutes a world service center. Businesspeople benefit from the country’s simple tax legislative framework with competitive tax rates, also in line with the E.U. acquis and governed by a wide range of double taxation agreements with other countries.
Investors seeking an EU compliant, tax efficient and stable tax planning environment will find the island offers considerable opportunities to minimize tax exposure. One of the reasons Cyprus is so attractive, is its low corporate tax– at just 12.5%. Apart from this, the investor also gains access to some other great tax advantages, including:
- No corporate tax for non-tax resident companies
- Full tax group relief
- Full adoption of the EU-Parent- Subsidiary Directive
- Rigid appliance of all relevant EU directives
- Double Taxation Avoidance Agreements fully apply
- 0% capital gains tax on profits realised on the sale of securities
- 0% tax on the trading of securities
- 0% tax on profits from the sale of property or sale of shares situated outside Cyprus
- 0% withholding tax on dividends
- No profits on PEs operating abroad
- FX Gains are tax exempt except of FX Gains arising from trading in FX Currencies and related derivatives
- Non-domiciled individuals are exempt from tax on dividend and interest income for a period of 17 years.
- Foreign sourced dividends are generally exempt from tax when received by Cypriot tax resident companies.
- A tonnage tax system for qualifying shipping companies
- Up to 80% tax exemption for qualifying income and expenditure from the R&D and licensing of qualifying intellectual property. The Cyprus company pays only 2.50% tax on all profits from possession or trading in Intellectual Property rights (patents, trade names, trademarks, music or sports or scientific rights)
- A network of tax treaties concluded with other countries for the avoidance of double taxation.
Personal Income Tax in Cyprus
- Annual earnings of an individual up to EUR 19.500 are not taxable in Cyprus. Earnings over EUR 19.500 are taxed as per the Cyprus Income Tax Law, at a rate of 20 – 35 %, where the highest tax rate of 35 % is applied for the portion of annual earnings over EUR 65.000.
When selecting which country to set up your business in, it goes without saying that you’ll want to choose a country that is stable. Cyprus fills these criteria. Being a member of the EU means you gain access to the European market (in terms of clientele, personnel and goods and services). With a stable economy, well established trade agreements and a clear path for the future of the country, it has the ideal conditions to start a business
Uses of Cyprus Companies
A Cyprus company can act as an intermediary between EU and non-EU jurisdictions, as well as in combination with emerging markets such as India. The Cyprus Company receives dividends from subsidiaries suffering no or little withholding tax at source in accordance with the provisions of the EC Parent – Subsidiary Directive or under Cyprus DTT. Disposals of shares in the subsidiaries are not taxable and dividends can be paid by the Cyprus Company with no deduction of withholding tax.
A Cyprus company can act as a group financing function, and the Cyprus company will receive interest income suffering no or little withholding tax at source in accordance with the provisions of the EC Interest & Royalties Directive or under Cyprus DTT.
A Cyprus company can act as an investment trading company. The profits from the disposal of securities (shares, bonds, debentures and options) are exempt from tax irrespective of whether the profits form part of a company’s trading income or is capital in nature.
A Cyprus company can act as an intellectual property holding company. Royalty income can be derived suffering no or little withholding tax at source in accordance with the provisions of the EC Interest & Royalties Directive or under Cyprus extensive network of DTTs.
A Cyprus company can act as a ship owning and/or managing and crew employer company. There are tax exemptions applicable to companies owning Cyprus flagged ships or managing or employing crews working in international waters.
The permanent establishment exemption can be used by a Cyprus company for oil and gas exploration activities.
Cyprus Tax Residency and taxation of profits of the Cyprus Company
As a general rule, companies are liable to pay tax on their taxable profit in the country where they conduct business and generate profit, and/or where management decisions are taken.
All companies tax resident of Cyprus are taxed on all their income accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus.
A company is resident in Cyprus if it is managed and controlled in Cyprus. Foreign taxes paid can be credited against the Cyprus corporation tax liability. As from 2023, a Cyprus incorporated company will by default be considered a tax resident of Cyprus provided it is not tax resident in any other jurisdiction.
The place of management is generally defined by the place of residence of the majority of a company’s directors. If a company registered in country A effectively conducts active business in country B, then the profit of the company in country A might become taxable in country B.
Therefore, establishing effective Cyprus tax residency from the perspective of country B is important.
Result: The place of tax residency as per the one country can be different from the place of tax liability of a company as per the other country. It is relatively new that countries are focusing on the place where business is effectively carried out and profits generated, in order to determine the taxability of a foreign company’s profits.
The Place of Business in Cyprus
Based on the above, it is important that a company in Cyprus, has a place of business with operational substance in the country of registration, a so-called permanent establishment. Cyprus tax residency is essential for Cyprus companies, meeting applicable substance requirements. Tax authorities are now evaluating where the business of a foreign company is actually conducted effectively and where profits are generated. Renting an office in the country where the foreign company is registered is not enough anymore.
Tax Residency and Place of Business (“Substance”) – Recommendations:
Operative Place of Business in Cyprus
Please keep in mind that your foreign company, for example a Cyprus Company, needs an operative place of business in order to comply with recent international taxation rules. The shape and scope of the place of business depends on the type and scope of business of the company. Typically, an operative place of business consists of a verifiable physical office infrastructure and of verifiable business activities. As per the legislation of the beneficial owner’s country, documented and resilient tax residency based on operative substance in the country of a company’s registration is of highest importance.
Verifiable Physical Infrastructure
The verifiable physical place of business should comply at least with the legal minimum requirements of the beneficial owner’s country. The following criteria must generally be met as a minimum:
- Fully-fledged office or office space, to be verified by a rental contract;
- Company must be reachable by phone, with its own phone number. The phone bill in the name of the company may be needed as proof of address as well;
- The company should have its own website, preferably with a domain extension of the country where it is registered;
- The director of a company shall be employed with an adequate salary and be managing the company within the guidelines provided by the Memorandum & Articles of Association and additional shareholder resolutions, if applicable.
Depending on the kind and scope of business, the company may need more than one employee.
Verifiable Business Activities
The place of business is not only an “empty shell”, but an operating place of business. Respective criteria might be:
- The company shall be able to proof communication with its suppliers and customers (emails, letters, call notes);
- Signing of contracts with suppliers and customers by the director of the company;
- Traceability of the director’s discretion in his or her decisions, within the guidelines provided by the Memorandum & Articles of Association and additional shareholder resolutions, if applicable;
- The director of the company shall be signatory of the company’s bank accounts.
It is of course up to your discretion where and how to establish a place of business for your Cyprus Company, keeping in mind possible consequences.
Beneficial owners must avoid business activities on behalf of their foreign company, in their own country
If the shareholder or beneficial owner conducts business in his or her own country on behalf of his or her foreign company, the foreign company might become liable for taxes to be paid in the country of the shareholder or beneficial owner. Cyprus tax residency requires that the Cyprus company is apparently managed from Cyprus.
Attend your duties as your company’s shareholder
It is common for shareholders that personally follow up the business of their companies and their directors, and that they attend shareholder meetings. You should not neglect your shareholder responsibilities. The tax authorities of any country would (perhaps rightfully) become suspicious if a shareholder does not travel to the country where his or her company is active to control its business.
Cyprus is probably the best place to do business in the EU, not only because business-friendly Cyprus Tax Regime but because due to the other advantages as mentioned above.
Apserou Shiaka & co will be happy to consult and assist you with the set-up of your Cyprus Company’s operative place of business.
Apserou Shiaka & co ltd