Offshore Legal And Tax Regimes

The offshore regime in Cyprus has changed as part of the island’s accession to the EU, and as a result of agreements with the Organisation for Economic Cooperation and Development (OECD). Cyprus was excluded from the OECD’s June 2000 ‘harmful’ tax haven blacklist in return for pledging a commitment to amend its tax practices. In April 2009, Cyprus was placed on the OECD ‘white list’ of territories which have ‘substantially implemented’ the internationally agreed standard in tax transparency.

In July, 2002, as part of the Income Tax Act No. 118(I) of 2002, Parliament approved a uniform 10% corporate tax rate, to apply to both onshore and offshore companies, plus a 2% levy on wage bills (meant to subsidise pensioners), and a ‘Special Contribution’ related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, the rules are complex.

The 10% corporate tax gives Cyprus one of the lowest rates in the EU, alongside Ireland (12.5%), with the exception of the Isle of Man, Jersey and Guernsey, which have all announced a nil rate – but these islands are not in the EU anyway for most purposes.

The new regime introduced a ‘residence’-based system of taxation, and was in operation from 1st January 2003.

Further proposals included the exchange of tax and finance information, as well as the signing of double tax treaties, between Cyprus and additional OECD member countries. Cyprus proposed to maintain its company and trust management regime, although the identity of the beneficiaries has to be disclosed to the tax authorities when a company is registered or when a change of ownership takes place. The new rules came into effect from December 31, 2003 for new companies registering in Cyprus, while those that are already registered on the island had until December 31, 2005 to comply with the new requirements.

After the EU finally agreed its Tax Directive in June, 2003, the Commission said it intended to give the ten acceding states, of which Cyprus was one, until 2007 to implement the Directive, which included a ‘Code of Conduct’ on ‘harmful tax practices’ and rules to avoid the double taxation of royalty and interest payments. However, a statement released by the Cypriot Ministry of Finance at the time said that Cyprus would adopt the new code in full in 2004. The royalties and company interest directive was in place from January 2004, according to the ministry, which pointed out that it was already compliant with the Code of Conduct rules as a result of its recent tax reforms.

A new tonnage tax system was approved by the European Commission on March 24, 2010 under state aid rules for maritime transport. The simplified tonnage tax system extends the favourable benefits available to owners of Cyprus flag vessels and ship managers to owners of foreign flag vessels and charterers. It also extends the tax benefits that previously only covered profits from the operation of vessels in shipping activities, to cover profits on the sale of vessels, interest earned on funds used other than for investment purposes and dividends paid directly or indirectly from shipping-related profits.

The remainder of this section describes the offshore regime prior to implementation of the changes outlined above. As far as taxation is concerned, it is now mostly of historical interest, except that offshore companies in existence before the end of 2002 were allowed to continue to make use of the 4.25% corporation tax rate until 2006 if they so chose.

For further information about the taxation of companies in Cyprus, see Direct Corporate Taxation.

Cyprus Forms of Offshore Operation

Offshore entities took the following forms:

  • Limited liability company
  • Branch
  • General or Limited Partnership
  • Offshore Banking Unit (now known as International Banking Units)
  • Offshore Financial Services Company
  • Offshore Captive Insurance Company
  • Shipping Company (Ship)

 

 

 

 
 

NB: See above for new rules applying to Cyprus companies from 2003.

Checks are made to exclude undesirable operations, and conditions are usually imposed:

  • The entity must be entirely foreign-owned
  • The objects of the business and sources of income must be outside Cyprus
  • No local borrowing is permitted
  • Audited annual accounts must be filed with the Central Bank
  • Local payments must be recorded and reported

 

 

 
 

Anonymity may be achieved by using nominee shareholders; the beneficial owners must be made known to the Central Bank, which is then statute-bound to non-disclosure. NB There is no provision under the law for migration or re-domiciliation.

The expression ‘International Business Company’ (IBC) simply refers to a duly authorised offshore Limited Liability Company. There are no formal requirements in addition to those in standard Cyprus company law, but the Central Bank recommends a minimum authorised share capital of CY£10,000. This does not have to be paid up, unless the company concerned wants to make use of the import duty concessions described in Tax Treatment of Offshore Operations.

Cyprus Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of Cyprus corporate taxation, which also apply to offshore entities.

NB: See above for new rules applying to Cyprus companies from 2003.

All offshore companies are taxed at 4.25% of profits; offshore branches of foreign companies with management and control in Cyprus are also taxed at 4.25%; branches with management and control outside Cyprus are exempt from tax on profits derived from sources outside Cyprus.

Offshore partnerships are not taxed on profits originating outside Cyprus.

There is no withholding tax on dividends paid by offshore companies; but no tax credit either on any tax paid.

Interest or royalties paid by an offshore company to another person or company outside Cyprus are not subject to withholding tax.

Estate duty is not charged on inheritance of shares in offshore companies, and the sale of or transfer of their assets (other than Cyprus real estate) is exempt from capital gains and other taxes.

Offshore entities (and their expatriate staff) may import various goods duty-free:

  • Motor vehicles (not buses, motor-bicycles, coaches or caravans)
  • Office equipment (not air conditioners and consumables)
  • Household effects (not furniture and air conditioners)

 
 

 

Cyprus Taxation of Foreign Employees of Offshore Operations

This section refers to the taxation of foreign employees of offshore operations, the general principles of individual taxation in Cyprus also apply to the resident employees of offshore entities.

Salaries from services provided from outside Cyprus for more than 90 days to a non Cypriot resident employer or in the permanent establishment of a Cypriot resident employer are not taxed in Cyprus.

Expatriate employees who at the start of their employment were non-residents of Cyprus, for the first three years of their employment will be exempted from tax on 20% of their salary or CYP5,000 (prior to the introduction of the Euro in Cyprus) whichever is the lowest.

Cyprus Exchange Control

Once Central Bank consent has been received for offshore status, the entity is non-resident with complete freedom from Cyprus exchange control restrictions; thus it may maintain bank accounts inside or outside Cyprus in any currency and use its funds as it chooses.

By 2004, almost exchange control restrictions had been removed by the Central Bank as part of EU accession.

Cyprus Offshore Activities

Offshore entities may not carry out any trading activities in Cyprus with Cypriot residents. The only permissible activities within Cyprus are those compatible with the exercise of management and control.

NB: See above for new rules applying to Cyprus companies from 2003.

Certain borderline activities may be carried on with express Central Bank permission, such as:

  • Transit trade through Cyprus
  • Repackaging for re-export, within a tariff classification
  • Printing of foreign-language magazines or books for distribution abroad
  • Storage, repair or maintenance of goods to be used or sold outside Cyprus
  • Establishment of a private bonded warehouse for the display of foreign-made goods intended for re-export.
  • Sales activities provided these do not result in sales in Cyprus or to Cypriot companies.

 

 

 
 
 
 
Cyprus Employment & Residence

NB: Following Cyprus’s accession to the EU, citizens of EU Member States are evidently exempt from local Work Permit rules, although it is taking some time for the bureaucracy to get used to this new situation. The rules outlined below now apply only to non-EU citizens.

The employees of offshore entities in Cyprus require ‘Temporary Work and Residence (TRE) Permits’, which are issued by the Central Bank. For this purpose, employees are categorized either as Executives or Non-Executives.

In effect, Executives are defined as senior management, and three only of them are permitted unless the Central Bank can be persuaded otherwise. The minimum age for an Executive is 24, and the minimum salary is CYP12,000 pa.

Non-Executives are those foreigners employed in managerial, professional, administrative, technical and clerical positions. The employer must make an effort to recruit suitable local personnel. Permits are issued by the Ministry of Labour.

In both cases, a fair amount of documentation is required by the authorities. Permits are normally issued for 2 years, renewable for a further three years.

Under a law implemented in July 2000, foreigners to Cyprus must either have a five-year work permit or have worked on the island for five years or have a combination of worked time and work permit totalling a minimum of five years before their spouses can join them.

But in November 2000, the Cyprus government introduced new regulations designed to make it easier for some foreigners to have their loved ones live with them. However, this solely applies to those EU nationals and non-Cypriots who work in certain sectors which are: offshore workers, reporters, foreign correspondents, accountants with big firms, lecturers, teachers and those who have invested more than £100,000 in local businesses.

The five-year permits will be automatically granted to new foreign entrants into these sectors and those renewing permits will be given extensions long enough to enable them to meet the ‘five years in total’ clause.

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