The Republic of Cyprus has a long-established reputation as an international business hub and has always been at the forefront of popular business destinations. The country's advantageous tax system, highly educated professionals, cost-efficient provision of services and inherent strong business culture justifiably render Cyprus as one of the most attractive investment centres in Europe and internationally.
Cyprus has been recognised as a centre of excellence by reputable research analysts worldwide. The World Bank's Doing Business Report 2016 ranked Cyprus 45th out of 189 countries for ease of doing business, whereas Forbes Magazine's 2016 Best Countries for Doing Business ranked Cyprus 31st out of 141 countries.
Cyprus recently passed a set of laws intending to enhance investments in real estate such as laws protecting new buyers, certain exemptions from capital gains tax on the sale of property and reduced transfer fees on the transferring of property. Furthermore, amendments to the tax legislation were also recently implemented aimed at improving the competitiveness of Cyprus as a business hub and attracting foreign investment. The amendments are the most drastic changes seen in recent years since the total reform of the tax system in 2003, whereas the 12.5 per cent uniform corporate tax rate, perhaps the most competitive feature of Cyprus' inward investment policy, was left unchanged.
Cyprus has also developed an extremely beneficial tax treatment of funds and collective investment schemes, which are subject to tax like any other legal entity in Cyprus and benefit from the uniform corporate tax rate of 12.5 per cent. However, given the detailed legislation, the procedure of establishing such funds and schemes will not be analysed in this chapter.
Last but not least, the recent discovery of natural gas reserves in the Exclusive Economic Zone of Cyprus has opened a whole new world of opportunities and has an appeal to many multinational investors. Although this is a newly born industry for Cyprus, there is substantial activity in the sector, with exploration licences already granted to operators.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
As an international business centre, Cyprus provides a variety of options to entrepreneurs seeking to establish a legal entity in Cyprus, always designed to meet their specific needs.
Forms of corporate entities include the limited liability company by shares, the limited liability company by guarantee with share capital or without share capital, the public company limited by shares and the European joint-stock company (Societas Europaea). Corporate entities are subject to corporation tax at a rate of 12.5 per cent, which rate is among the lowest tax rates in the European Union. Legal entities are subject to corporation tax in Cyprus provided that they are tax resident in Cyprus, and a legal entity is deemed to be a tax resident in Cyprus if its management and control are exercised in Cyprus.
Non-corporate legal forms include the sole proprietor, the limited partnership and the general partnership. Non-corporate entities are not subject to corporation tax, but instead all income is treated as income of the sole proprietor or partner who then pays income tax according to the applicable rates in force.
The majority of business organisations in Cyprus are limited liability companies by shares. These companies have proven to be extremely attractive to foreign investors given their easy and fast registration procedure, the many tax advantages and exemptions they enjoy, and because these type of companies have their own separate legal personality that is distinct from the legal personality of their members.
A public company limited by shares can be the optimal vehicle for businesses wishing to increase their growth and to generate the capital needed to grow. Apart from the benefit of raising capital with ease, public companies also have a distinct legal personality from the investors that participate in it. Public companies, however, have greater reporting obligations than limited liability companies, including a minimum share capital requirement of €25,650.
The main differences between a private limited liability company and a public limited company are the following:
- a the maximum number of shareholders that can participate in a private company is 50. There is no maximum number of shareholders for a public company limited by shares;
- b a public company must have at least two directors, whereas a private company may have just one;
- c the minimum number of shareholders in a public company is seven. In a limited liability company, the minimum number is one; and
- d a public company has a requirement of a minimum share capital of €25,650, whereas such requirement does not exist for a private company, where the share capital can be €100.
General and limited partnerships
A partnership has been defined as the relationship that exists between persons carrying on a business in common with a view to profit, and that is not a separate and distinct legal entity from the partners who compose it. A partner can be a physical or a legal person.
A partnership can be distinguished as either a general partnership or a limited partnership. The main difference between the two types of partnerships is the extent of liability of the partners. Under a limited liability partnership, the liability can be limited for certain of the partners. Furthermore, the Partnership Law was amended in 2015 to introduce the concept of a limited liability partnership that is limited by shares. This means that the liability of the limited partners is limited up to the amount that remains unpaid (if any) for the shares that they hold in the limited partnership.
A limited partner shall not take part in the management of the partnership business and shall not have the power to bind the firm.
As a partnership is not a separate and distinct entity from the partners who compose it, the partnership itself is not liable to income tax. The common income taxation rules applying to individual taxpayers apply to each partner who is being assessed for tax purposes distinctly from the other partners. Each partner's percentage of profit is assessed along with his or her total income from other sources and taxed accordingly.
Partnerships are preferred in cases where a simple straightforward structure is needed. Furthermore, they can provide for a clear split-up of the duties and responsibilities between the partners, which can be utilised as a great incentive for the employees of the partnership.
Moreover, under the Assessment and Collection of Taxes Law, if the annual income of each partner does not exceed €70,000 no audited accounts need to be produced. Additionally, forming a partnership can result in an advantageous tax outcome for each partner provided that each partner's total income does not exceed €60,000 per year.
Doing business as a sole trader is the simplest form of doing business in Cyprus, and a sole trader can commence doing business instantly, subject to special business licences required for certain professions.
Sole trader can easily adjust to changes in their sector, normally with no overbearing procedures and requirements, and they have absolute control over their dealings and their bookkeeping. On the other hand, they are solely liable for the debts and liabilities of their business, and will be sued in their own name in the case of any wrongdoing. Consequently, their personal assets and the assets of their business can be the subject of a claim by an aggrieved creditor. A further consideration to be taken into account is whether it would be tax-beneficial to set up as a sole trader given that the following progressive rates apply for individuals in Cyprus:
Chargeable income €
Rate of tax %
Up to 19,500
Depending on the sole trader's annual income, setting up as a sole trader can prove quite expensive, and in the case of high turnover, the sole trader might consider establishing his or her own limited liability company to benefit from the 12.5 per cent corporate tax rate. If not domiciled in Cyprus, he or she can also benefit from an exemption for a special defence contribution on dividends (where he or she also has a Cyprus company), interest and rents.
III DIRECT TAXATION OF BUSINESSES
Companies tax resident in Cyprus are liable to tax on their accrued worldwide income at the corporate tax rate of 12.5 per cent. A company is a tax resident of Cyprus if it is managed and controlled in Cyprus.
i Tax on profits
Determination of taxable profit
A Cyprus tax-resident company is taxed in Cyprus on its income accrued or derived from sources in Cyprus and overseas (worldwide income). A company that is not tax resident in Cyprus is taxed on income accrued or derived through a permanent establishment in Cyprus and on income sourced in Cyprus.
In computing their taxable profit, Cyprus companies use accrual accounting according to the International Financial Reporting Standards. Therefore, to arrive at a company's taxable profit, several exemptions and deductions must first be taken into consideration. The standard rule states that expenses are allowable provided that they are incurred wholly and exclusively for the production of income by the business, they are specifically provided for in the Income Tax Law and they are not specifically disallowed in the Income Tax Law.
Expenses that are not tax deductible mainly consist of the following:
- a business entertainment expenses in excess of 1 per cent of the gross income (the amount of the expense is limited up to €17,086);
- b immoveable property tax;
- c professional tax;
- d any sum recoverable under an insurance or contract of indemnity;
- e contributions to the social cohesion fund; and
- f expenditure that is not supported by invoices or other supporting documentation.
The Income Tax Law provides for depreciation on all fixed assets (excluding land) enabling the business to write off the value of these assets over their useful economic life. Depreciation is not considered as an allowable expense; nevertheless, capital allowances are permitted as per the rates stated in the law for each group of assets and are tax deductible. For the years 2012 to 2016 higher capital allowances were set for machinery and equipment (20 per cent) and for commercial buildings and hotels (7 per cent) that were acquired during those years. Furthermore, capital allowances on an intangible asset amount to 20 per cent of the acquisition cost and they can be deducted over a five-year period as from the year of acquisition.
Capital and income
Capital is not incorporated in the income of a company, but instead is taxed independently under the Capital Gains Law at a fixed rate of 20 per cent. Capital gains tax is solely imposed on the sale of immoveable property situated in Cyprus and on the sale of shares in companies that mainly own immoveable property in Cyprus. Other than that, shares are generally exempted from capital gains taxation.
It should be noted that no capital gains tax will be imposed on the subsequent sale of immoveable property that was acquired within the time period from 16 July 2015 to 31 December 2016.
Losses can be carried forward subject to a five-year time limitation from the year in which the loss occurred. Nevertheless, if there is a substantial change in ownership or a substantial change in the nature of the business in the three years following the year in which the loss occurred, losses cannot be carried forward.
Group relief is also available for Cyprus companies that are members of the same group of companies. To qualify for the relief, the companies must be tax resident in Cyprus and must be members of the same group, meaning that one of the companies holds 75 per cent in the share capital of the other company share capital, or that a third company holds 75 per cent in the share capital of both of the Cyprus tax-resident companies. However, as from 1 of January 2015, the interposition of a non-Cyprus tax resident company or companies does not affect the eligibility for group relief (subject to conditions), and a Cyprus tax-resident company can now claim the tax losses of a group company that is tax resident in another EU country (subject to conditions).
The carry-back of losses is not permitted.
Losses from a permanent establishment abroad can be set off against profits of the company in Cyprus. Subsequent profits of the permanent establishment abroad are taxable up to the amount of losses utilised in the past against profits arising in Cyprus.
The corporate tax rate for all Cyprus tax resident companies is 12.5 per cent.
Capital gains tax
The capital gains tax rate is fixed at 20 per cent imposed only on the sale of immoveable property and on the sale of shares in companies that mainly own immoveable property in Cyprus.
Special defence contribution tax
Tax residents of Cyprus are subject to a special defence contribution in relation to dividends, interest and rental income received at the following rates:
- a 17 per cent on dividends;
- b 30 per cent on interest;
- c 3 per cent on 75 per cent of rental income; and
- d non-residents are not subject to the special defence contribution.
On 16 July 2015, a ‘domicile' concept was established under the Special Defence Contribution Law with the goal of exempting high-net-worth non-domiciled individuals from paying such a contribution when they are tax residents of Cyprus. Said persons, when not considered as being domiciled in Cyprus, can state Cyprus as their taxable jurisdiction and will consequently receive an exemption from the special defence contribution, which applies on rents, interest and dividends and currently applies to persons domiciled in Cyprus.
The Tax Department is the taxation authority of Cyprus, which merged with the VAT Service on 1 July 2014 to form an integrated Tax Department with the aspiration of providing a high-quality service to the taxpayers, who will be able to manage all of their tax affairs by contacting a single department.
The tax year for a Cyprus company is the calendar year, and therefore runs from 1 January to 31 December unless declared otherwise. Upon registration, a Cyprus company needs to acquire a tax identification number by registering with the Tax Department within 60 days from its incorporation.
Cyprus has established a self-assessment system as regards corporation tax, and corporate income tax is payable within the same year in two instalments (31 July and 31 December). By 31 July, a company will have to pay 50 per cent of the tax on the chargeable income that it declared as expected, and then a second final instalment by 31 December. Where the tax payment is not paid by self-assessment, an amount of 5 per cent is added to the tax due, irrespective of whether the tax return was filed in accordance with the statutory deadline.
If the income declared for the provisional tax is lower than 75 per cent of the income as last established, an extra amount equal to 10 per cent of the difference between the final and provisional tax must be paid. All Cyprus companies are entitled to adjust their expected taxable income at any time before 31 December 2015 for tax year 2017. Furthermore, electronic filing is compulsory for all Cyprus companies, and the deadline for submitting the tax return electronically is 31 March of the year following the tax year.
The filing of consolidated tax returns is not permitted in. However, the filing of consolidated financial statements is obligatory for Cyprus companies that have subsidiaries. Small-sized groups are exempt from such an obligation provided that they fall within the definition of ‘small-sized group' as defined in the Companies Law, Cap 113. As from September 2016, this exemption also applies to medium-sized groups (as defined in the Companies Law, Cap 113), whereas groups of companies continue to be exempted from preparing consolidated financial statements if the ultimate parent or parent companies publish consolidated financial statements on the basis of generally accepted accounting principles.
ii Other relevant taxes
A person making taxable supplies exceeding the threshold of €15,600 is obliged to register with the VAT authorities. VAT applies on the sale of goods, the provision of services and the import of goods from outside the EU.
The applicable VAT tax rates in Cyprus are the standard rate of 19 per cent, the first reduced rate of 9 per cent, the second reduced rate of 5 per cent and a rate of zero per cent that apply to certain goods and services.
Stamp duty is imposed on documents relating to property situated in Cyprus or to things or matters executed or performed in Cyprus, irrespective of the place of execution of the document, capped at a maximum of €20,000. Transactions taking place outside of Cyprus or relating to property and generally to matters taking place outside of Cyprus are exempt from stamp duty. Preliminary tax rulings can be obtained as to whether stamp duty will be imposed upon a transaction.
Immoveable property tax
Every registered owner is liable to immoveable property tax, which is calculated in accordance with the market value of the property as at 1 January 1980.
Bills were submitted to Parliament aiming to modernise and reform the tax provisions relating to immoveable property and the immoveable property tax rate. As a result, in July 2016 the House of Parliament has amended the laws relating to immoveable property tax; hence, whereas the immoveable property tax for 2016 will continue to be calculated in accordance with the 1980 values, such tax will be reduced by 75 per cent on the amount paid last year, and the obligation to pay immoveable property tax will be abolished altogether in 2017.
iii Non-applicable taxes
The following taxes do not apply in Cyprus: capital acquisitions tax, inheritance and estate tax, and net wealth and net worth tax.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
A company is a tax resident of Cyprus if it is managed and controlled in Cyprus, although the term ‘management and control' has not been defined in the law. Nevertheless, it has been interpreted by recent case law to mean the place where the company is actually managed. The residency of the directors, the place where the directors hold their meetings, whether the directors are actually putting their minds to decisions, and whether key decisions and important transaction documentation are executed in Cyprus, are central factors in determining the tax residency of the company.
Companies that are tax resident in Cyprus are taxed in Cyprus on their worldwide income, and can benefit from the 12.5 per cent corporation tax and the many tax exemptions, whereas companies not tax resident in Cyprus are taxed on a source-based system. Furthermore, companies that are not tax resident in Cyprus cannot take advantage of the double tax treaties that Cyprus has signed with other countries.
ii Branch or permanent establishment
The definition of a permanent establishment can be found in the Income Tax Law, and is identical to the definition of Article 5 of the OECD Tax Treaty model.
Profits from activities of a permanent establishment situated outside of Cyprus are completely exempt from corporate taxation. The Cyprus company will not be able to qualify for this exemption if its foreign permanent establishment directly or indirectly engages in more than 50 per cent of its activities in producing investment income; and the foreign tax burden is substantially lower than the tax in Cyprus (6.25 per cent and less is considered as a significantly lower tax burden).
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Fixed corporate tax rate of 12.5 per cent
The foundation of Cyprus' attractive tax system is the standard corporate tax rate of 12.5 per cent, which is among the lowest in the European Union. Tax relief is also unilaterally granted by way of a tax credit.
The corporate tax rate can be further reduced following the recent provisions introduced into the Income Tax Law relating to new equity. In accordance with the latest amendments, new equity used by a Cyprus company or a permanent establishment in Cyprus for carrying out its activities will allow a notional interest reduction in the effective corporate tax rate as from 1 January 2015, thus encouraging new investment and fresh funding.
Notional interest will be calculated based on the effective interest earned on the 10-year government bonds of the country in which the new sum is invested plus 3 per cent, with the minimum rate being the equivalent 10-year bond yield of Cyprus plus 3 per cent. The notional interest deduction cannot, however, exceed 80 per cent of the taxable income of the company for the year before the deduction of the deemed interest expense.
ii Significant reductions and exemptions
Cyprus tax-resident companies enjoy numerous reductions and exemptions, with the most significant allowable expenses and exemptions, which are considered highly attractive for foreign investors, being the following:
- a any income or gain arising from the disposal of securities is entirely exempt from corporation tax, where the term ‘securities' is given a wide definition;
- b expenses incurred for the purposes of scientific research that have been incurred for the use and the benefit of the business shall be allowed as a deduction;
- c expenditure incurred for the purchase of shares in an innovation company and all expenditure relating to research and development assumed by innovation companies is allowed as a deduction;
- d any interest payable on credit and financing facilities taken for acquiring assets to be used in the business is tax deductible; and
- e dividend income is wholly exempt from corporation tax.
iii A tax-efficient IP jurisdiction
Over the years, Cyprus has developed into a tax-beneficial IP jurisdiction and has become a signatory to all major IP treaties.
The tax benefits of incorporating an IP company in Cyprus are many, most importantly:
- a Cyprus tax-resident companies generating income from qualifying IP are allowed up to an 80 per cent exemption on their worldwide royalty income (net from any direct expenses) and then taxed at the corporate tax rate of 12.5 per cent, giving an effective tax rate of 2.5 per cent. Qualifying IP means an asset that was acquired, developed or exploited by a person in the course of his or her business, and that is a result of research and development. It also includes assets for which only economic ownership exists; and
- b Cyprus tax-resident companies are allowed to claim a deduction for any qualifying expenditure of a capital nature for the acquisition or development of IP in the year which it was incurred and in the immediate four following years. Qualifying expenditure is defined as the total expenses for research and development carried out wholly and exclusively for the development, improvement or creation of qualifying IP in any fiscal year. Such expenditure should be a direct expenditure.
iv Shipping taxation
The Cyprus shipping industry has demonstrated remarkable development in the past few years. A full exemption from all direct taxes applies for qualifying ship owners, charterers and ship managers for the operation of qualifying community ships and for qualifying foreign ships, who are instead taxed under a favourable tonnage tax system.
In addition, the following also apply: dividends received from a ship-owning corporation and profits from the operation of Cyprus-registered vessels are tax-free; no capital gains apply on the sale of a vessel registered in Cyprus or on the sale of the shares of a ship-owning company; and ship mortgage deeds and other collateral documentation are not subject to stamp duty.
v State aid
The Human Resource Development Authority of Cyprus offers grants to Cyprus companies to support a variety of their training needs.
The Research Promotion Foundation provides government grants to Cyprus companies with the goal of encouraging the advancement of scientific and technological research in Cyprus and promoting the vital significance of research in the modern world.
The government also offers funding (de minimis funding) for a variety of entrepreneurial activities.
The Ministry of Commerce, Industry and Tourism provides grants for the establishment of control laboratories, testing, analysis and calibration of machinery.
The Cyprus Tourism Organisation offers grants aiming to draw investment for the sustainable enrichment and development of tourism in Cyprus.
Finally, the Cyprus Institute of Energy provides grants for investment in the field of energy conservation and the advancement of the application of renewable energy sources.
Cyprus has one of the most beneficial tax systems in the European Union; it is known for its simplicity and many advantages, as well as a robust legal regime built in accordance with English law principles and legislation. Furthermore, Cyprus has aligned its legislation with European legislation, enabling Cyprus companies to utilise EU tax directives, and actively participates in many EU innovation and entrepreneurship programmes. Cyprus has been recorded on the ‘white list' of the OECD as one of the countries that comply with the OECD's principles on the elimination of harmful tax practices, and has established anti-money laundering processes in conformity with international standards ensuring transparency and compliance with the international consensus.
Cyprus is also renowned for ease of doing business, an inherent business culture and highly educated professionals with experience in serving international investors, and expertise in key sectors of the economy.
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding outward-bound payments (domestic law)
Dividends and interest paid to non-resident shareholders are not subject to any withholding tax in Cyprus, irrespective of the existence of a double tax treaty with their country of residence. No withholding tax applies to interest derived from Cyprus and paid to non-residents.
Payments of dividends and interest from Cyprus to non-Cyprus tax residents
No withholding tax is imposed on payments of dividends and interest by Cyprus companies to non-Cyprus tax residents notwithstanding whether a double tax treaty is in place, as Cyprus has implemented zero per cent withholding tax provisions within its legislation. Royalties granted for use outside of Cyprus are also free from any withholding taxes.
Withholding taxes on intellectual property tights
A withholding tax rate of 10 per cent applies on the gross income of a person who is not residing in Cyprus resulting from intellectual property rights and from other exploitation rights arising from sources within Cyprus or granted for use within Cyprus unless a double tax treaty provides for a lower withholding tax rate.
Since Cyprus is a member of the EU, Cyprus companies can take advantage of the Royalties Directive; hence, royalties received by an affiliated corporation registered in an EU Member State are exempted from taxation (provided that certain conditions are fulfilled).
No withholding tax is imposed on rights granted for use outside Cyprus.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
No withholding taxes apply on the payment of dividends and interest to non-Cyprus residents as per the applicable legislation in Cyprus, and inter-company dividends (from a Cyprus company to another Cyprus company) are exempt also from taxation. Cyprus also has an appealing participation exemption system since there are no specific requirements as regards participation holding periods or participation holding thresholds.
Cyprus companies can also benefit from the Parent-Subsidiary Directive, which exempts dividends paid by a subsidiary company to its parent from any withholding taxes and prevents double taxation at the level of the parent company. It should be noted, however, that Cyprus will proceed and implement the EU amendments to the Directive into its own legislation, effective as from 1 January 2016.
The dividend exemption will not be available where the dividend received by a Cypriot company is allowed as a tax deduction in the country of the foreign company, and where the main purpose of the said arrangements was to obtain the relevant exemption and there is no other commercial rationale or economic reality behind the arrangements. If the dividend exemption is not available, the dividend will be subject to the corporation tax rate of 12.5 per cent.
iii Double tax treaties
Cyprus has an extensive and generous tax treaty network, and has concluded double tax treaties with 58 countries that largely follow the OECD Model Tax Treaty. During its restructuring in 2014, the Ministry of Finance of Cyprus established a Tax Policy Unit responsible for dealing with international tax issues, while the Council of Ministers has further approved an enhanced regulatory framework that will govern the administration and management of double taxation agreements.
Despite the extensive tax treaty network in place it should be noted that, irrespective of any tax treaty, Cyprus does not impose withholding taxation on dividends, interest and royalties. However, in cases where royalties are earned on rights used within Cyprus, there is withholding tax at a rate of 10 per cent.
iv Taxation on receipt
Dividend income received from non-Cyprus-resident companies is subject to the special defence contribution at a rate of 17 per cent only if more than 50 per cent of the activities of the company paying the dividend result directly or indirectly from investment income, and the foreign tax is significantly lower that the applicable tax rate in Cyprus (significantly lower has been interpreted to mean a tax rate below 6.25 per cent).
Cyprus has established a credit relief system in accordance with tax withheld in relation to income sourced abroad, which will be credited against the tax chargeable in respect of the same income in Cyprus. However, the amount of the credit shall not exceed the amount that would have been determined if the amount of the income was computed in accordance with the provisions of Cypriot legislation.
VII TAXATION OF FUNDING STRUCTURES
Companies tax resident in Cyprus are commonly funded through either debt or equity, or by a combination of the two.
i Thin capitalisation
There are no thin capitalisation rules currently in force in Cyprus.
ii Deduction of finance costs
A Cyprus company making interest payments on loans or borrowings is allowed for a full tax deduction for the interest paid provided that the interest payable is incurred solely for the purpose of producing income.
Further, there is no withholding tax on interest payments made to non-residents.
iii Restrictions on payments
Under Cyprus common law principles, a Cyprus company can only make a distribution of dividends out of profit. The company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duty made.
iv Return of capital
The Cyprus Companies Law, Cap 113 allows a company, subject to confirmation by the court and if so authorised by its articles, by special resolution, to reduce its share capital in any way.
Any amounts paid to shareholders in excess of the share capital that had actually been paid will be treated as a deemed dividend distribution and taxed accordingly. Non-Cyprus residents are exempt from the taxation of dividends.
The Companies Law, Cap 113 further contains provisions that enable a company to issue redeemable preference shares provided that certain rigid requirements regarding the funds that can be used to redeem such shares are met. Effectively, shares can only be redeemed by the profits that would otherwise have been available for distribution as dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. It is clearly stated in the Law that no such shares shall be redeemed unless they are fully paid. In general, redemption of shares is not treated as a distribution.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
A Cyprus acquisition can be planned in multiple ways. The simplest form of acquisition can be conducted by a purchase of the majority of the issued share capital in the target company provided that the company is not listed on the Cyprus Stock Exchange. An acquisition in Cyprus is generally conducted by purchasing the shares of a company rather than purchasing its business and assets.
There is no capital gains tax imposed on the sale of the said shares, and such tax is solely imposed on the sale of immoveable property situated in Cyprus and on the sale of shares in companies that mainly own immoveable property in Cyprus. Consequently, share acquisitions are more attractive than asset and property acquisitions, especially where there is immoveable property involved. Moreover, no stamp duty is imposed on the documentation effecting the transfer of shares.
The sale of shares is outside the scope of VAT. In the case of asset purchases, if the purchaser will purchase a business as a going concern, this will fall again outside the scope of VAT, so long as particular requirements are satisfied. Thus on a purchase of assets not qualifying to be considered as a transfer of a business as a going concern, VAT at an effective rate of 19 per cent will be applicable.
If a company is listed, a public offer needs to be made for its acquisition by way of a purchase of shares. Furthermore, the Cyprus Companies Law, Cap 113 also provides for a merger or division of a company where two companies divide or unite through one company acquiring a controlling holding of shares in another.
Cyprus has fully adopted the EU Merger Directive, thus enabling company reorganisations with a foreign and local component. The Cyprus Companies Law, Cap 113 states the straightforward procedure to be followed for such reorganisations of companies, and the relevant provisions recognise mergers, divisions and partial divisions, transfers of assets and exchanges of shares in two or more companies intending to merge together.
Reorganisations are generally intended to be tax-neutral. Profits from the transfer of assets because of a reorganisation do not generate a tax burden for the transferring company. Further, VAT is not applicable to reorganisations, and no stamp duty is imposed on the documentation relating to a reorganisation. Finally, in the process of reorganisation, immoveable property is exempt from capital gains taxation and from mortgage fees.
A Cyprus company can alter its tax residency by moving its management and control outside of Cyprus, and Cyprus does not impose exit charges on companies that move their tax residency out of Cyprus. Furthermore, Cyprus allows for re-domiciliation of companies in and out of Cyprus without any exit or entry charges being imposed, and facilitates the uninterrupted carrying on of business without the necessity to liquidate the foreign company and to transfer all assets and liabilities to the newly incorporated company in Cyprus.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
Although Cyprus does not have a specific general anti-avoidance rule mechanism, it has implemented in its legislation general anti-avoidance rules, and it has adopted the ‘substance over form' and ‘business purpose' tests. Under the Assessment and Collection of Taxes Law, tax authorities may overlook sham or artificial transactions and structures whose sole purpose was the attainment of a tax benefit, and where there is no economic reality or business purpose behind the said transaction or structure.
Furthermore, given the new non-domicile legislation, which exempts non-domiciled persons who are tax residents in Cyprus from the special defence contribution in an effort to attract substance and high-net-worth individuals to Cyprus, specific anti-avoidance rules were introduced to prevent abuse of the said new legislation.
The new law introduced an anti-avoidance rule limiting its application where domiciled tax residents transfer assets to related non-domiciled persons to benefit from the new tax provisions, allowing the tax authorities to disregard such transfers of assets.
The law further introduced a new anti-abuse rule allowing tax authorities to disregard the interposition of a company without any actual business or economic reason between an individual and a company if this has been put in place with the sole aim of diminishing or deferring the payment of the special defence contribution tax.
For Cyprus legislation to become aligned with the amended EU Parent-Subsidiary Directive, the formerly absolute exemption of dividend income from corporate income tax on dividends received by a Cyprus company is not available as of 1 January 2016. Such dividends will fall outside the scope of the exemption where the relevant dividend received by a Cyprus tax-resident company is allowed as a tax deduction in the jurisdiction of the foreign paying company.
The exemption will additionally not apply where a structure has been put in place solely to benefit from this exemption where no real economic substance or real business purpose to exist lie behind the structure.
Dividend income falling outside the scope of the exemption as described above will be treated as trading income and will be subject to 12.5 per cent income tax in Cyprus.
ii Controlled foreign corporations
There are no controlled foreign corporation rules in place in Cyprus.
iii Transfer pricing
There is no explicit transfer pricing legislation in Cyprus. Nevertheless, Cyprus follows the principles of the OECD Transfer Pricing Guidelines relating to transactions between connected parties and the arm's-length principle. In accordance with Article 33 of the Income Tax Law, the arm's-length principle must be applied on all transactions between related parties, and all transactions must carry the same terms and conditions as those that would have been carried out by independent parties in the open market.
In cases where the arm's-length principle is not applied on transactions between related parties, the Cyprus tax authorities can proceed and adjust the tax base of the company accordingly.
As from 1 January 2015, in the case of transactions between Cyprus tax-resident companies, when an adjustment is made to the income of one company a deduction will be granted to the other.
iv Tax clearances and rulings
The Cyprus tax authorities provide tax clearance certificates for companies tax resident in Cyprus in accordance with their records.
Furthermore, on 1 October 2015, the Tax Department issued a formal procedure for obtaining advance tax rulings. Although the Tax Department had a long tradition of providing written replies with respect to tax queries, it now has a formal process for doing so.
The Tax Rulings Division of the Tax Department will, on request by the taxpayer or his or her representative, produce advance tax rulings with regard to transactions for the tax years for which the due date for filing a tax return has not yet passed or with regard to future transactions to be assumed by existing or new companies.
X YEAR IN REVIEW
The extensive recent changes in the Cypriot tax legislation demonstrate the government's commitment to attracting inward direct investment and remaining at the forefront of economic development.
Substantial incentives have been introduced, such as the notional deduction on new equity invested as well as the new non-domicile legislation intending to attract substance and new investments into Cyprus. Considerable exemptions from capital gains taxation also currently apply in relation to immoveable property and protection schemes for hidden mortgages with the aim of boosting the real estate market.
Furthermore, the government has reinstated the maintenance of the uniform 12.5 per cent corporate tax rate, which as previously mentioned is among the lowest in the EU and forms which the cornerstone of the Cypriot tax system.
The economy returned to growth last year, with the growth rate for the first quarter of 2016 being estimated at +2.7 per cent in relation to 2015. Such growth was achieved with systematic work by and the commitment of both the government and professional bodies. The significant tax reforms during the past year have once more given Cyprus a competitive edge, rendering Cyprus even easier to do business with, and have created a transparent and safe business environment that is attractive to foreign investments.
Taken everything into consideration, the competitive advantages of Cyprus as a financial centre of excellence remain and continue to develop constantly.
XI OUTLOOK AND CONCLUSIONS
Cyprus has proven to be a robust and competitive economy, and continues to be considered one of the most appealing jurisdictions for new operations and inward investment. Despite the economy's expansion over the past two years, the government is still dedicated to seeking and promoting reforms that will further enhance Cyprus's competitive edge.
The government is also committed in opening up closed professions to competition, and to reform the civil service drastically by modernising it and remodelling it to make it more effective and efficient for the attraction of foreign investment.
There are still challenges to overcome, such as non-performing loans (which have been significantly reduced as a result of the new legislation that has been passed) and private debt complications. Cyprus has a well-deserved reputation as a financial centre, and is regarded as an exceptional place for doing business with ease. Cyprus maintains its commitment to continuous improvements and developments focused on attracting foreign investment.
1 Georgia Papa is a senior associate at Pyrgou Vakis Law Firm.