We refer to the above matter and advise as follows;

The new tax system in Cyprus, coupled with its extensive network of double tax treaties, will improve its attractiveness as a regional business and financial centre. It is in full compliance with the EU Code of Conduct for Business Taxation, strictly adheres to the OECD’s rules for the elimination of harmful tax practices and is upgrading its image and reputation ahead of global tax competition.

As from 1 January 2003 the previous distinction between local companies and international business companies (IBCs) has been abolished.

Under the new Income Tax Law (the Law), a Cypriot registered company, whether or not beneficially owned by foreigners, will enjoy the following attributes:-

it is subject to a single corporate tax rate of 10%, provided that its management and control is exercised in Cyprus;

- there is no longer any geographical limitation on the exercise of its activities, i.e. its income may be derived from any source, including Cypriot based sources, unlike the previous regime where IBCs were prevented from participating in the local market; and

- there is no restriction on its shareholding structure and both Cypriots and non-Cypriots may be admitted as shareholders, unlike the old regime where IBCs could only be owned 100% by non-Cypriots.

Cypriot registered companies which are not managed and controlled in Cyprus are deemed non-tax residents of Cyprus and therefore are not subject to tax in Cyprus on any income derived from sources outside Cyprus, but will be taxed on their Cyprus sourced income. A Cypriot non-resident company, which will not be able to take the benefit of double tax treaties, but will also not be subject to any Exchange of Information treaties, may be beneficially used in many instances as, for example, to own Cypriot resident companies. We will be very happy to provide you with more information in this respect.

THE CYPRUS HOLDING COMPANY

Cyprus is most commonly used as a top holding company or an intermediate holding company jurisdiction and is of particular interest in the following set of circumstances:

• For international or domestic groups investing outside Cyprus and receiving dividends from such investments, since such dividend will in most cases be tax exempt in Cyprus;
• To hold subsidiaries that have potential for significant capital appreciation which may be sold in the future as such disposals are not taxable in Cyprus;

To benefit from the favourable withholding tax provisions of the Cyprus Double Tax Treaties network and the EU Parent-subsidiary directive and the other directives for payments such as interest, dividends and royalties made to the Cyprus company;

• Where a jurisdiction is required that does not have tax inefficient controlled Foreign company tax legislation;
• Where it may be important to unwind the holding company structure at some stage in the future in a tax free manner, since Cyprus has no holding period requirements for its exemptions on the taxation of dividends or from the sale of stock;
• To avail of the easy exit strategy under Cyprus law which allows payment of dividend, interest and royalties (in most cases) without payment of withholding tax;
• To host any fund or investment vehicle, as there is no tax on transactions in securities as defined, even if this is the trading activity of the entity;
• To locate a finance company, whereby the Cyprus company extends loans to other group companies.
• To hold intellectual property and license such property to third parties and other group companies.

According to Cyprus Income tax laws, a company is tax resident in Cyprus if its management and control is exercised in the Republic of Cyprus. There is no definition in the Cyprus Income tax laws as to what constitutes management and control. It is understood that the definition per the OECD model convention in relation to “place of effective management” is the one to be followed by the Cyprus tax authorities. Therefore, as a minimum, management and control is considered to be exercised where the Board of Directors meets and takes decisions.

CYPRUS RE-DOMICILIATION OF COMPANIES

New law on this subject enacted in 2007 opens new dimensions to the international investors and traders as non Cyprus companies can now be re – domiciled in Cyprus and be benefited from the various provisions of the Cyprus legislation. It also provides for Cyprus registered companies to be re – domiciled abroad. At the same time the companies will not lose their previous records, investments, trading history and connections

REGISTRATION

The procedure for the incorporation of a Cypriot registered company begins with the approval of the name by the Registrar of Companies. After obtaining the approval, which may take up to 10 days, the following documents must be lodged with the Registrar of Companies:-

(a) The Memorandum and Articles of Association, which contain the company’s main objects and the rules that govern the company’s internal procedures and functions.

(b) A list of the directors and the secretary’s name.

(c) The address of the company’s registered office, which will be the place at which all official notices are served.

In the case of foreign beneficial owners, the permission of the Central Bank of Cyprus, which will be granted on receipt by the Central Bank of satisfactory bank references for the beneficial owners.

As far as the incorporation procedure is concerned, this should take about one month from the day all the required information and documents are submitted, assuming that the bank references meet the criteria set out in Cyprus Registered Company (International Business Company) Form 1. If the company is required urgently, there is a special accelerated incorporation procedure, at an extra cost of about Euro 400, and all relevant procedures are completed within a maximum time frame of four to five days. Shelf companies and names are also available.

A company must have its financial statements audited yearly by Cypriot auditors. Auditors will normally not give quotations for their audit services before they know more about the size and business of the company and its proposed operations.

TAX PLANNING ADVANTAGES FOR INTERNATIONAL BUSINESSES

The new tax package essentially replaces the territorial system, based on domicile and registration, with a simple system of worldwide taxation for Cypriot residents and of taxation of Cypriot source income for non-Cypriot residents.

The new tax laws provide substantial opportunities for the beneficial tax use of Cypriot corporate entities in cross-border transactions. The main features of such advantages are presented below

New residence rules for companies

Management and control test

Worldwide income for residents of Cyprus versus Cypriot-source income for non-residents

New withholding regime for dividends and interests payable to non-residents

No withholding taxes on dividends and interest payable to non-residents

New rules for doing business abroad

No taxation of foreign dividends and income from permanent establishment abroad

New concept for capital gains

Trading gains realised through the disposal of securities exempt from taxation

No capital gain tax on any profits realised through the disposal of securities

New reorganisation rules

Domestic law linked with EU Merger Directive Rules

Exemption from taxation – privileged treatment of reorganisations

New rules for tax losses

Losses can be carried forward indefinitely

Group relief is allowed between resident companies within a group structure

Transitional provisions for IBCs

Option for the 4.25% tax rate for IBCs which on the 31 December 2001 had income derived outside Cyprus and qualify under the transitional provisions.

CYPRUS DOUBLE TAX TREATIES

Cyprus has concluded Double Tax Treaties with the following countries:

* Azerbaijan, Armenia, Kyurghystan, Moldova, Tajikistan, Uzbekistan and Ukraine apply the USSR/Cyprus treaty.

** Slovenia and Serbia/Montenegro have also adopted the double taxation convention concluded by the former Socialist Federal Republic of Yugoslavia.

Contributed By Christodoulou & Mavrikis Inc

Attorneys: Johannesburg & Athens

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