Cyprus Tax Law

On 15 July 2002 new income tax legislation was enacted in Cyprus repealing the existing legislation. The new legislation comes into force on 1 January 2003. The most important provisions of this legislation are the following:

1.      Under the new law Cyprus tax is imposed:

(a) On the world wide income of all residents of Cyprus, and
(b) On the income generated in Cyprus by any non-residents of Cyprus.

2.      In the case of companies, the test of residency is whether the relevant company has its management and control in Cyprus. It would appear, therefore, that any companies that carry out operations outside Cyprus and belong to non-residents of Cyprus and having their majority of their board of directors outside Cyprus are not liable to taxation in Cyprus. This would mean that such companies cannot take the benefit of any double tax treaties involving Cyprus. On the other hand, if a company wishes to take advantage of the double tax treaty network of Cyprus it is highly advisable to have the majority of the directors in Cyprus and to provide that all board meetings shall take place in Cyprus.

3.      The law provides for a uniform corporate tax rate of 10%.

4.      Profits from the disposal of any securities are exempt from income tax.

5.      The treatment of dividends is as follows:

(a) Dividends are exempt from income tax.
(b) Dividends received by a resident of Cyprus are subject to a special "special contribution" tax at a rate of 15% except in the following cases:

                                 i.            A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company, which is a resident of Cyprus.

                               ii.            A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company which is not a resident of Cyprus provided that it holds at least 1% in the share capital of the payer. This exemption will not apply if: (a) the payer engages directly or indirectly more than 50% in activities which lead to investment income and (b) the foreign tax burden of the payer is substantially lower than the tax burden of the recipient.

                              iii.            The law further provides for a deemed distribution as dividend of 70% of the distributable profits of a company which is a resident of Cyprus on which special contribution is levied. It is interesting to note that in case of a deemed distribution (as opposed to an actual distribution) the exemption in (b)(i) above does not apply.

6.      The treatment of interest is as follows:

a) If the interest is received in the recipient's ordinary course of business or in close relation to it, it will be taxable as trading income at the corporate tax rate of 10%;

b) If the interest is received not in the recipient's ordinary course of business or in close relation to it, it will be subject to:

 .                        A special "special contribution" tax at a rate of 10%; and

i.                        50% of such interest will be taxed at the 10% corporation tax rate. The effective tax rate in this case will, therefore, be 15%. In view of this, it would appear that if substantial interest income is expected it is advisable to create a special company for this purpose.

7.      Profits generated by a company resident of Cyprus from a permanent establishment outside Cyprus are exempt from taxation. 

In order to establish a Cyprus company the following is needed: 

(a) Approval by the Registrar of Companies of the proposed name of the company. If the clients are not particular about the name we can provide a "shelf" name. 

(b) A brief description of the main objects of the company in order to print its Memorandum and Articles of Association. 

(c) The amount of the nominal capital of the company, and how it is going to be divided. This is usually CYP1, 000 divided into 1,000 shares of CYP 1 each. We note that it is also possible to denominate the capital in a currency other than Cyprus Pounds.

(d) The names, addresses, occupations, passport details and nationalities of the proposed beneficial shareholders as well as the proportion in which they will hold the shares of the company. If nominees will be used, the particulars of the nominees are needed as well. 

(e) The names, addresses, occupations, passport details and nationalities of the proposed directors and secretary of the company. 

(f) The proposed address of the registered office of the company. 

Our firm can provide the nominee shareholders, directors, secretary and registered office, if so requested. 

Once all the information is received the registration procedure takes two weeks