New legislation has recently been passed which is effective from January 1st 2003 and which regulates the tax treatment of Cyprus companies. The new legislation aims to conform to European Union law and the European Union code of conduct and abide by Cyprus' commitment to the Organisation of Economic Cooperation and Development (OECD) to eliminate harmful tax practices.
The main features of the tax reform are the following: -
The taxable income of all Cypriot companies is taxed at the rate of 10%.
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Dividend income from abroad to Cyprus is wholly exempt from corporation tax provided the direct holding is at least one per cent (1%) of the share capital of the overseas company. This exemption will not apply if the company paying the dividend engages in more than fifty per cent (50%) of its activities in producing investment income and the foreign tax burden on the income of the company paying the dividends is substantially lower than that in Cyprus.
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There is no withholding tax on the payment of dividends, interest and royalties from Cyprus to non-residents of Cyprus.
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In order to conform to the European Union, the new tax legislation adopts the appropriate European Union directive which enables reorganizations, mergers, acquisitions and amalgamations of companies without tax implications.
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Dividend income and profits from the sale of securities are exempt from corporation tax.
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With 2 exceptions, profits from a permanent establishment abroad are exempt from corporation tax.
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There are no time restrictions on the carrying forward of tax losses.
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There is group relief for the utilization of tax losses.
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The treaties for the avoidance of double taxation which Cyprus has signed remain in force. There are currently 34 such treaties. The existence of these treaties, combined with the low tax paid by a Cyprus company offer the possibilities for effective international tax planning as I will indicate in my example in a moment. The main objective of the double tax treaties is to avoid the double taxation of income earned in any of the two contracting countries. This is done through the tax sparing provisions whereby tax is credited against the tax that must be paid in the contracting state. The treaties also provide for reduced withholding taxes for dividends, interest and royalties. The table provided shows the countries with which Cyprus has concluded a double tax treaty. On the same table are stated the percentage of withholding tax that has to be paid for dividends, royalties and interest paid to and from Cyprus.
As regards the procedures involved in incorporating and administering a Cyprus company it must be noted that the aim in Cyprus has always been to create not a tax haven but a tax incentive country. Therefore, regulations have always been adhered to. Permission from the Central Bank is necessary before a company can be established while at the end of each fiscal year audited accounts and annual returns must be submitted both to the Central Bank and to the tax authorities. Having said that, applications for the incorporation of a Cyprus company are processed efficiently by the Central Bank and the Registrar of Companies and the procedure can be completed in about a week. Local law firms and accountancy firms can provide nominee services for the administration of the company thus securing anonymity for the actual owner, where this is required. Instructions for the incorporation of a company can be given by fax or e-mail and the presence of the owner in Cyprus is not required.
A Cyprus holding company therefore enjoys not only the aforementioned tax advantages but also the status of being located at a reputable business center. With EU accession in May 2004 the status of a Cyprus holding company will be enhanced further as it will enjoy the reputation and privileges attached to a European company.
A Cyprus holding company can be used very effectively for international tax planning purposes. This is through the use of, on the one hand, the tax incentives and, on the other, the treaties for the avoidance of double taxation.
In the first scenario, a Greek company is to carry out business in Russia and in Ireland and establishes subsidiary companies in these two countries. In the case of Ireland we will examine the case where the Irish subsidiary is owned 100% by the Greek company (hereinafter will be referred to as the first Irish company) and the case where it is owned 25% by the Greek company (hereinafter the second Irish company). We examine this scenario because according to the prevailing Irish law if the parent company, with interest over 25% over the subsidiary company, is registered in an EU country then there is no withholding tax. In the example, the Russian and Irish subsidiary companies will make a net profit of USD 100,000 each. This net profit will be taxed at the rate of 12.5% in Ireland and at the rate of 24% in Russia because this is the prevailing tax rate in these countries. This leaves us with after tax net profits of USD 87,500 in the case of the Irish company and after tax net profits of USD 76,000 in the case of the Russian company. If these profits are to be received in Greece in the form of dividend then, as already stated, withholding tax at the rate of 0% will apply in the case of the first Irish company, withholding tax at the rate of 24% will apply in the case of the second Irish company and withholding tax at the rate of 20% will apply in the case of the Russian company. The dividend received in Greece will then be taxed at 35% which is the prevailing tax rate leaving net income of USD 56,875 in the case of the first Irish company, USD 43,225 in the case of the second Irish company and USD 39,520 in the case of the Russian company.
  | | SCENARIO A | | | IRISH COMPANY(100% owned) | IRISH COMPANY
less than
(100% owned) | RUSSIAN COMPANY(100% owned) | | | Directly | Directly | Directly | | Net profit | 100.000 | 100.000 | 100.000 | | Local Taxes 12,5%,24% | -12.500 | -12.500 | -24.000 | | Net Profits | 87.500 | 87.500 | 76.000 | | Withholding tax 24%, 20% | | -21.000 | -15.200 | | Net dividend received in Greece | 87.500 | 66.500 | 60.800 | | Tax in Greece 35% on dividends | -30.625 | -23.275 | -21.280 | | Net Income | 56.875 | 43.225 | 39.520 |
| | SCENARIO B | | | IRISH COMPANY(100% owned) | IRISH COMPANY
less than
(100% owned) | RUSSIAN COMPANY(100% owned) | | | Indirectly | Indirectly | Indirectly | | Net profit | 100.000 | 100.000 | 100.000 | | Local Taxes 12,5%,24% | -12.500 | -12.500 | -20.000 | | Net Profits | 87.500 | 87.500 | 80.000 | | Withholding tax 0%, 0% | 0 | 0 | 0 | | | 87.500 | 87.500 | 80.000 | | Cyprus Corporation tax 10% | 0 | 0 | 0 | | | 87.500 | 87.500 | 80.000 | | Withholding tax 0%, 0% | 0 | 0 | 0 | | Net dividend received in Greece | 87.500 | 87.500 | 80.000 | | Tax in Greece (35%-15%) 20% | -17.500 | -17.500 | -16.000 | | Net Income | 70.000 | 70.000 | 64.000 | | SAVING | 13.125 | 26.775 | 24.480 | | Tax saving % Scenario B over Scenario A | 23,08% | 61,94% | 61,94% |
In the second scenario, the Greek company has a subsidiary company in Cyprus which acts as a holding company to its immediate subsidiaries in Russia and Ireland. In this case as you can see from the diagram there is no withholding tax when the Cyprus company receives the profits in the form of dividend from the Russian and Irish companies. This is because of the double tax treaty signed between Cyprus and Ireland and that signed between Cyprus and Russia which so provide. Although Cyprus corporation tax is at 10%, in this case there will be no tax incidence since, as stated previously, dividend income received from abroad is exempt from tax. Moreover, the net dividend received in Greece will not be taxed at 35% as in the first scenario, but at 15%. This is because a tax credit of 15% will be given for the underlying tax on the dividend due to a tax sparing credit provided for in the double tax treaty between Cyprus and Greece. Therefore we will have a final net income of USD 70,000 from the two Irish companies and USD 64,000 from the Russian company.
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