Changes in the tax laws in Cyprus which became effective on 1 January 2003 have abolished the distinction between local companies and international business companies. A uniform corporation tax rate of 12,5% now apply to all companies resident in Cyprus. Whether companies are classed as resident or non-resident is dependent upon the location of the management and control of the company.
There is no legal definition of ‘management and control’ but it is generally taken to mean where the board meetings take place or the majority of board members reside.Resident companies are now taxed at 12,5% on their worldwide income and non-resident companies are only taxed on profits arising out of a permanent establishment on Cyprus. ‘Permanent establishment’ includes an office, a branch, a factory and a construction site for a project exceeding three months. Companies, whose management and control is outside of Cyprus and having activities outside Cyprus, only, will not therefore pay any tax in Cyprus.
Cyprus resident companies can take advantage of the double tax treaty network. The anti-avoidance provisions will no longer apply under the new regime. Since joining the EU in May 2004, resident companies enjoy one of the lowest corporate tax rates in Europe.
Dividends paid to non-resident shareholders of Cyprus companies will not be subject to withholding taxes. In addition dividends received by Cyprus companies are exempt from corporation tax. Cyprus resident companies receiving dividends from a foreign company are not liable to withholding tax provided the company receiving the dividend holds more than 1% of the share capital of the foreign company paying the dividend. (Other conditions are that not more than 50% of the paying company’s activities result in investment income and the tax paid in the jurisdiction in which the foreign company is registered is not significantly lower than the tax paid in Cyprus).
These provisions make Cyprus a good location in which to incorporate a holding company. If a subsidiary were incorporated in a jurisdiction other than Cyprus with 0% tax e.g. BVI and the holding company were a Cyprus resident company it would enjoy double-tax treaty benefits and subsequently minimize the taxable profit in Cyprus.
Non-resident companies may be best used where there is no intention to make use of the double-tax treaty network or to repatriate profits, e.g. where monies are transferred to a foreign bank account or left in a foreign currency account in Cyprus.