New legislation has 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 12.5%.
- 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.
- There is no withholding tax on the payment of dividends, interest and royalties from Cyprus to non-residents of Cyprus.
- 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.
- Dividend income and profits from the sale of securities are exempt from corporation tax.
- With 2 exceptions, profits from a permanent establishment abroad are exempt from corporation tax.
- There are no time restrictions on the carrying forward of tax losses.
- There is group relief for the utilization of tax losses.
- The treaties for the avoidance of double taxation which Cyprus has signed remain in force. The existence of these treaties, combined with the low tax paid by a Cyprus company offer the possibilities for effective international tax planning. 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.
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 was enhanced further as it enjoys the reputation and privileges attached to a European company.