Why Cyprus is so popular with tax savvy entrepreneurs

Last updated: 13 June 2023 Views: 6990

Although Cyprus is a tiny island, it’s now becoming a giant for business due to its extremely tax-friendly environment. With the UK exiting the European Union, many entrepreneurs are now looking to other EU member states to set up their companies and Cyprus has quickly become the go-to country for international business people.

The attractive tax regime, the country’s solid legal and regulatory framework, together with a highly skilled workforce and a prime location - just below Turkey and east of the Greek island of Crete, with excellent sea trading routes to mainland Europe – are just some of the reasons Cyprus company formation is currently experiencing a boost.

What are the tax benefits in Cyprus?

Tax resident companies in Cyprus are able to benefit from the extremely low corporation tax rate of 12.5% and there is 0% tax on dividends received and 0% withholding tax on dividend payments. There is also an exemption from tax on profits from the sale of securities and no capital gains tax is paid on the transfer of property owned by a Cyprus company abroad. Any tax losses you make can be carried forward and are off-set against the profits you make over the next five years. There are also a considerable number of double taxation treaties with various countries which can help if you trade regularly with other EU countries.

Cyprus Company Structures & Tax Benefits

TRADING COMPANY

A minimum of one director and one shareholder is required to set up a company in Cyprus. Nominee shareholders and nominee directors are allowed and there are no restrictions on investment activities within the Cyprus tax environment. A trading company can carry out all of its trading activities through Cyprus and benefit from:

One of the lowest EU tax rates of 12.5%.
No withholding tax deducted on dividends paid by a Cyprus company to foreign shareholders.

HOLDING COMPANY

The tax benefits of a holding company are:

Tax free distribution of dividends to non-resident shareholders and no withholding tax on dividends paid by a Cyprus company to foreign shareholders (individuals or corporations).
The ability to attract foreign sourced dividends from subsidiaries at 0%.
Full exemption from tax on the disposal of subsidiaries.
No tax on the disposal of shares.
A Cyprus tax resident company may also claim the tax losses of a group company which is tax resident in another EU country, provided the other company firstly exhausts all possibilities available to utilize its losses in its country of residence or in the country of any intermediary EU holding company.
No VAT registration & compliance obligations.

SECURITIES TRADING COMPANY

A Cyprus company trading in shares and other securities (trading or investment activities) may benefit from:

Tax exemptions on gains on securities, including disposal of shares in subsidiaries.
Tax exemptions on dividend income.
Unilateral tax credit relief for foreign tax paid on income received abroad.
No withholding tax deducted in Cyprus on dividends paid by a Cyprus company to foreign shareholders.

FOREIGN PERMANENT ESTABLISHMENT

A company may set up a foreign Permanent Establishment (branch) with the following benefits:

No taxation of a branch in the country of operation if a project (construction, assembly works etc) lasts up to 12 months.
The profits of a branch are tax exempt in Cyprus if a Permanent Establishment lasts more than 3 months.
No withholding tax on dividends paid to foreign investors.
A Permanent Establishment outside Cyprus can off-set its losses against its Cyprus income.

ROYALTY COMPANY

A Cyprus company can be used as an intermediary royalty company between a foreign licencing company and a foreign high tax operating company in a double tax treaty location in the following way:

Profits are reduced in a high tax operating company through payments of a licence to Cyprus
Withholding tax is minimised in the operating country through the use of DTT (Double Tax Treaties) and EU Directive on Royalties and Interest
Tax credits are available in Cyprus for any withholding tax paid by the operating company
No withholding tax is payable in Cyprus on the payment of royalties to the licencing company
80% exemption is applied on net profit (after deducting all direct expenses) arising from the exploitation of intellectual property (I.P.) rights and profit arising from the disposal of such assets, meaning the tax rate for the I.P. Rights derived profit is 2.5%.

What is a Cyprus International Trust (CIT)?

CITs are widely employed in what may be loosely termed ‘family situations’ but can also be used in commercial and business transactions or for charitable causes. They are ideal for "high worth" individuals especially those with slightly complicated family structures i.e. with divorced and children from different spouses For example, a CIT may be created for the following reasons:

To hold property for minors or future generations of a family.
To protect property against family members.
To provide secretly for others (anonymous benefactor).
To provide for a couple on their marriage whilst ensuring that any property is ‘tied up’ in the event of that marriage failing.
To establish a fund for the benefit of family members.
As an investment vehicle via unit trusts.
To provide pensions for employees and dependents.
To provide an incentive to the workforce via employee trusts.
To enable charitable projects to be carried out as part of commercial arrangements to protect commercial lenders.

The tax benefits of a Cyprus International Trust include no taxation on income in Cyprus and it may be used to reduce or eliminate inheritance tax or capital gains and used to distribute untaxed income to the beneficiaries.

How to set up a company in Cyprus

The easiest way to set up a company or trust in Cyprus is to go through a company formation agent who is able to advise on the suitable company structure and can arrange introductions with banks for business accounts and deal all the subsequent formation paperwork.

For more information on how to set up a business in Cyprus, or how to open a business bank account or to talk to a tax advisor, please email us through our contact page or call our bi-lingual team on either 0033 (0) 1 53 57 49 10 (France) or 0044 (0) 203 445 0916 (UK).