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News & Press: TaxTalk


04 March 2012   (0 Comments)
Posted by: Author: Andreas Athinodorou
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Cyprus offers significant advantages to South African entrepreneurs,wealthy individuals and investors seeking a safe yet attractive business environment and a low cost yet high European/Mediterranean lifestyle.

With one of Europe’s highest percentage of university degree-holders, a highly skilled and multilingual workforce, a vibrant free market economy, superb infrastructure and being a member of the European Union ideally positions Cyprus in the international business world.Furthermore, Cyprus has the advantage of having the lowest corporate tax rate in the EU and stable relations with Central and Eastern Europe as well as the Middle East,ensuring its success as a European financial centre.

Cyprus as a financial centre
Since the dawn of civilisation, Cyprus’ strategic location has attracted many conquerors,starting with the Mycenaean Achaeans in 3000 BC and ending with the Turks who invaded the island in 1974 and still occupy approximately 40 percent of the land.The British, from whom Cyprus gained its independence in 1960, left a legacy of organisational efficiency.Cypriots are highly educated.In fact, Cyprus has the highest percentage of university degree-holders per capita in the EU.Although the native language is Greek, English has been established as the official business language, with French and German also being widely spoken.

Other benefits Cyprus offers include:
•Modern telecommunications and infrastructure.
•Economic stability.
•Readily available professional services.
•Business-friendly time zones.
•Competitive and approachable service providers.

Tax benefits
Cyprus is ranked high on the list of preferential tax jurisdictions for international tax planners,with the lowest corporate tax rate in the European Union and several tax advantages for holding companies, such as full participation exemption (dividends and capital gains)and zero withholding taxes on dividends,interest and royalties.Cyprus has succeeded in differentiating itself from other financial centres.It has a very favourable tax system with a wide network of double tax treaties and full applicability of the EU Directives for remittances of income from other EU member states.The directives have also been fully adopted In Cyprus’ tax law.The main features of the tax system of Cyprus are described below.

Scope of tax
Tax is imposed on all Cypriot-resident persons(individuals and corporations) on their worldwide income.A corporation is tax-resident in Cyprus when its management and control is exercised in Cyprus.

Corporation tax
The corporation tax rate is 10 percent and is the lowest rate in the EU

Dividend income
Corporations do not pay any tax on dividends received from other Cypriot corporations.

Dividends received from foreign corporations are exempt from tax.
The exemption will not be granted only if directly or indirectly more than 50 percent of the activities of the paying company result in investment income; and the paying company is subject to tax at a rate substantially lower than the Cypriot rate.When dividend income is not exempt, it is subject to another type of tax (defence contribution) at the rate of 20 percent.Tax credits for taxes paid abroad are available.

Capital gains
Capital gains tax is imposed only on the sale of land and buildings situated in Cyprus, or of shares in non-listed companies that own such property.There is no tax on the sale of any other asset, including real estate outside Cyprus and shares.As far as shares are concerned, gains as well as trading profits from the disposal of titles are exempt from tax.Titles are described as shares, bonds, debentures and similar titles, as well as rights thereon (options, futures, etc).

Other significant provisions:
•Losses can be carried forward indefinitely.
•Group relief is available (companies part of a group can consolidate their results, thus allowing losses of one company to be off-set against profit of another company).
•Mergers, acquisitions and spin-offs can be effected without tax cost.
•There are no thin capitalisation rules(companies can be funded by 100 percent debt) and no controlled foreign corporation rules (CFC rules).
•Acceptance of a thin profit margin as being arm’s-length.
•Exemption of profits from a permanent establishment/fixed place of business abroad.

Withholding taxes
Cyprus does not impose any withholding tax on dividend, interest and royalty payments made to non-Cypriot resident recipients.

In the case of royalties, the exemption applies for royalty payments when the right/asset is used outside Cyprus.If the right/asset is used within Cyprus, there is a 10 percent withholding tax, subject to treaty provisions.

Double Tax Treaty Network and EU Directives
Cyprus has an extensive network of double taxation treaties (DTT) with 36 countries and several others under negotiation.Where there is no DTT, a Cypriot company can benefit from the EU Directives to eliminate withholding taxes when collecting income from the EU.

In summary, the tax climate offers to investors:
•Only 10 per cent corporation tax – the lowest rate in the EU.
•Extensive double tax treaties network.
•Exemption from tax of profit generated from transactions in titles.
•Exemption from withholding tax on the repatriation of income either in the form of dividends, interest and almost all royalties.
•Access to EU Directives.

Summary of the Cyprus tax system

In summary, the tax climate offers to investors:
•Only 10 per cent corporation tax – the lowest rate in the EU.
•Extensive double tax treaties network.
•Tax-exempt gains on the trading and disposal of financial securities.
•Tax-exempt dividend income (subject to applicable criteria).
•Tax-neutral group re organisations.
•Exemption from tax of profit generated from transactions in titles.
•Exemption from withholding tax on the repatriation of income either in the form of dividends, interest and almost all royalties.
•Access to EU Directives.

Tax planning opportunities
The key benefits outlined above render Cyprus the ideal location for:
•Holding companies
•Finance companies
•Royalty companies
•Property-holding companies
•Trading companies.

Holding company
A Cypriot holding company can act as an intermediate holding company to assist in the repatriation of dividends in a tax-efficient manner. The use of a Cypriot holding company also avoids triggering of thin capitalisation rules and controlled foreign company rules that exist in countries such as Germany, the UK and the Netherlands.

As a holding company location, Cyprus is the obvious choice since it is possible for income to flow through a Cypriot company tax-free and, what is more, Cyprus offers very effective and quick tax-free exit routes to investors.The Cypriot tax system offers full participation exemption on dividend income and on gains on disposal of shares, without the imposition of any conditions.A non-EU investor can, therefore, gain access to the EU market through a Cypriot holding company.Profits can be distributed to the Cypriot company from the EU trading company location tax-free by application of the parent/subsidiary directive.

In Cyprus, the dividend income will be exempt from taxation, and repatriation from Cyprus to the non-EU investor will be tax-free since Cyprus does not levy withholding taxes on distributions to persons outside Cyprus.The reverse is also possible if an EU investor wishes to invest in a non-European market.

EU operating subsidiary
Dividends will be received in Cyprus with no withholding tax under the provisions of the EU parent/subsidiary directive.

Non-EU operating subsidiary
Dividends will be paid to the Cyprus holding company net of the withholding tax.The level of the withholding tax is subject to the double tax treaty between Cyprus and the other non EU member state of the operating subsidiary.

Dividends received by the Cyprus holding company
Exempt from all taxes.
Dividend paid to non-resident shareholder
There is no withholding tax on dividend paid by the Cyprus holding company to the non-resident shareholder, based in the EU or outside the EU.

Disposal of the operating subsidiary
The gains arising from the disposal of the shares of the operating subsidiary are not subject to any tax in Cyprus, provided that the operating subsidiary does not own any immovable property in Cyprus.

Finance company
Finance companies are favoured due to the low tax rate imposed on interest income (10 percent). Relief is usually granted on the interest expense charged by the Cyprus company at a higher rate; there is no withholding tax if from an EU location by means of application of the interest and royalty directive; and in Cyprus the income is taxed at 10 per cent.Other structures are possible for finance companies, resulting in much lower effective tax rates such as using foreign branches (Switzerland, Ireland or the BVI) of a Cyprus company.

Royalty company
Royalty companies operate in much the same way as finance companies.Income from royalties is included in the computation of the taxable profits of a Cyprus tax-resident company and is subject to tax in Cyprus at the rate of 10 percent.Royalty payments are deductible expenses in the computation of the taxable profits of a Cyprus tax resident company.The gross amount of any royalty premiums payable for the use of the intellectual property outside Cyprus are not subject to withholding tax unless the IP is used within Cyprus.In the latter case there is withholding tax at 10 per cent (five per cent if it relates to cinema films), unless the DTT provides for a lower rate or the EU interest royalty directive applies.

Property holding company
Cyprus is more and more frequently used as a property holding company location for investors wishing to invest in countries such as Russia, Ukraine, UK, Romania, India, Africa,etc. Usually a Cyprus special purpose vehicle is created to hold shares in a property holding company in the target location.Future taxation on gains on disposal of the property is avoided by disposal of the shares that the Cyprus SPV holds in the property holding company since taxation of the gains on disposal of shares is granted to Cyprus under the DTT and such gains are exempt under local rules.

Trading company
The low corporate tax rate (10 per cent), the lowest in Europe, renders Cyprus an attractive location for trading activities.Trading through a Cyprus company allows profits of big multinational companies to be taxed at a low effective tax rate.

Why Cyprus?
The main reasons are not only purely tax related.Cyprus also offers immigration permits and has implemented naturalisation policies that can be leveraged by financially healthy individuals, business people and investors from non-EU countries to move to Cyprus permanently with the intention of obtaining the Cypriot and European Union citizenships.

As a measure to boost the local economy, the Council of Ministers recently decided to adopt a favourable treatment on applications for immigration permits by third-country nationals  who own a residence in Cyprus.The preferential treatment for the Immigration Permit Category F, as described in the Aliens and Immigration Regulations of 1972 to 2004,applies only to third-country nationals who:

•Have purchased property in Cyprus for private use with a value of over €300 000.
•Have a secure annual income from sources overseas and not in Cyprus (around€30 000 a couple per year).
•Have no criminal record.

The immigration permit in Cyprus is equivalent to a permanent residence permit.Those who qualify for this type of permit benefit from avoiding the time-consuming processes usually required to be followed by non-EU nationals wishing to acquire permanent residency in Cyprus, such as embassy checks,renewals of permits, and multiple entry permits.The Cyprus-South Africa DTT is probably the best DTT in South Africa and provides amongst others the following:

Taxation of dividends
Payments of dividends by a South African company to a Cyprus company are free of any WHT in South Africa.

Taxation of interest
Payments of interest by a South African company to a Cyprus company are free of any WHT in South Africa.

Taxation of royalties
Same as for interest, there is no WHT from South Africa.It is therefore the combination of the very favourable tax system and a very favourable DTT that makes Cyprus the ideal location for investments into South Africa.

The rate of tax in Cyprus is low; therefore, a Cypriot investment vehicle can in many cases collect income, which protects against high tax rates.Foreign withholding tax is eliminated or reduced under double tax treaties or EU Directives.The income can then be repatriated in any form the investor wishes, without any Cypriot withholding tax.This investment vehicle is suitable both for EU inbound or outbound investments.With more than 300 days of sunshine every year and an enviable quality of life, Cyprus is the place where things get done, service is delivered with a smile and business is always a pleasure.

Source: By Andreas Athinodorou (TaxTalk)


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