General Info

Cyprus, officially the Republic of Cyprus, is an island in the Eastern Mediterranean, east of Greece, south of Turkey, west of Syria and north of Egypt. It is the third largest island in the Mediterranean Sea and one of its most popular tourist destinations.

Taking into consideration and acknowledging the competition targeting Cyprus from other low tax or no tax jurisdictions, we remain confident that Cyprus continues to provide a complete value proposition for foreign investors as a financial and business centre.

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Dividends & Tax

As far as foreign dividends are concerned, these are exempt from Cyprus tax if either:

  1. Dividend derives by at least 50% directly or indirectly from trading / or active income, or
  2. The foreign tax imposed on the dividend paying company is not significantly lower than the Cyprus tax rate (estimated at around 5%).

If the exemption does not apply, then a flat tax rate of 20% is imposed, BUT there is tax credit on all foreign withholding tax and credit on underlying tax for EU and for non EU if provided by the DTT

Most international companies in Cyprus are set up as investment holding companies or group financing companies. The small increase in corporation tax from 10% to 12.5% will not have a significant effect on the tax liability of such structures, as corporation tax affects mainly trading income. The Cyprus Holding Company structure, where a Cyprus company is shareholder of an overseas company, has been voted by participants in international surveys as being the best holding company regime in Europe. The structure can be simplified as follows:

cyprus dividends

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This structure makes use of the fact that dividend income for Cyprus companies is exempt from corporation tax.

In the case where a Cyprus company ‘holds’ companies in the EU or companies with zero tax, the effect in most cases would be zero taxation on dividend distributions from the trading companies all the way to the ultimate beneficiary. The overall effect is zero in most cases because either the relevant double tax treaty provides for a 0% withholding tax on dividends or because the conditions for application of the EU Parent Subsidiary Directive are satisfied.

In the case where a Cyprus company ‘holds’ companies in double tax treaty countries, the effect on dividend distributions from the trading companies all the way to the ultimate beneficiary would be a withholding tax in the overseas jurisdiction at a reduced rate as per the double tax treaty.

If the shares of the overseas company are eventually sold, there will be no capital gain tax on the profit of the sale.

With regards to the aforementioned Double Tax Treaties, Cyprus has developed a wide network of such agreements with over 40 countries, including the Russian Federation, Qatar, Romania, United Kingdom, India, etc. ensuring that the same income is not taxed in more than one country. The Double Tax Treaty between Cyprus and the Russian Federation is the best treaty that Russia has signed with any other country. In 2008 Russian statistics showed that out 52 billion US Dollars was invested by foreigners in Russia. (For more information about the double tax treaties that Cyprus maintains visit: Ministry of Finance.)

Another common company structure is that of the Cyprus Financing Company structure. An intermediary Cyprus Finance Company can be placed in between a parent company in a European or no tax jurisdiction and subsidiary companies operating in treaty countries. The Cyprus Company will borrow money from the parent company in a European or no tax jurisdiction and lend money to the subsidiaries operating in treaty countries.

Advantages of a Cyprus Finance Company

  1.   Interest income is considered to arise from the ordinary activities of the company and is subject to corporation tax after the deduction of the interest payable. Therefore, a small margin of net interest income will be taxable in Cyprus at 10%.
  2.  Dividends distributed to non-resident shareholders bear not Withholding Tax.
  3.  Interest paid to non-resident creditors bears no Withholding Tax and interest income received by the Cyprus company from a foreign country bears no Withholding Tax.

In addition to the aforementioned beneficial company structures, Cyprus offers a great standard of professional services. Cyprus inherited a legal system based on Common Law. The legal profession is long established and consists of many independent law practices. Highly qualified and well trained professionals can provide expert and reliable advice on all aspects of business and commercial law, both local and international. The accounting profession is very well represented too, with many international companies operating on the island, as well as a number of private individuals providing accounting, auditing and consulting services. Most accountants are British trained and members of either the Institute of Chartered Accountants or the Chartered Association of Certified Accountants. Overall, the professional services sector plays a significant and rapidly expanding role in the Cyprus business landscape.

*Securities: The term securities include shares, bonds, debentures, other securities (bills of exchange, certificates of deposit), founders of securities and rights thereon. Rights on these five categories of underlying securities are granted by derivative instruments including options, futures, forwards, swaps and warrants. However, direct investments in futures, promissory notes, mutual funds, options, forwards, commodities and other underlying instruments do not fall within the category of investments thus profits from disposal of such securities are subject to corporation tax.