Operational Case Study
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 10% will 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 10% 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 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.
Mr. Dokic from Romania is a buyer of sports wear from Taiwan and sells to European Companies and has considered using an offshore company to mitigate his tax exposure on his profits, however on research Mr. Dokic has accepted that he requires to establish a company in a tax paying location that has a good image within the European Union, where his buyers are from.
Mr. Dokic decides to establish a Cyprus resident company that will acquire the goods from Taiwan and sell within the EU.
The goods are shipped from Taiwan to the order of the Cyprus Company to a port of the client’s choice for example the United Kingdom. On arrival, the goods are trans-shipped without being imported and the documentation from Taiwan is replaced with new documents reflecting the Cyprus Company and if needs be the origin can be changed on the shipping documents from China to UK, even though the goods have not been imported.
The Cyprus Company, registered for VAT in Cyprus, will be obliged to quote their VAT number on their invoice to the European buying party, as well as the European buyers VAT number which will enable the Cyprus Company to zero rate the supply to buyer. The buyer will account for VAT on the supply in the usual manner within it’s own country.
The profits accrued within the Cypriot entity are subject to 10% taxation within Cyprus, however there are ways to mitigate and reduce this amount. Should this be of interest please do not hesitate to contact one of our consultants.
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