Christodoulos Vassiliades outlines the legislative and regulatory framework of the jurisdiction.
Cyprus is The Third largest island in the Mediterranean Sea after Sicily and Sardinia. The island benefits from a strategic location in the north east of the Mediterranean, and is effectively the ideal crossroads linking Europe, Africa and Asia with close proximity to the three continents and their trade routes. The capital, Nicosia is the island’s administrative and main business centre.
Cyprus became an independent state in 1960 after 82 years of British rule and is politically stable. It has a system of government based on democracy – human rights, political pluralism and private property are safeguarded.
The legal system has developed from its English counterpart and has retained the same principles, including those relating to banking, commercial and company law and procedures. Most statutes and regulations relevant to business practices are in the English language. A system of administrative law according to continental principles under the constitution provides for the judicial review of public administrative decisions.
In July 2003, the Capital Movement Law was enacted and came into force on 1 May 2004, the date of Cyprus’s accession to the EU. It repealed the Exchange Control Law thus abolishing all exchange control restrictions.
Cyprus formally acceded to the European Union in May 2004. It is represented in the European Parliament by one commissioner and six members and has four votes in the EU’s policy-making council of ministers.
As from October 2004, Cyprus approved the complete freedom of direct investments from non-residents in Cyprus. Consequently, non-residents who wish to establish a company in Cyprus or acquire shares in existing Cyprus companies or otherwise to invest in or from Cyprus, no longer require approval by the Central Bank of Cyprus. The same applies for direct and portfolio investments by natural or legal persons from EU member states.
At the same time, the government has made vigilance against money laundering activities a key policy. The policy was formally put into effect by the Prevention and Suppression of Money Laundering Activities Laws 1996. According to this banks and other persons engaged in financial business are required to implement vigilant control systems for detection of such activities. The Central Bank has issued a series of guidance notes to banks concerning strict customer identification procedures, record keeping, recognition and reporting of suspicious transactions, the appointment and duties of money laundering compliance officers and education and training of bank employees.
As there is no longer a distinction between local companies and international business corporations (IBCs), the profits of all Cypriot companies will be taxed at the rate of 10 per cent. Existing IBCs that had income from their activities at 31 December 2001 can choose to be taxed with the rate of 4.25 per cent until the end of the fiscal year 2005. This regime makes Cyprus the country with the lowest corporation tax in the European Union. Dividend income from abroad and from Cyprus is wholly exempt from corporation tax. Profits earned from permanent establishment abroad are also fully exempt from corporation tax. As is common in most jurisdictions, companies that are involved in fi nancial services to the public, especially banking, insurance and trust business, must get special permission from the authorities.
Corporate entities include companies limited by shares, a branch of an overseas company and general or limited partnerships. Usually it takes three working days to get name approval for a custom-made company with payment of an acceleration fee. Since the central bank does not have to approve applications, these are made directly to the department of the Registrar of Companies.
The minimum number of directors is one, who may be natural persons or corporate, be of any nationality and need not be resident in Cyprus. However, for tax residency purposes they or (their majority) have to be Cypriots. The minimum number of shareholders is one. A registered office is required and it must be maintained in Cyprus.
The procedure to incorporate a company involves submission of the memorandum and articles of association to the Registrar of Companies, together with an affi davit before a court and the registration fee. The powers and objects of a Cyprus company are contained within the memorandum of association and have to be specific.
Disclosure of beneficial owners to the regulatory authorities is not required. It is possible to obtain absolute secrecy of the identity of shareholders, either through trust fiduciary agreements, through nominees or through other companies. Business entities are required to prepare and submit to the department of finance and the department of Inland Revenue annual financial statements audited by auditors practicing on the island.
As an EU member state, Cyprus must adhere to the Acquis Communautaire, so the country has introduced or modified economic and social laws to harmonise them with EU legislation. New laws adopted in 2002 also considerably modified the country’s fiscal regulations, including removing the distinction between resident regimes (onshore) and those of nonresidents (offshore) as from 2006.
With its strategic location, great accessibility, excellent infrastructure combined with the numerous government incentives, Cyprus is an ideal financial and business hub. Investments of European origin have to comply only with certain restrictions such as respect for the environment and safety standards. With EU accession, dividends paid to Cyprus from other EU countries have no tax withheld in those countries.
Besides the low corporate tax rates, the numerous double tax treaties that Cyprus has concluded with other countries – including eastern European countries – offers tremendous possibilities for international tax planning through Cyprus in view of the fact that any tax paid in a country with which Cyprus has a treaty is deducted from the Cyprus tax payable on the same income. Furthermore, Cyprus does not impose any withholding tax and dividends, interest and royalties paid by business companies.
Christodoulos G. Vassiliades, Cyprus