Cypriot tax – A little overview of economic substance

The Tax residency is determined by application of  management and control of company. If the parties do not provide a formal definition of place of managemente and control of Company, the Cyprus authorities will follow  the definition of “place of effective management” provided by the OECD model convention.

However if you need to open a Cyprus Company, and you need to operate as an effective and real Cyprus company, you need to evaluate very well these basic parameters as well as:

1)  The majority of the directors of the company are residents in Cyprus;

2) The main important company decisions are taken in Cyprus by the local directors;

3) The headquarters of the company are maintained in Cyprus;

4) the Company has an economic substance in Cyprus;

With reference to this last issue, we have to consider that a Cyprus company has  as an economic substance in Cyprus, when there is a specific economic reason to operate from this State.

The concepts of “Economic substance” and “beneficial ownership” are extremely important in International European taxation as more and more countries are looking deeper into the “substance” of holding companies and challenge the beneficial ownership of their income as for example Italy.

As such, companies may be subject to evaluate by the tax authorities whereby substantial evidence for the substance of the company should be provided as well as real justification for their existence.

It is a rather dangerous exercise to try to codify what actions need to be taken by any company to enhance its substance. It simply cannot be an exercise of generalisation. Thus, careful planning and sophisticated tax advice is always needed to determine the extent of enhancing the substance of a company.

In any case many international company find Cyprus’s tax system an attractive jurisdiction for holding, financing, trading and intellectual property structures. We summarises the main benefits, and the tax laws multinationals should be aware of when choosing to operate there.

In particular, we would underline the main benefit of this jurisidiction :

  • Low corporate taxation at the rate of 12.5%;
  • Extended and exceptionally beneficial network of double tax treaties;
  •  Full adoption and compliance with the EU Directives;
  • Unilateral tax-relief for foreign tax suffered is granted irrespective of the absence of a double tax treaty;
  • Attractive intellectual property regime;
  •  Group re-organisations can be implemented without any tax consequences;
  •  Tax relief for group losses and losses carried forward for the next five years.
  •  No withholding tax on dividends, interest and royalties paid to non tax residents;
  • Gains from trading and disposal of securities are tax exempt;
  •  No capital gains tax from the sale of property situated outside of Cyprus;
  •  Dividend income is tax exempt upon easily met conditions;
  •  No inheritance and gift tax;
  •  Attractive permanent establishment rules;
  •  Low personal tax rates and introduction of significant incentives for first time employment in Cyprus for highly paid non-resident individuals.