The Advantages of the Cyprus Tax System Nicos S. Kyriakides Partner in Charge, Limassol Copenhagen April 2009 Cyprus Tax Reform Objectives Conformity to European Law and the Acquis Communautaire on Direct and Indirect Taxation Compliance with the Code of Conduct on Business Taxation and our commitment towards OECD requirements against harmful tax practices. Simplification and effectiveness of the tax system and more transparency Maintain and improve the competitive position of Cyprus in the international tax arena. 1
Interpretation and Tax Base Change of philosophy and the tax base Connecting the tax residence of the taxpayer with the source of income. Treatment of income derived from sources abroad under a new approach Interpretation and Tax Base Resident in the Republic When applied to an individual, means an individual who is present in Cyprus for a period or periods > 183 days in the year of assessment. 2
Interpretation and Tax Base Resident in the Republic When applied to a company, means a company whose management and control is exercised in Cyprus. Interpretation and Tax Base Management and Control There is no definition in the law Management and control in practice is considered to be exercised in: The place where the majority of the Board of Directors reside The place where the majority of the meetings of the Board take place and significant decisions are taken 3
Interpretation and Tax Base Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on and includes: Place of management Branch Office Factory Workshop Mine, oil or gas well, quarry or any other place of extraction of natural resources. Building site or construction or installation project or supervisory activities, provided they last more than three months. Imposition of Tax Resident in the Republic Tax is imposed on income derived or arising from sources both within and outside Cyprus. 4
Imposition of Tax Non-resident in the Republic Tax is imposed only on income derived or arising from sources within Cyprus. Taxation of individuals The Income tax rates for individuals for 2009 are: Up to 19.500 0% From 19.501 to 28.000 20% From 28.001 to 36.300 25% Above 36.300 30% 5
Taxation of individuals Other useful provisions are: Interest income subject to SDC 10% Dividend income subject to SDC 15% Pension income from services rendered abroad 5% Remuneration from salaried services to a non-resident employer for an aggregated period of more than 90 days exempt Ideal Jurisdiction Low internal taxes Well developed tax system Political and economic stability Well developed financial sector Use of double tax treaties Low or zero exit taxes (withholding taxes) Ability to create substance. 6
Basic Advantages of Cyprus Corporate tax at 10% Exemption of dividend income (subject to conditions) Exemption of overseas PE profits (subject to conditions) Exemption of profits from disposal of securities Extensive network of double tax treaties Use of EU Directives Unilateral credit relief Low or zero withholding taxes. Corporation Tax Rates Companies 10% (Lowest in EU) Ship management companies 4,25% (or Tonnage tax) 7
Taxation of Dividends Dividends are exempt from corporation tax Dividends received by a person (individual or corporate) resident in the Republic are subject to Special Defence Contribution (SDC) at 15%. However, for companies there are exemptions. Taxation of Dividends Exemptions (a) Dividends received by a resident company, or a nonresident company which maintains a permanent establishment in the Republic from a company which is non-resident in the Republic and of which at least 1% of the share capital is held. are exempt from SDC 8
Taxation of Dividends Exemption (a) The exemption does not apply if the non-resident company paying the dividend: engages directly or indirectly by more than 50% in activities that lead to investment income and the overseas tax burden on its income is significantly lower than the Cyprus tax burden. (in practice less than 5%) Taxation of Dividends Exemptions (b) Dividends paid by a resident company to another company, which is also resident in the Republic are exempt from SDC. 9
Taxation of Interest Interest earned from financing activities is taxed as ordinary business income at a rate of 10% If interest does not qualify as business income, then: 50% is exempt from corporation tax and the remainder is taxed at a rate of 10% (effective rate 5%), and The gross amount of interest received is subject to SDC at a rate of 10%. Taxation of Royalties Intellectual Property Rights etc. No tax is withheld on royalty premiums payable to a non-resident, when the right is granted to a Cyprus entity for use outside the Republic Tax at 10% is withheld when the right is used in the Republic, provided: There is no DTT in place which provides for a lower rate. and The royalties are not paid to another EU resident (subject to the conditions of the EU Interest/Royalties Directive). 10
Taxation of Overseas PE Profits Profits from a Permanent Establishment abroad are exempt from tax irrespective of the existence of a DTT The exemption does not apply if the Overseas PE: engages directly or indirectly by more than 50% in activities that lead to investment income and the overseas tax burden on its income is significantly lower than the Cyprus tax burden. (in practice less than 5%) If loss relief in previous years recapture rules apply. Profits from Disposal of Securities Profits or gains from the disposal of Securities are exempt from tax Irrespective of whether the profit or gain is of a revenue or capital nature Securities means shares, bonds, debentures, founder s shares and other securities of companies or other legal persons, incorporated under a law in the Republic or abroad and options thereon 11
Profits from Disposal of Securities Based on an interpretation Circular issued by the Commissioner on 17/12/2008, securities also include short positions on titles, futures/forwards on titles, swaps on titles, depositary receipts on titles such as ADRs and GDRs, rights of claim on bonds and debentures but not including rights on interest, index participations only if they result in titles, repurchase agreements or Repos on titles, units in open-end or closed-end collective investment schemes Shipping Operations According to Merchant Shipping Laws: No tax on profits from the operations of a Cypriot registered vessel or on dividends from a Cypriot ship owning company No capital gains tax on the sale or transfer of a Cypriot registered vessel or the shares of the Cypriot ship owning company No income tax on the emoluments of officers or crew on board a Cypriot registered vessel 12
Ship Management Companies According to Merchant Shipping Laws: Ship management services means crewing, technical and commercial management of ships Companies which satisfy the conditions may elect to be taxed either: At reduced tonnage tax (25% of amount calculated) on the ships managed by the company (Cyprus flag or foreign flag), or At the special rate provided in the Income Tax Law for ship management activities of 4,25% Use of Double Tax Treaties Cyprus has an extensive network of Treaties for the Avoidance of Double Taxation with more than 40 countries Covers most of Central and Eastern Europe and Russia 13
Double tax treaties Austria Belarus Belgium Bulgaria Canada China CIS * Czech Republic Denmark Egypt France * CIS replaced by treaties with Armenia, Kyrgyzstan, Tajikistan, Ukraine and Uzbekistan Germany Greece Hungary India Ireland Italy Kuwait Lebanon San Marino Malta Mauritius Moldova Norway Poland Qatar Romania Russia Slovakia South Africa Syria Sweden Thailand Seychelles U.K. United States Yugoslavia Treaties with other countries under negotiation Algeria Armenia Bahrain Kazakhstan Finland Indonesia Shrilanka Malaysia Bangladesh Australia Lithuania Latvia Italy Estonia Brazil Georgia Spain Bangladesh Brazil Gabon Switzerland Zambia Jordan Iceland Spain Ukraine Israel Libya Morocco Mexico Netherlands Pakistan Portugal Turkmenistan Yemen United Arab Emirates Iran Vietnam Uzbekistan 14
Cyprus Denmark DTT Main provisions Withholding taxes in Denmark: On dividends 10% (15% if <25% of the voting power) On interest 10% On royalties 0% Permanent establishment: defined as a branch, place of management, office, factory, workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Includes a building site or construction or installation project but only if it last for more than six months. Adoption of EU Directives A. Parent/Subsidiary Directive No withholding tax on payment of dividends No transitional period immediate effect No minimum participation/shareholding No minimum holding period Dividends are exempt subject to conditions Tax credit for both the tax withheld abroad and the underlying tax 15
Adoption of EU Directives B. Interest/Royalties Directive No withholding tax on interest paid to non-residents No transitional period immediate effect 25% minimum participation/shareholding required in the case of royalties No minimum holding period Interest taxed depending on nature Royalties are subject to corporation tax Tax credit for Tax Withheld abroad Adoption of EU Directives C. Merger Directive Copied into local legislation Effective from 1 January 2003 Applies to any reorganization Merger Division (including partial divisions) Transfer of assets Exchange of shares Involves companies resident and not resident 16
Unilateral credit relief for tax withheld abroad Irrespective of the existence of a DTT credit relief is granted for tax withheld abroad in respect of income derived from a foreign country, which is taxable in Cyprus against tax payable in Cyprus in respect of such income The relief shall not exceed the tax withheld abroad Withholding tax rates No withholding tax on dividends No withholding tax on interest No withholding tax on royalties for use of the rights outside Cyprus 10% withholding for use of the rights in Cyprus (subject to DTT & EU Directive) 5% on films (subject to DTT & EU Directive) 17
Other important provisions Tax losses can be carried forward indefinitely Group relief provisions Tax Planning Ideas 18
Tax planning ideas Maximum Cyprus tax 10% Danish Shareholder Nil withholding tax Cyprus Subsidiary Cyprus corporate tax 10%. Tax planning ideas Holding Company Treaty subsidiary Danish Ultimate Holding Co Cyprus Holding Co EU subsidiary At least 1% shareholding Dividends exempt from tax (subject to conditions) No withholding tax on dividends to non resident shareholders Wide Cyprus DTT network EU Parent Subsidiary Directive Result = 0% tax in Cyprus 19
Tax planning ideas Outbound Investments Danish Investor Co Investment in Non EU No Treaty Cyprus Holding Co Investment in a country with no DTT with Denmark and Non EU Or better DTT with Cyprus Investment through Cyprus At least 1% shareholding Dividends received by Cyprus holding Co exempt from tax (subject to conditions) or Credit relief No withholding taxes on payments to Danish Investor Tax planning ideas Inbound investment Investor Non EU No Treaty Danish Subsidiary Cyprus Holding Co Investor from a country with no DTT with Denmark Or Cyprus-Denmark DTT better Investment through Cyprus At least 1% shareholding Dividends received by Cyprus holding Co exempt from tax (subject to conditions) No withholding taxes on payments out of Cyprus. 20
PE in Denmark Tax planning ideas Holding Company Cyprus Company PE in Denmark Use of PE article of DTT to escape taxation in country of operations (under the DTT with Denmark PE profit is exempt in Denmark if building site or construction or installation project lasting less than 6 months) Tax exempt profits in Cyprus if PE project exceeds 3 months No withholding tax on dividends to holding company Result = 0% tax Tax planning ideas Employment Company Parent Co Danish Operating Co Cyprus Employment Co Cyprus company employs staff Charges at cost plus Profits taxable in Cyprus at 10% Profits reduced in operating country Employee costs reduced as employees pay less tax and S.I. Contributions * Employees exempt from tax in Cyprus. * Depends on nationality of employees and rules of operating country 21
Tax planning ideas Royalty Company (outbound) Danish Licensor Co Non EU or no DTT Operating Co Royalty payable Cyprus Royalty Co Royalty receivable Profits reduced in operating country Use of treaty network Credit relief in Cyprus for WHT in operating country if any Small margin taxable in Cyprus at 10% No withholding taxes on payments out of Cyprus. Tax planning ideas Royalty Company (inbound) Non EU or No DTT Licensor Co Danish Operating Co Royalty payable Cyprus Royalty Co Royalty receivable Profits reduced in Denmark No WHT in Denmark based on DTT Small margin taxed at 10% in Cyprus No withholding taxes on payments out of Cyprus. 22
Tax planning ideas Financing Company Haven Co Danish Operating Co Interest payable Cyprus Financing Co Interest receivable Profits reduced in operating country (Danish) 10% WHT in Denmark based on DTT (may be reduced to 0% under the EU Interest and Royalties Directive) Small margin taxable in Cyprus at 10% Credit for WHT in Denmark if any No withholding taxes on payments out of Cyprus. Tax planning ideas Ship management company Controlling company PE Abroad Cyprus Ship Man Co Vessels Special tax on profits from ship management services Employee costs reduced as employees pay less tax and S.I. * 90 days rule No tax on profits of PE subject to conditions No withholding taxes on payments out of Cyprus. Vessels * Depends on nationality of employees and rules of operating country 23
Tax planning ideas Trading in Securities Profit is exempt from tax Cyprus Trading Co Use of double tax treaties No withholding tax on payments out of Cyprus Buy Securities Sell Securities Result = 0% tax in Cyprus Tax planning ideas Non Resident Trading Company Cyprus Trading Co Managed and controlled outside Cyprus Exempt from tax in Cyprus Non resident Cyprus registered company Buy products Sell products Use of EU VAT number and reputation Result = 0% tax in Cyprus 24
In Summary Modern tax regime acceptable by EU and OECD Lowest corporate tax rate in Europe Added commercial value and benefits due to ability to register for VAT Tax breaks for expatriates. Offers many opportunities for effective tax planning Result Respectable & Competitive international business location 25
Thank You For more information you may contact: Nicos S. Kyriakides Member of the Board of Directors In Charge of Limassol Office Deloitte Ltd Tel: + 357 25 868686 Fax: + 357 25 868600 Mob : + 357 99 611827 Email: nkyriakides@deloitte.com Web: www.deloitte.com/cy Deloitte. Maximos Plaza, Tower 1, 3 rd Floor 213, Arch. Makariou III Ave. CY-3105 Limassol, Cyprus P.O.Box 58466, CY-3734 Limassol, Cyprus 26