NOTE ON THE INCOME TAX LEGISLATION IN CYPRUS

We set out, herewith, a brief summary of the income tax regime in Cyprus:

1. Under the new law Cyprus tax is imposed:

(a) On the world wide income of all residents of Cyprus; and

(b) On the income generated in Cyprus of any non-residents of Cyprus.

2. In the case of companies, the test of residency is whether the relevant company has its management and control in Cyprus. It would appear, therefore, that any companies that carry out operations outside Cyprus and belong to non-residents of Cyprus and having their majority of their board of directors outside Cyprus are not liable to taxation in Cyprus. This would mean that such companies cannot take the benefit of any double tax treaties involving Cyprus. On the other hand, if a company wishes to take advantage of the double tax treaty network of Cyprus, it is highly advisable to have the majority of the directors in Cyprus and to provide that all board meetings shall take place in Cyprus.

3. The law provides for a uniform corporate tax rate of 10%.

4. Profits from the disposal of any securities are exempt from income tax.

5. The treatment of dividends is as follows:

(a) Dividends are exempt from income tax.

(b) Dividends received by a resident of Cyprus are subject to a special “special contribution” tax at a rate of 15%, except in the following cases:

(i) A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company, which is a resident of Cyprus.

(ii) A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company which is not a resident of Cyprus. This exemption will not apply if: (a) the payer engages directly or indirectly more than 50% in activities which lead to investment income and (b) the foreign tax burden of the payer is substantially lower than the tax burden of the recipient.

(iii) The law further provides for a deemed distribution as dividend, on which special contribution is levied, of 70% of the distributable profits of a company which is a resident of Cyprus. It is interesting to note that in case of a deemed distribution the exemption in (b)(i) does not apply.

6. The treatment of interest is as follows:

(a) If the interest is received in the recipient’s ordinary course of business or in close relation to it, it will be taxable as trading income at the corporate tax rate of 10%.

(b) If the interest is received not in the recipient’s ordinary course of business or in close relation to it, it will not be subject to income tax but at special “special contribution” tax at a rate of 10% which is levied on the gross interest received and, therefore, is substantial interest is expected, it is better to create a dedicated finance company so that it would come under paragraph (a) above.

7. Profits generated by a company resident of Cyprus from a permanent establishment outside Cyprus are exempt from taxation.

8. Any companies that were operating under the international business companies regime and had income prior to the year ended 2001, have the choice to elect irrevocably to be taxed under the old regime of 4.25%, up to and including, the tax year of 2005.

ANTIS TRIANTAFYLLIDES & SONS LLC
ADVOCATES