Cyprus Company Formation, Holding Cyprus, Cyprus Investment Firm, Offshore Company Formation
Company formation Cyprus: Banking Law
- Index company formation cyprus
- Tax planning via a network of international tax advisers and attorneys
- Offshore Company Formation: Tax haven rankings
- Cyprus Holding – Cyprus DTAs
- Services Company Formation Cyprus
- Examples for the legal reduction of corporate taxes
- DTA permanent establishment concept –Our services and fees
- Parent companies and their subsidiaries in the European Union
- OECD: Articles of the Model Convention with Respect to taxes on income and on capital
- Beware of cheap founders!
- Information about the company formations in English
- Basic considerations within the framework of international taxation
Company Formation Cyprus:
Company formation Cyprus: Cyprus Banking Law
For the offshore investor, Cyprus banking law provides a reasonable but not outstanding level of non-disclosure.
Offshore entities must disclose beneficial ownership to the Central Bank on formation, but Central Bank employees are bound to secrecy by Section 3 of the Central Bank Law 37 of 1975 (now Section 29 of the Banking Laws 1997 to 2009). Offshore entities also have to disclose this information to their local agent, but he can only be forced to divulge it with a Court Order.
Trustees do not have to register the beneficiaries of a trust, but a trustee opening a bank account must disclose beneficial ownership. Confidentiality on the part of commercial banks is covered by the Banking Law 1997. Normally speaking, local banks apply about the same standards of confidentiality as apply in English law. In December, 2003, the Government announced plans to breach banking confidentiality, allowing the tax authorities access to residents’ bank accounts. This made it possible for the government to run a tax amnesty scheme targetting those with undeclared bank accounts.
The rules for exchange of information with foreign states are a complex mixture of the local taxation laws, the network of double-tax treaties, and international agreements for mutual legal assistance and the exchange of information to which Cyprus is a signatory, now further complicated by the EU acquis communitaire which substantially worsens the position of individuals and corporations as regards secrecy. However Cyprus law does provide for normal judicial appeal procedures against treaty requests for information and cooperation.
The Cyprus Government has taken strong measures to prevent the use of the island for money laundering, partly in response to an influx of doubtful money and unwanted organizations from Russia and other CIS countries in the early nineties. The Prevention and Suppression of Money Laundering Law of 1996 has been largely successful: in April 1998 a Select Committee of Experts from the Council of Europe reported enthusiastically about the island’s measures to control money laundering.
On December 13, 2007, the House of Representatives enacted an updated Prevention and Suppression of Money Laundering Activities Law, which consolidated, revised and repealed the 1996 law. Under the current Law, which came into force on January 1, 2008, the Cyprus legislation has been harmonised with the Third European Union Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Directive 2005/60/C).
The present Law, as the previous one, designates the Central Bank of Cyprus as the competent supervisory authority for persons engaged in banking activities and money transfer business. Under this framework, the Central Bank of Cyprus has the responsibility of supervising and monitoring the compliance of banks and money transfer businesses with the provisions of the Law for the purpose of preventing the use of the financial system for money laundering and terrorist financing activities.
Since 1997 and by virtue of the powers vested to it under the Law, the Central Bank of Cyprus issued several Directives to banks and money transfer businesses which determine the practice and procedures that should be implemented by those entities for the effective prevention of money laundering and terrorist financing so as to achieve full compliance with the requirements of the Law.
In April 2008, the Central Bank of Cyprus has issued a revised Directive to the banks, in accordance with the provisions of the Law of 2007, requiring the introduction of new revised policies and procedures, as well as the upgrading and enhancement of the measures and systems for the effective prevention of money laundering and terrorist financing in line with the FATF standards and the Directives of the European Union in this sector. It is emphasized that the Law explicitly states that Central Bank of Cyprus’ Directives are binding and compulsory to all persons to whom they are addressed.
Since 1997, a special Unit for Combating Money Laundering has been set up at the Attorney General’s Office which is responsible for the receipt and analysis of suspicious transaction reports and money laundering investigations. In the course of money laundering investigations, this Unit may apply to the Court and obtain an order for the disclosure of information addressed to any person, including banks, who may be in possession of information related to the investigation as well as orders for the freezing and confiscation of funds and property suspected to be derived from money laundering.
On April 14, 2011, legislation was enacted to introduce a special bank levy under which financial institutions operating in Cyprus will be required to pay 0.095% on the total amount of deposits held at the end of each calendar year.
Company Formation Cyprus: Types of Company
Private Company Limited by Shares
The relevant legislation is Cyprus Companies Law, Cap. 113, which is virtually a copy of the English 1948 Companies Act. A private company is one which by its articles:
- Restricts the right to transfer its shares
- Limits the number of its members to 50
- Prohibits any public subscription to shares or debentures
The Companies (Amendment) Law of 2000 (Law 2(I)/2000) introduced single-member companies. The Companies (Amendment) (No. 3) Law of 2000 (151(I)/2000) introduced new provisions as to the validity of transactions of companies and as to the information which must be included in the official documents of companies. The Companies (Amendment) Law of 2001, Law 76(I) of 2001 provided for a new system for the certification of companies’ auditors and for the recognition of Bodies of Auditors and the grant of approval to auditors with foreign qualifications and also the recognition of accountants’ companies by the Council of Ministers.
When 100% foreign-owned, a private company used to be referred to as an ‘offshore company’, although the expression International Business Company subsequently came into favour to describe such entities. However, as from 1st January, 2003, an offshore company (IBC) no longer has a separate taxation status, and is taxed according to the same principles as a regular company. IBCs are now allowed to trade inside Cyprus. A pre-existing IBC which made an irrevocable commitment not to trade inside Cyprus until 2006 was able to claim the existing low tax rate for the three years 2003, 2004 and 2005.
In order to form a foreign-owned company, a bank reference and copy of the owner’s passport is required for the registration. The bank reference must be issued by a bank included on the Central Bank of Cyprus’s list of qualifying banks.
The following information will be required for the formation of a standard Cyprus offshore company:
- Name of the company with two alternatives;
- Objects of the company (description of principal activities of a Cypriot off-shore company);
- Capital: a minimum of (the Euro equivalent of) CYP 1,000 for a company with no offices in Cyprus, or (the Euro equivalent of) CYP 10,000 for a company with offices in Cyprus. Payment of the capital can be extended in time.
- Full personal details of shareholders will be necessary.
- Full personal details of directors (minimum two) will be necessary.
Registration of a standard Cyprus offshore company takes three weeks typically.
In Cyprus, a company’s formation documents and its annual return must be filed in Greek; the same applies to accounts when these need to be filed.
Amendments made in 2003 to the Companies Law as part of the EU accession process included the following changes:
- Every company must prepare a full set of financial statements in accordance with International Financial Reporting Standards, and every parent company that has one or more subsidiaries, other than a company which is itself a wholly owned subsidiary, should present consolidated financial statements.
- Under article 120, every company must complete an annual return within a period of 42 days from the date of its Annual General Meeting and must file immediately with the Registrar of Companies a copy of the annual return, signed by a director and the company secretary. Under article 121, the annual return filed with the Registrar of Companies must be accompanied by the full set of financial statements.
An online company search system was launched by the Ministry of Trade, Commerce and Tourism in February 2011. The system, which is being co-funded by the European Regional Development Fund and the European Union, allows users to access information about companies already registered with the Registrar of Companies and Official Receiver. Users can view data regarding company directors, shareholders, partners and owners, registered addresses, and the charges and mortgages registered on company assets.
Company Formation Cyprus: Cyprus Exempt Private Company
A private company limited by shares is exempt if:
- No body corporate other than another exempt company holds any of its shares or debentures
- The number of debenture holders is not more than 50
- no body corporate is a director of the company.
The main advantages of an exempt private company are:
- It need not file accounts with its Annual Return
- It is not subject to the statutory restrictions on loans to directors
Any company registered under the Act whose Articles do not contain the restrictions applicable to private companies is a public company. A public company may obtain a listing on the Cyprus Stock Exchange.
Cyprus Company Limited by Guarantee
As in England, companies limited by guarantee are normally used only for charitable or non-profit-making purposes. Apart from their share structure, they are similar to other types of private company and also fall under the Cyprus Companies Law.
Company Formation Cyprus: Cyprus Branch of Overseas Company
Any overseas company may operate in Cyprus as a branch. Within one month of establishment of such a branch, the following documents must be filed (in Greek) with the Registrar:
- A certified copy of the Memorandum and Articles of Association
- A list of the directors and secretary
- The names and addresses of persons residing in Cyprus authorized to accept all notices on behalf of the Company.
Companies with branches in Cyprus must also file their accounts annually, together with certified Greek translations.
Company law changes implemented in 2003 as part of the EU accession process include the following rules covering branches:
- Every foreign corporation that maintains a branch in the Republic must submit, for every financial year, copies of its financial statements as presented in its last AGM and published in accordance with the laws of the country of incorporation, except that EU corporations that publish audited financial statements in their countries of registration and submit these financial statements to the Registrar of Companies are exempted from preparing and submitting separate branch financial statements.
Cyprus General Partnership
Partnerships fall under the Partnerships and Business Names Law Cap 116, basically similar to the equivalent English legislation. They must be registered with the Registrar of Partnerships within one month of formation, giving name, purposes, place of business, full particulars of the partners etc. Foreigners may belong.
A general partnership may have between 2 and 20 individual members (up to 10 only, if it intends to conduct banking business).
Partnerships do not need to file accounts or to be audited.
Cyprus Limited Partnership
These are similar to general partnerships except that they have one or more general partners with unlimited liability and one or more limited partners (whose liability is limited to the amount declared in the partnership return filed with the Registrar).
Limited partnerships, used in conjunction with offshore companies offer good tax planning possibilities.
Cyprus Sole Proprietorship
A Sole Proprietorship falls under the Partnership and Business Names Law Cap 116, being essentially similar to the English sole partnership. It is subject to broadly the same rules as a General Partnership.
A sole proprietor has unlimited liability for his debts, and any business name (other than his own) must be registered with the Registrar of Partnerships.
Company Formation Cyprus: Cyprus Trusts
A ‘local trust’ is governed by the Cyprus Trustees Law Cap 193, which closely follows the English Trustee Act 1925. The settlor and beneficiaries are normally residents of Cyprus, and the trust and its property are subject to exchange controls, although these are vestigial since Cyprus joined the EU.
Offshore Trusts are the same as local trusts, but their beneficiaries must be non-resident, and all the trust’s activities must be outside Cyprus. As with ‘offshore’ companies, the special tax status of offshore companies has ceased with Cyprus’s accession to the EU.
The International Trusts Law of 1992 brought Cyprus trust law into line with that of other major international trust jurisdictions. Both settlor and beneficiaries must be non-resident, although one Trustee must be Cypriot. International trusts may have many tax and legal advantages.
Company Formation Cyprus: Law of Offshore
Cyprus Trust Law
Cyprus trust law began with the Cyprus Trustee Law Chapter 193, based on the English Trustee Act 1925, but the island’s trust regime was brought into line with normal international practice with the International Trusts Law 69(I) of 1992. The result is that there are three types of trust available, of which only the last will normally be of interest to the international settlor:
Local Trusts are governed by English common law and the original Trustee Law. The settlor and beneficiaries are normally residents of Cyprus, and the trust and its property are subject to exchange controls.
Offshore Trusts are equally outside the International Trusts legislation, and are the same as Local Trusts except that their beneficiaries must be non-resident and all the trust’s activities must be outside Cyprus.
International Trusts are the normal form of Cyprus Trust used by foreign settlors. International Trusts have the following key characteristics:
- the settlor must be non-resident
- the beneficiaries must also be non-resident (except for local charities)
- one of the Trustees must be Cypriot (individual or corporate)
- the trust period may be up to 100 years (longer for charitable trusts)
- confidentiality is protected in the law, and foreign judgements are specifically non-recognized
- there is no registration requirement
- trust documents are in English
- trust assets may not include immovable property in Cyprus
- creditors have to prove intent and must claim within two years
- there is Stamp Duty of CYP250
- broadly speaking, the income and assets of International Trusts are not taxable in Cyprus
It is often possible to combine Cyprus International Trusts with the island’s network of double-tax treaties to create very advantageous results. double taxation agreements (DTA) Yes, with most countries Corporate tax 10% tax free receipt of foreign dividends Yes EU Parent-Subsidiary Directive applicable Yes Holding company privileges Yes Banking secrecy High Nominee relationships allowed Yes
Cyprus has double taxation agreements = DTA with most countries. Freedom of establishment in the European Union is applicable. From a European point of view, NO commercially equipped business operation is required for approval of a permanent establishment regarding the tax legislation in Cyprus, and neither is the proof of active business in Cyprus. The profit tax in Cyprus amounts to only 10%, irrespective of the amount of profits. Distributions of profits are not taxed.
Company Formation Cyprus: Taxation of Income
Any person (natural or legal) resident of Cyprus is taxable with its whole world income. Non tax-resident persons are liable for taxation with their income derived in Cyprus.
A legal person (company, corporate body) is deemed to be resident of Cyprus if the management and the control of the company are located in Cyprus. Although there is no definition of “resident” in the sense provided by relevant laws, it is assumed that a company is a resident of Cyprus if the majority of the directors resides in Cyprus or if Board Meetings are regularly held in Cyprus.
A natural person is considered to be resident of Cyprus if he/she is staying in Cyprus at least 183 days a year.
The Cypriot Income Tax Law prescribes a uniform taxation of corporations of 10% of the taxable income.
The taxable income includes:
- profits deriving from business
- profits from interest
- profits from licensing fees,
- profits from rental income of real estate,
- capital gains from securities
Ship management companies may choose to be either taxed by a corporate tax of a 4,24% tax on their profits or a taxation based on tonnage.
There is no limit to loss carry-forwards.
Within a firm group, gains of one company can be set off against the losses of another company. Group profit will be taxed in this case.
Company Formation Cyprus: Foreigners and their companies generally remain unaffected by the defence tax.
According to the Law on Special Contribution to Defence Tax (Defence Tax Law), a natural person resident of Cyprus, has to pay a 15% Defense Tax on its paid dividends. If the recipient of the dividends is a legal entity, that entity is exempt from the tax defense, unless the legal entity itself pays no dividends for at least two years.
Residents of Cyprus (natural or legal persons) pay 10% defense tax on income deriveed from interest. It is therefore appropriate to distribute profits or, if they are not to be distributed, to invest them in securities.
Interest income on bank accounts in Cyprus of non-resident persons (foreigners as a natural or legal person) is not subject to Defence Tax.
Should your company distribute dividends to its shareholders, these dividends may thus remain on a Cyprus bank account in the name of the shareholder; defence Tax will not be applied.
Company Formation Cyprus: Income from dividends is categorically not taxable in Cyprus.
Income of a company taxable in Cyprus, which consists of dividends paid from another taxable company in Cyprus, is not subject to the Law on Special Duty to Defence tax.
Income of a taxable company in Cyprus, which consists of dividends paid from another non-taxable company in Cyprus is not subject to the Law on Special Contribution to Defence Tax, if the taxable company holds at least 1% shares of the company paying the dividends.
Income of a taxable company in Cyprus, which consists of dividends paid from a company out of Cyprus is not subject to the Law on Special Contribution to Defence Tax and is also not taxable according to the Income Tax Law.
The above exemptions do not apply if;
- more than 50% of the income of the company paying the dividends comes from income occurred from financial investments and
- the profits of the company paying the dividends are taxed with half or less than half of the Cypriot Corporate Tax, i.e. 5% or less.
Both above conditions must be met in order to occur non-applicability.
In Cyprus, there is no Capital Gain Tax, Tax Deductable at Source or Withholding Tax on dividends paid to non-residents.
The Cypriot tax legislation basically distinguishes between interest income from bank deposits and interest income occurring within the ordinary course of business.
Interest income from bank deposits
50% of interest income from bank deposits is exempted from income tax. This concerns taxable residents of Cyprus (natural or legal).
However, according to the Law on Special Contribution to Defence Tax, interest income from bank deposits is taxed by 10%. Thus, the total tax duty for interest income from bank deposits is 15%.
Interest income from deposits on current accounts and business accounts is exempted from the above provisions (see below).
It is advisable therefore, to invest dividends either in securities, for example, or to distribute them.
Interest Income from Ordinary Course of Business of a Company
Interest income related to business activities is part of a company’s profit and therefore subject to 10% income tax of the company (corporate tax).
Special contributions in accordance with the Law on the Special Contribution of Defense Tax do not apply.
As per definition in the official circulars of the Cyprus Tax Authority, the following activities are deemed to be business activities of companies:
- account activities (current and business accounts)
- for finance companies: interest income from loans, financing and leasing business
- interest from debtors of the company
- interest income of insurance companies
- interest income of intra-group finance companies
Company Formation Cyprus: Non-taxable companies (whose management and operations are located outside of Cyprus) are exempt from any income tax and special contributions.
Royalties received by taxable persons (natural or legal persons) resident of Cyprus are fully booked as profits; correspondingly, royalties paid are fully booked as expenses of the company.
Royalties for the use of rights within Cyprus are subject to a withholding tax of 10%.
Royalties for the use of rights outside of Cyprus are not subject to withholding tax.
Non-taxable companies (whose management and operations are located outside of Cyprus) are not subject to withholding tax mentioned above.
Income deriving from the holding or purchase and sale of securities is not subject to any income tax.
The income derived from holding or the disposal of securities is not subject to any capital gains tax. Exception: If the securities are shares of a company which owns real estates in Cyprus, income from holding or from the disposal of such securities will be taxed with flat capital gains tax of 20%.
Securities in this sense are:
- Governmental Bonds
- Founder’s shares and other legal shares of companies incorporated within and outside of Cyprus
- as well as options on the aforementioned.
Comprehensive revisions since the beginning of 2009:
The Tax Authority of Cyprus (“Commission for Income and Tax”) has announced an expanded redefinition of the scope of securities in an official circular!
As a result, income from holding of and the trade with the following securities is basically not subject to any income tax:
- Ordinary shares
- Founder’s shares
- Preference shares
- Options on aforementioned shares
- Debentures (obligations)
- Short Positions on titles
- Future and Forward Contracts on titles
- Exchange contracts (swaps) on titles
- Certificates of Deposit (i.e. Global Depositary Receipts on titles (GDRs) and American Depository Receipts (ADR))
- Claim rights on obligations and bonds (but not claim rights on interest thereof)
- Index certificates if they are conceptual designed on titles
- Repurchase rights or repos, if these are conceptual designed on titles
- Shares in companies (namely such as the Russian OOO and ZAO, the American LLC, provided that those are subject to taxation, the Romanian SA and SRL and the Bulgarian AD and OOD)
- Shares of open or closed investment vehicles, provided such do operate in the country of incorporation and are registered and regulated in that country.
Examples of such investment vehicles are:
- Investment Trusts
- All kind of open and closed funds
- Pension funds
- State funds
- Other similar investment funds of any kind
This latest revision is undoubtedly a significant step towards a first-class global financial center.
Loss Carried Forward
Losses from business activities may be set off against future profits for an unlimited period of time.
Offset of Losses for Groups of Companies
Losses of company that belongs to a group of companies can be set off against profits of companies which belong to the same group of companies. The condition to be complied with is that the companies are incorporated in Cyprus and belong to the same group of companies. Both companies must belong to the group of companies throughout the entire tax year.
Group of companies in this sense means that either at least 75% of one of the two companies belong to the other company, or that at least 75% of both the companies belong to a third company.
‘Belonging’ means that a company holds directly or indirectly at least 75% of the voting shares of the other company, and the holding company is entitled to at least 75% of the dividends, as well as to at least 75% of the values of the held company in the event of its liquidation.
Losses of a Permanent Establishment Abroad
Business losses of a permanent establishment of a Cypriot company abroad may be set off against the profits of the Cypriot company.
If the permanent establishment abroad shows profits again, an amount equal to the former loss of the foreign permanent establishment shall be counted towards the profits of the Cypriot company.
The exceedingly profitable EU Merger Directive fully applies in Cyprus.
All stipulations of the EU Merger Directive have been incorporated in the Income Tax Law and other applicable laws. In several cases, the rules of the Merger Directive have been enhanced in favour of the persons concerned, provided that these extensions remained within the framework of the intention of the merger guidelines.
The EU provides for the application of the Merger Directive to companies. Since partnerships of natural and/or legal persons constitute a corporation under Cypriot law, the Merger Directive applies to them consequently.
The Cypriot legislation has expanded the applicability of tax-neutral reorganizations of groups of companies to company mergers from outside the EU.
The EU merger guidelines are not only applied to cross-border reorganizations, as provided by the EU Directive, but also to the reorganization of groups of companies within Cyprus.
Furthermore, Merger Directive is not only applied to capital gains tax, as provided by the EU Directive, but also to stamp duty and purchase tax (VAT).
Scope of Applicability
The rules of the EU Merger Directive are applied to mergers, divisions, transfers of assets and exchanges of shares.
- The transfer of assets and liabilities, including provisions and reserves, does not cause any tax liability for the transferring company.
- Accumulated losses of a corporation may be transferred to the new company.
- If a transfer receiving company is shareholder of the transferring company, no tax liability arises to the receiving company on revenues from this transfer, even if the receiving company will loose its holdings of the transferring company during the reorganization.
- The exchange of shares is not subject to taxation. The value of newly subscribed shares is the same value as the value of the exchanged shares before the reorganization.
Cyprus maintains Double Taxation Treaties with the countries on the list below.
Taxes that were paid in a DTT partner country of Cyprus, are booked as a credit on the tax account of the same type of income of the Cypriot company. Any tax obligations of the Cypriot company that arise from the Income Tax Law or the Law on Special Contribution to Defense Tax may be set off against this tax credit.
Cyprus’ Unilateral Warranty:
Should there be no DTT in place between Cyprus and another country, or should the Cypriot company not qualified for the provisions of the EU Parent-Subsidiary Directive, then Cyprus unilaterally guarantees a tax credit for the tax paid in the other state. The tax credit cannot exceed the amount of taxes paid in the other state.
Company Formation Cyprus: List of DTTs of Cyprus.
|Withholding tax % *|
|Received in Cyprus||Paid from Cyprus **|
Please note that only basic information is provided above. there are important exceptions and special rules in many DTts. You should therefore pay attention to the specific DTT that may apply.
* Only ratified DTTs are listed. A total of 32 DTT s has been ratified, covering 42 States.
** According to Cypriot legislation, dividends paid to nonresident persons are not subject to withholding tax in Cyprus.
*** The DTT between Cyprus and the former Soviet Union applies.
**** The DTT between Cyprus and former Czechoslovakia applies.
***** The DTT between Cyprus and former Yugoslavia applies.
****** Since 1st of January, 2007.
Company Formation Cyprus: Application of all relevant EU directives
The EU aims to establish, within its borders, a uniform economic region to its greatest possible extend. Within this process, national states increasingly loose importance.
Basically, this phenomenon is the continuation of an ongoing process since the mediaeval times. While today’s Germany, for eample, was a conglomerate of regional principalities during the Middle Ages, each one applying their own fiscal and tax policies, it is now, since the founding of the Federal Republic, a unitary state, apart from the territory (federal) distinctions.
Germany is a founding member of the EU and continuously undergoes transformations. More and more laws and regulations are changed to comply with EU law.
Just as the principalities of Germany waived their sovereign rights piece by piece and submitted to a common idea, the German idea, during the late Middle Ages, nowadays more and more German rights are replaced by European law, convinced of the advantageousness of a unitary European legal area.
For sure this is not a homogeneous process; there are always voices militating against giving up existing rights and privileges, but always there are other voices that are convinced of the idea and superiority of a unitary Europe and that vehemently support the process. It cannot be stopped anymore, anyway.
The Republic of Cyprus joined the EU in May 2004 as a full member. During the period of legal adaption of EU laws during the years prior to the accession, Cyprus has abolished its former “offshore” legislation and completely reissued, inter alia, its economic and tax-relevant laws. This process did provide the chance to implement EU regulations from the scratch, without the need to „alter” existing laws.
Cyprus has fully adapted all relevant EU directives in its legislation and has even optimized them in some points.
Below you will find some example court decisions regarding the Freedom of Establishment:
With its Centros Decision, the European Court of Justice (ECJ) extended the Freedom of Establishment to so called foreign sham companies.
The Court ruled that the Freedom of Establishment does prohibit local authorities to subject a foreign EU company to local legislation and to refuse the registration of the branch or establishment of such a company on the grounds that said company is only pretending to be a foreign company.
With its Überseering Decision, the ECJ clarified that a member state is not entitled to expect that a foreign company, which has been duly incorporated under the law of another member state, and which has an establishment in the member state, applies the entire company legislation of the said member state solely with the justification of the real seat theory.
Thus, a capital company, which has been duly incorporated under the law of one member state, will remain
Just as you used to be (and still are) free to settle down in Berlin or Stuttgart with your German company, for instance, due to EU Directives you are now free to do so in Germany, France or Cyprus.
Within the EU, “freedom of choice” regarding to the legal form of the company is guaranteed. Every EU citizen is free to establish a company in the member state where corporate law rules grant the largest freedoms. Then you are free to operate in any EU Member State, even in your own country, through branches or representative offices. It is explicitly not required to exercise any economic activity at the “Headquarter” of the company. The law to be applied is that of its residence state, so e.g. France, Cyprus, etc…
Restriction: The not yet fully EU-compliant tax laws in Germany, suggest a permanent establishment (place of business) in the state of the registered office, in order to benefit from EU tax privileges also in Germany.
Following a few court decisions that Cyprus enjoys a sound and conclusive legal system based on the Anglo-Saxon law system. Jurisprudence is independent from legislature and performs well. The protection of property is a firmly established legally protected interest.
In Cyprus, the following maxim applies to corporate and tax:
“It is the mission of the State to protect the property of those who put their trust in Cyprus.”
Discretion is essential in Cyprus !
In the context of Article 26 of the OECD Model Agreement about the Avoidance of Double Taxation, Cyprus has also submitted to the obligations of sharing information and of transparency.
However, Cyprus meets those obligations only under certain conditions.
On the one hand, the obligation of disclosure only applies, in principle, to information concerning non-tax-residents. However, since a company established in Cyprus , is resident and taxable in Cyprus , the obligation to provide information applies only in the event of a crime which is being prosecuted.
The same applies to bank secrecy. Data of corporate clients established in Cyprus are only exposed in case of a court order.
But also the duty to supply information regarding data from non-tax-residents is subject to various conditions.
For example, the principle of reciprocity is one of those conditions. Furthermore, the existence of a constituted suspicion is required. Additionally, questions must be asked precisely. No office, no lawyer and no trustee etc. is obliged to respond to questions such as “Who shareholder of the company ABC Ltd.?” The acceptable form of the question would be: “Is Mr. Miller shareholder of ABC Ltd.?” Not allowed would be, for example: “Which company belongs to Mr. Miller?”
On top of the above conditions, a written approval of the Attorney General is required for each case in order to be obliged to provide information. Without such an approval, nobody is obliged to provide information on natural or legal persons who are not residents of Cyprus . Information on natural and legal persons, who are residents of Cyprus are not provided anyway.
The Register of Companies in Cyprus is public. Providing the name and the register number of a company, any person may obtain a register extract at request.
While the deductibility of expenses is heavily restricted with all kinds of regulations and laws in Germany and other countries, and may even be prohibited, nearly all reasonable expenses, which are really associated with the management, are fully deductible in Cyprus .
In addition, there are a number of generous tax allowances.
We would gladly provide specific information on request.
Cyprus enjoys an excellent infrastructure. Communication standards are among the highest in the world. Fast Internet and VoIP communications are used widely and are of low cost.
The financial services sector of Cyprus is characterized by efficiency and professionalism. It is common that employees and managers receive their higher education in England, other EU countries or the United States. The long experience of Cyprus as an international financial and trade centre has led to a high degree of experience and expertise.
The financial services sector and foreign companies in Cyprus employ about 60,000 foreigners.
Nearly all banks operate separate “International Business Units” which are specialised in serving foreign clients.
Axiomatically, all individuals and companies from Europe, including Germany , are entitled to maintain their business from a registered business address in a more tax-favourable EU-country, thus benefiting from lower tax burdens on revenues. As a prerequisite for those advantages, the beneficial owners must be able to proof the presence of certain criteria, with the so-called criteria of “permanent establishment” being the most important one. Regarding the criteria of permanent establishment, please read the related section below.
Germany tops all EU countries, when it comes to imaginativeness related to tax levy. Doing so, Germany does not shy away not to apply EU law knowingly and intentionally, though it is applicable in Germany as well. Instead, the Federal Ministry of Finances retreats in a quiet corner and waits until it’s forced by appropriate court, to give in at least in the court decision concerned points.An important court decision of this kind for the application of the EU Parent-Subsidiary Directive was for example the ruling of the European Court of Justice regarding the Cadbury-Schweppes case (C-196/04, published on 12.09.2006). In that decision, the ECJ confirmed the EU-Freedom of establishment and recognized an CFC legislation, ruling the exisiting practice to tax dividends received from subsidiaries in another EU country as illegal. In its very detailed judgment the ECJ also noted that “the mere exploitation of existing tax gaps in tax levels within the EU, shall not be treated as such an abuse”. More about the Cadbury-Schweppes decision in the appropriate section below.
The Federal Ministry of Finance has therefore modified in 2007 the Article 8, paragraph 2 of the Foreign Tax act (AStG). The Article 8 par. 2 AStG now excludes the “addition tax” (“Hinzurechnungssteuer” in German) for domestically controlled companies with a registered office or management in an EU Member State from where the company exercises a real economic activity, provided the taxpayer can prove it.In order to eliminate any lack of clarity arising from other articles, the Federal Ministry of Finance also sent an instruction to its subordinate authorities, dated 08.01.2007, which confirms the impact of the Cadbury-Schweppes-decision and instructs lower tax authorities not to apply any “addition tax”, if the relevant conditions are met (> Criteria of “permanent establishments”).
Both the EU parent-subsidiary directive and the Foreign Tax Act, most double taxation treaties as well as relevant court rulings and by-laws require the existence of permanent establishments in the other EU State, in order to benefit from the lower taxes of the other EU State.
The recognition of a permanent establishment of the foreign company is subject to the existence of specific characteristics, which are designed by the German legislature, of course, as far as possible in its own favour.
However, if the following individual characteristics have been implemented, the characteristics of permanent establishemnts will be recognized as given, and the parties concerned will enjoy the tax incentives of the other country (source country) even in Germany.
A permanent establishment in the terms of the provisions of the Federal Ministry of Finance (Germany as well as other countries) is assumed if the following conditions are met:
1. The Company keeps an office in Cyprus with its own phone number, registered on its name, at which someone can be reached (answering machine is not enough). The head office should also be detectable by the accounts of the company’s running costs. We can provide this service.
2. The management of the Company will be recognizably undertaken from Cyprus. This could mean that you go to Cyprus and take over the management in person. Would you not do so, trust directors could be appointed. However, experience shows that German clients arise concerns in giving the management out of their hands. As a solution, we recommend three directors, thus an outward impression would’nt arise, that you lead the affairs as a dominant manager from the place of your residence. One of the directors would be the German investor, so this is you, the two other directors should be residents of Cyprus. We could also meet this condition for you.
Another alternative would be two directors, the beneficial owner and a local director, provided that the beneficial owner travels to Cyprus twice a year and is able to proof that.
Of course, the directors who are residents of Cyprus can also be appointed at the client’s option. It is also expected from the Federal Ministry for Finance, that the directors in Cyprus are competent persons (which excludes the previous usual nomination of not qualified persons), which generally have to be also reachable. We would also meet this condition for you. The Directors must be authorised to sign, in order to be able to perform verifiable their management task. However, one can make the statute so, that the exclusive authorisation to sign of the directors based in Cyprus is reduced to minimal issues and that important matters must be signed also by the German director. In addition, the Company may issue a full power of attorney to the German director for exclusive authorisation to sign.
The local directors have to be employed directors (part-time possible). If necessary, contribution payment receipts from the Social Insurance have to be provided.
3. Depending on the volume of business, the company must employ a secretary (part-time possible), for general business and office tasks of the company. We would be able to provide adequate personnel. If necessary, contribution payment receipts from the Social Insurance have to be provided.
4. The company should send important offers etc. per email or letter from Cyprus , and should sign important agreements fully or partly in Cyprus and send such agreements to the other party from Cyprus .
As per request the Federal Ministry of Finance and the relevant authorities of many other countries, the dividend-distributing company must actively generate income. The fact of actively generated income is deemed as given if the company runs its own permanent establishment (as above), because permanent establishments realize active income.
If a Cyprus Holding Company holds the shares of your “operative” Cyprus Company, perhaps for reasons of risk minimization, the holding company’s income from dividends paid by the “operative” company are always deemed to be active income (§8 section1 Nr.8 Foreign Transaction Tax Act, Germany), without the necessity of a permanent establishment of the holding company.
Would the holding company be a “stand-alone” company in Cyprus that holds shares of subsidiaries in other countries, for example in Germany, it would still generate active income, but not be fulfilling the criteria of a permanent establishment in the country of incorporation (Cyprus).
What are your alternatives, and what consequences would they cause?
Please read under “Examples” on the left about the applications offered through an EU company and about the structure most suitable for you.
1. A not taxable Limited in Cyprus
A Limited Company in Cyprus , whose control and management is located abroad, is treated as a non-resident taxpayer and pays in Cyprus 0% taxes on its profits from transactions outside Cyprus . However, if this company makes transactions in Cyprus, it will pay on the profits of that company 10 % Corporate tax.
In Cyprus, companies without tax liability are often called IBC (International Business Unit) or are mistakenly named as offshore companies, a hangover of past times of offshore legislation.
The dividends of a non-taxable company must be fully taxed as income in Germany .
This kind of company is often used when the beneficial owner makes transactions outside Germany and the operating profits of the Company are not taken to Germany. Even operators of Internet business like to select this form of company. Dividend payments of the company are included in the worldwide income of the taxpayer. Someone who takes the profits of this type of company to Germany without reporting it as taxable income, can be faced with consequences for tax evasion. A recapture or corporate income tax according to German rates (profit of company) and on income tax according to German rates (dividend income of the beneficiaries)will be effected.
The double taxation agreement between Cyprus and Germany is not applicable to non-taxable Companies. Fiduciary occurring shareholders and directors are possible.
Company Formation Cyprus: The taxable limited in Cyprus
From the perspective of the German tax authorities, a Cyprus Company has to provide an establishment, in order to enjoy the Cypriot tax privileges. One of the premises features is a recognizable management in Cyprus. The result is thus a taxable limited in Cyprus. This limited pays 10% corporate tax on its profits. EU Directives and tax treaties are fully applicable. Dividends of that company paid to foreign countries are not taxable in Cyprus.
If the recipient of the dividends in Germany is a legal person (company), the dividends can be collected without being taxable because of the EU parent-subsidiary directive tax. Taxation takes place in the form of Income tax upon distribution of dividends by the German company. Because of the EU Freedom of establishment and the correspondingly modified § 8, Paragraph 2 a AstG, a taxation of foreign sourced income does not apply here. The taxpayer has to pay taxes on the dividends paid to him by the German Company of the Cyprus company with a flat tax of 25%.
If the recipient of the Cypriot dividends is a natural person, the dividends received from Cyprus are directly taxable with 25% flat final withholding tax.
All in all are the following advantages arising:
- Corporate Tax only 10% instead of 25% in Germany
- No business tax
- Better depreciation ways of operating costs
- 25% final withholding tax versus 43 or 48% income tax in Germany
- Special bonuses to executive directors of the Cypriot company don’t have to be taxed in Germany
- The double taxation agreement between Cyprus and Germany is fully applicable
- Of course you can operate a branch or representation in Germany.
- Fiduciary occurring shareholders and directors are also possible.
Company Formation Cyprus: The taxable Limited in Cyprus with BVI Partner
Someone who wishes to transact on behalf of its own EU company, without appearing as a shareholder, but doesn’t wish to appoint fiduciary acting shareholders, can appoint a company as an associate founded on the British Virgin Islands.
- Anonymous registration of the BVI company is possible (bearer shares)
- Nominal Directors are possible, if desired
- No accounting requirement for the BVI company
- No taxes at all for the BVI company
- The BVI company is recognized as a partner in Cyprus
- The opening of an account at a Cypriot bank on behalf of the BVI company is possible (thus easily accessible account in the EU)
- Further no withholding tax on dividends paid by the Cypriot company to a BVI company
- You would control the Cypriot company and officially make transactions on its behalf
- Corporate income of the Cypriot company, only 10% instead of 25% in Germany
- No business tax.
2. The taxable Limited in Cyprus, with tax consolidation in Germany as a partner
An excellent opportunity to earn gained profits in Germany almost tax-free (under progressivity proviso), is a Cypriot company, which is dominated by a tax consolidation in Germany.
An affiliation consists of a subsidiary company and a controlling company. Between the subsidiary company and the controlling company must exist a profit transfer-and-control agreement. A subsidiary company, which usually is a GmbH & Co. KG, holds 100% or less of the shares of a Cypriot Limited Company. Because of the EU parent-subsidiary directive, the dividends of the Cypriot company are being received tax-free by the subsidiary company.
The subsidiary company must be a non-incorporated firm, as a non-incorporated firm usually occurs after the Civil Code. The non-incorporated firm under Civil Code is not taxed as a company.
The taxation of the profits paid to the members of the non-incorporated firm happens under progressivity proviso.
Besides the advantages of a limited company in Cyprus mentioned in the preceding sections, there is the advantage of an affiliation, which provides that incoming dividends from the Cypriot company are taxed in Germany only under progressivity proviso.
Thus, dividends are not included in taxable income of the beneficial owner’s holding, but only increase its tax rate.
Company Formation Cyprus: The Cypriot Holding
Cyprus has excellent arrangements for holding companies and stands today as a holding domicile in an advantageous competitive position to Ireland and the Netherlands
This company structure, including a Holding, considers the ownership position of a foreign (eg German) subsidiary by a holding company based in Cyprus, which in turn is owned by the parent company.
Many multinational corporations already enjoy the benefits of Cypriot holding companies.
The Cypriot Holding provides many options, which can not be considered in detail here. Some important features are listed below:
- In Cyprus there is a real privilege for Holdings: Holding companies are not taxed.
- If a Cypriot holding company holds at least 15% on an another European company, for example a German limited liability company, then the arising dividend due on such participation is given by the limited liability company to the holding company tax-free. The collection of dividends remains also at the level of the Cypriot holding company tax-free, if it holds at least 1% of the shares in the subsidiary
- The payment of dividends by the holding company abroad is tax exempt in Cyprus. Cyprus does not levy a withholding tax, regardless of the existence of a double taxation agreement and independent of the EU parent-subsidiary directive.
- The collection of dividends paid by the Cypriot holding company is also at the level of the parent company in another EU country tax exempt. From the German point of view are dividends received by corporations (Holding) always active gainings.
- Incoming dividends at the Cypriot holding company may be collected there and then reinvested.
- If the holding company solds shares to the subsidiary, the income generated therefrom is exempt from corporation tax.
- Profits of the holding company that is not attributable to the dividends received will be subject to a 10% tax.
- A holding company serves also the Risk diversification. Holding companies are often being placed over “operational” companies in Cyprus, to reduce liability. If you operate, for example, different business sectors or projects, it stands to reason to found a company for each business or each project its own, in order if applicable not to compromise the other Businesses and projects. The various companies are then concentrated under the cloak of the Holding.
- Cyprus offers a very favorable environment for Fund companies (ICIS, the International Collective Investment Schemes “). The Cypriot law for International fund management companies (International Collective Investment Schemes Law, 47 (I) / 1999) differentiates from the structure, four different legal forms of investment companies:
- International closed-end funds (International Fixed Capital Companies)
- Open International Fund (International Variable Capital Companies)
- International Fund Foundations (International Unit Trust Schemes)
- International investment partnerships with limited liability (International Investment Limited Partnerships)
In addition funds are different in their objectives:
Public investment funds
- Investment companies for “sophisticated investors”
- Private investment companies
We encourage you to contact us if necessary to advise you on your own needs.
International Closed-End Funds
Only non-resident natural and legal persons can be an investor in International Closed-end funds.The fund assets must accordingly come from abroad. The capital must be at least U.S. $ 100,000 and can not be changed after the formation. Fund units can be marketed to the public or to “experienced investors”. Closed-end funds founded as a private investment company (Limitation of shareholders to a maximum of 100 persons) are exempt from the above provision. Closed fund companies can, like all other forms of investment companies listed below, be established for a limited time.
International Open Funds
Both, resident and non-resident individuals and legal entities can be shareholders of International Open Funds, the capital of open-ended funds is variable.
International Fund Foundations
International Fund foundations combine the fund- and the foundation-law and are fund companies, accordingly established as a foundation. (Trust)
International investment partnerships with limited liability
International Investment partnerships with limited liability are non-incorporated firms with limited liability, similar to the German KG and the English LLP, working with appropriate permits under the Law of International fund companies as a fund company.
Public fund companies
Public fund companies are fund companies, which promote and sell the fund shares in public. Public trust companies are subject to all provisions of the Act for International fund companies.
Fund companies for “experienced investors”
The following natural and legal entities are considered as “experienced investors”:
- people who provide themselves financial services to the public, and
- people with knowledge of all relevant facts of the Investment market, which often make investments of significant extent and from which can be expected that they know and accept the risks of investment.
Fund companies for experienced investors can be exempted from certain requirements of the law regarding international fund companies upon application.
Unit certificates of investment companies for experienced investors have to amount to at least $ 50,000 or an equivalent amount of another currency.
Fund companies for experienced investors may not issue bearer shares and must not merchandise their shares to the public under any circumstances.
Private investment companies
Similar to the aforementioned fund companies for experienced investors, are private investment companies subject to certain limitations:
- A maximum of 100 investors,
- No solicitation in public (“experienced investors” may be solicited directly),
- Limited right to distribute shares
- No bearer shares
Private investment companies are established as open-end funds.
Under the previous legislation all kinds of fund companies had to be approved by the Central Bank. It is currently (April 2009), however, a change in legislation expected, in such a way that the central bank will approve in future only fund companies, which are limited to a maximum of 100 investors.
Fund companies, which plan to have more than 100 investors, will need to be authorized by the Cyprus Securities and Exchange Commission (CySEC).
The assets of a fund company may not be managed by the management of the fund company, but by an external administrator. Administrators may be banks and other companies that may be required to prove their competence.
Permanent establishment requirement
For international fund companies there is no permanent establishment requirement in Cyprus. If an international fund company does not have fully equipped headquarters in Cyprus, a local representative must be appointed to act as an authorized representative to the supervisory authorities.
International fund companies are operating in the following fiscal framework:
- International fund companies are subject to an income tax of 10%, regardless of whether they are tax-residents or not,
- the recruited income from the possession and the sale of securities is exempt from corporation tax,
- income from dividends is tax exempt in most cases,
- payments of dividends, taxes and royalties to non-tax residents, natural and legal persons, are not subject to withholding tax
- Investment income from immovable property outside Cyprus is exempt from taxes in most cases.
In summary, and generated in a practical sense, international investment companies pay only corporate tax on in its own name earned interest income.
Most double tax treaties of Cyprus provide a taxation on stock and bond profits exclusively in Cyprus. In Cyprus are gains of this nature exempt from any taxation.
Please contact us for more details, if you are interested in a circulation of funds in Cyprus.
Cypriot trusts (Foundation Trust) offer unique opportunities to investors of various interests and positively stand out from trust of many other legal systems.
Today’s Trusts are based on the Trust Act 1992, which has modernized the since British colonial times existing trust law. Cyprus International Trusts are exempt from taxes and can be used for a variety of investments.
A Cyprus International Trust consists of the following parties:
- The settlor,
- The trustee,
- The protector and
- the beneficiary.
Cypriot companies, which are exempted from taxes may be used as trustees of the trust. Cypriot companies, which are exempted from taxes offer the significant advantage, that they are not subject to the corporate tax of 10 percent, which would otherwise be paid on the profits from services.
A Cyprus International Trust must have the following characteristics in order to benefit from the exemption:
- The settlor does not live permanently in Cyprus,
- None of the beneficiary is permanently living in Cyprus,
- There are no properties in Cyprus included in the assets of a foundation
- The trustees or at least one of the trustees, if there should be several, is a permanent resident of Cyprus for the duration of the existence of trusts.
Important: Both the settlors and the executors or the beneficiaries may occur as non-taxable Cypriot companies. The Trust will continue to apply as an International Trust. This is compared to the conditions in other states a significant difference, which offers to the founder many creative options.
International Trusts are designed for a period of 100 years and are usually irrevocable. A revocability can be included in the foundation charter, but such trusts are considered by the tax authorities in Cyprus as suspect. Another possibility for an early termination of the trust relationship would be, if creditors apply the termination of the trust and if they can prove that the Trust was founded with the sole purpose of deception. The burden of proof lies with the creditors. Such an entry must be made within two years after the Foundation of the considered eligible assets.
The Cypriot legislation provides the possibility to transform an International Trust later in a National Trust, and vice versa.
Discretion is an essential feature of the Trust. Unless ordered by a court, settlors, trustees, protectors and beneficiaries may not reveal any information. Offenses are under heavy penalty.
A special feature of the Cypriot trusts is that a so-called protector can be appointed. The protector does not appear in the foundation charter.
The role of the protector is to control the trust administrator. The protector has no right to intervene in the administrative operations of the administrator. But he has the right to dismiss the administrator.
According to Cypriot trust law the founder and protector may be the same person or company.
The legislation provides in clear form for the complete tax exemption of the trust, if its profits and gains derive from sources outside Cyprus, or may be deemed to arise from sources outside Cyprus. The exemption also applies to any form of inheritance tax.
Cyprus International Trusts are expressly exempted from any kind of a registration.
Fees for our service “Company Formation Cyprus”
The following services are offered by us:
Forming of the company, entry in the commercial register of the country, apostil, notarized and certified translations of certificates into English, unless official language
- Nominee Director: An attorney in the formation country will act as nominee director of the company (to the outside) and transfers all rights and obligations internally to the actual beneficiary (notarized deed of trust). The director does not have any account authority.
- Trustee Director: We offer a Trustee-Director who is engaged in your business on Cyprus, thus he can sign contracts for the company. Most of our competitors on the contrary only offer a Director who is acting in a statutory way. This implicates that any contract, any commercial transaction has to be signed by the client or his delegate.
Permanent Director: ETC can provide you with a permanent director who has an employment contract with your Cyprus company, payment of
- Nominee shareholder: a tax office in the formation country will act as nominee shareholder (to the outside) of the company and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust).
- social security benefits and income tax.
- Domicile of the company in the formation country: deliverable postal address, availability by telephone, telephone and fax, mail forwarding service
- Account opening: bank account for the company at a renowned major bank in the formation country, internet banking, VisaCard and cheques. Only the founder of the company is authorized to have access to the account.
- General power of attorney to the founder: Only the founder receives a notarially certified general power of attorney for the company.
- Recommendation of a renowned tax office in the formation country, for book-keeping and accounting
- Internet-homepage of the company hosted on a server in the formation country: 5 pages for presentation of services/products, feedback form, imprint, e-mail address. May be extended at any time.
Our Services within the scope of the Formation Package “Cypriote Limited”
- Tax identification number
- value added tax ID number,
- annual financial statement,
- preparation of the annual return
- advance turnover tax returns.
- Account opening in Cyprus
- Delivery and Shipping Service for letters / invoices!
- Formation / Consulting by Tax Accountants and Attorneys at Law
- No “Formation Director” or “Formation Shareholder” Moreover a Cypriot is the Director; the Director is registered and is reachable during the entire agreement term. Provision of Nominees via a Cypriote Law Firm, no “Figurehead Directors”
- No “Help with the opening of a bank account” on Cyprus (which as a rule means that an account is not opened) rather guaranteed account opening, incl. VisaCard and online banking. You do not have to travel to Cyprus
- Serviceable postal address, also for registered mail, no post office box
Upon request free within the scope of the total package: Swiss company and / or personal account at a major Swiss private bank. Our clients are not required to open a branch office in Switzerland, to open a company account in Switzerland, (otherwise a prerequisite). A Swiss account could, for example, be used to “securely park and multiply” Cypriote dividends.
Stock Capital: The recommended authorized capital amount is CYP£ 1,000, unless you wish to commit a larger amount. The business of the company is not restricted to the amount of the authorized capital. The minimum amount of authorized stock capital for the registration of a Ltd. is CYP£ 1,000. In the event, however, the company opens an office in Cyprus (commercially structured organization), the minimum amount is CYP£ 10,000. We would like to point out the fact that this amount does NOT have to be blocked on Cyprus.
Configuration at the Formation of a Cypriote Limited
1. Director on Cyprus
A production site, a site for the exploitation of mineral resources or construction works whose duration is greater than 9-12 months always constitutes the establishment of a place of business in Cyprus, irregardless of “the place of managerial supervision”. Otherwise a taxable permanent establishment is defined analogous to Article 5 DBA (Double Taxation Agreement) according to the „place of managerial supervision“. Either you – or an agent – relocate your ordinary residence to Cyprus and act as the Director of the Cypriote Limited OR you hire a Cypriote as a Director OR our Law Firm in Cyprus provides for a Nominee Director. By the way, we also provide the possibility to our clients, that a Cypriot acts as an „employed Director“ of the Cypriote Limited, with an employment agreement between the Cypriote Limited and the Director, as well as the payment of payroll tax and social security contributions.
Alternative: The non-Cypriote client / founder himself acts as the Director of the company and provides proof that he routinely travels to Cyprus to perform the required ordinary managerial duties (however, this is not feasible in the case of the necessary day-to-day decisions).
2. Shareholder of the Cypriote Limited
The shareholder is due the profits after taxes (dividends). In addition, the shareholder is the owner of the company. Shareholders of a Cypriote Limited can be natural persons, or domestic or foreign companies.
In the event a Cypriote is a shareholder a 15% defense tax is due, when the dividends are distributed or if no dividends are distributed for a period of two years. For this reason we offer a “Nominee Shareholder“ within the scope of our services, more specifically our English Tax Accounting Firm acts as the Nominee Shareholder.
Cyprus provides the advantage, that dividend distributions to a non-Cypriote is not taxed. There are exceptions to this arrangement, which we would like to explain in more detail in a personal setting.
To the extent the client / founder or his company would like to act as the shareholder himself, the following factors are to be observed:
- Does your country have laws analogous to the “taxation of fictitious distributions“, comparable to those in Germany and the USA? Such laws result in the Cypriote dividends being taxed at the shareholder, even if they are not distributed. This is subject to the prerequisites, that the client / founder owns more than 50% of the shares (majority shareholder) and the Cypriote Limited located on Cyprus only generates passive income. In the event such laws exist within the European Union, this is illegal, based on the findings of the European Court of Justice.
If this is the case, the client / founder should „officially“ only hold a maximum of 50% of the shares, the other shares should be held on a trust basis.
- Does the EU-Parent-Subsidiary- Directive apply? In the event the shareholder is a company located in the EU and should the company hold at least 15% of the shares of the Cypriote Limited and both companies (Cypriote Limited and Shareholder) are active companies and the interest is evidently set up for at least one year, then the dividends are distributed tax free to the foreign shareholder due to the EU Parent Subsidiary Directive.
A Danish corporation is the 100% shareholder of a Cypriote Limited. The Cypriote Limited is first taxed at a 10% rate. The dividends (earnings after taxes) distributed to the Danish corporation are tax free. Such dividends are first taxed in the event they are distributed to the shareholder of the Danish corporation, provided such shareholder is an individual.
Please consider, that it is not mandate of a Cypriote Limited to distribute dividends. Moreover, the Cypriote Limited can make investments across the globe, for example: purchase a house in Spain.
Cyprus Limited as Holding: no taxation!
Cyprus Holding (legal form of a Limited company) is not subject to taxation. In addition to the characteristics of a permanent establishment according to tax laws, it requires pure holding tasks and that the shareholders/co-partners perform active operations in their respective countries and are taxed or that the right of taxation is utilised, respectively. Example: an entrepreneur has independent enterprises in the form of limited liability companies in several countries, i.e. for example, an English Limited, a German GmbH and a Spanish S.I. All companies carry out active business in their countries and are subject to tax or the right of taxation is used, respectively. Now a Cyprus Limited is established, which becomes shareholder in the foreign companies. The foreign companies’ profits flow tax-free into the Cyprus Limited. Provided that they are European companies (directive on parent companies and their subsidiaries in the European Union), no withholding tax is imposed in the countries of the co-companies. That means that any profits may be received completely tax-free! It is again important that the Cyprus Limited (Holding) company meets all requirements of a permanent establishment according to tax laws:
- Place of business management: A Cypriot must hold the business management, at least to the outside (nominee solution)
- No bogus company in its sense, but a regular registered office (deliverable postal address, availability by telephone and fax during normal business hours, company sign). Any office or employees (commercially equipped business operation) are not required, since the freedom of establishment in the European Union is applicable
- Bank account in Cyprus
If the member companies are non-EU companies, withholding tax is usually imposed in case of a flow of profits into the Cyprus Limited. This withholding tax varies greatly within the individual countries.