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Expansion of the European Union - Spotlight on Cyprus
May 1 was an historic day for the European Union with the addition of 10 new member states to its ranks: Hungary, Poland, the Czech Republic, the Slovak Republic, Slovenia, Estonia, Latvia, Lithuania, Malta and Cyprus.
This newsletter concentrates on Cyprus - the first new EU member to be in full compliance with OECD criteria and the EU Code of Conduct and, with the recent revisions to its corporate law, is excellently positioned as an entry level jurisdiction for anyone seeking to do business in the EU. Cyprus has an excellent network of Tax Treaties, especially in regard to Russia, and resident companies can reap their substantial benefits.
Cyprus corporate tax rates are now 10%, the lowest in Europe with the exception of the Isle of Man slightly under Ireland's 12.5%. The new Cyprus system taxes worldwide income for Cyprus residents and only Cyprus-source income for non-residents. A Cyprus company will be taxed on worldwide income if it is deemed to be resident in Cyprus; a company will be deemed to be resident if it is managed and controlled in Cyprus (incorporation alone is insufficient to establish residence); and a company not managed and controlled in Cyprus will be non resident.
- There is no withholding tax on dividend distributions to non resident shareholders regardless of the existence or provisions of any Double Tax Treaty concluded by Cyprus.
- Dividend income can be exempted from tax if the Cyprus Company holds directly at least one per cent (1%) of the share capital of the paying company, and this exemption will not apply if the company paying the dividend engages directly or indirectly in more than fifty per cent (50%) of its activities that produce investment income and the foreign tax burden on the income of the company paying the dividends is substantially lower than the Cypriot tax burden.
- 50% of the interest received by corporations, excluding interest received in the context of the ordinary trading activity of the corporation (i.e. banks, interest on debtors) is exempted.
- Profits from disposal of shares, stocks, shares and securities in any recognized Stock Exchange are exempted from Cyprus income tax.
- Capital gains tax will be imposed only on disposal of property situated in Cyprus.
- Unilateral tax relief has been introduced for foreign tax paid abroad which will be credited against any Cyprus tax on the same income regardless of the existence of any double taxation agreement with the country where the foreign tax is paid or payable.
Cyprus has long been one of the leading jurisdictions for vessel registration in the world. The special status granted to shipowning and shipmanagement companies is extended to the year 2020. Under this status, profits earned by a Cyprus company which owns ships under the Cyprus flag and operates in international waters are exempt from tax, while profits of ship management companies are taxed at 4.25% unless they opt to be subject to tonnage tax calculated on the tonnage of the ships managed by them.
Cyprus companies will become favored as Holding Companies. Under the parent subsidiary directive as of May 2004, dividends exported to Cyprus from other EU countries will have no tax withheld in those countries. For non-EU countries, lower withholding rates will apply under many of the Cyprus Tax Treaties.
Of course, IBCF can assist you in creating and managing your Cyprus company, see http://www.ibcf.com/cyprus.html for details on costs and procedures.
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