ISBN No:

ISBN No: 9963-8133-0-5

CAUTION: The information in this booklet is subject to change without notice. Application of the information to specific circumstances requires the advice of lawyers who must rely upon their own sources of information before providing advice. The information in this booklet is intended only as a general guide and is not to be relied upon as the sole basis for any decision without verification from reliable professional sources familiar with the particular circumstances and the applicable laws in force at that time.

TABLE OF CONTENTS

1. INTRODUCTION

2. POLICY AND PROSPECTS

3. CYPRUS AS AN IDEAL LOCATION

3.1 Stability

3.2 Geographical Location

3.3 Taxation

3.4 Double Taxation Treaties

3.5 Respectability

3.6 Registration Procedures

3.7 Commercial Infrastructure

3.8 International Relations

3.9 Exchange Control

3.10 Confidentiality

3.11 Access to international markets

3.12 Low costs

4. DEFINITION OF "INTERNATIONAL BUSINESS"

5. LEGAL REQUIREMENTS FOR INTERNATIONAL BUSINESS COMPANIES

6. TYPES OF INTERNATIONAL BUSINESS COMPANIES

7. INTERNATIONAL BUSINESS BRANCHES

8. INTERNATIONAL BUSINESS PARTNERSHIPS

9. TAX AND OTHER INCENTIVES FOR INTERNATIONAL BUSINESS ENTITIES

9.1 Exemption or Reduced Income Tax Rates for International Business Entities

9.2 Reduced Income Tax Rates for Foreign Employees of International Business Entities

9.3 Exemption from Payment of Income Tax on Foreign Capital Interest

9.4 Reduced Income Tax Rates for Foreign Investment Income

9.5 Exemption from Estate Duty

9.6 Exemption from Capital Gains Tax

9.7 Exemption from Stamp Duty

9.8 Exemption from Value Added Taxation

9.9 Exemption from Exchange Control

9.10 Exemption from Social Insurance Contributions

9.11 Duty-Free Facilities

10. FINANCIAL REPORTING AND AUDITING REQUIREMENTS

11. RESIDENCE AND WORK PERMITS

12. INTERNATIONAL BANKING UNITS (IBUs)

12.1 Taxation

12.2 Other Advantages

13. BANK REPRESENTATIVE OFFICES

14. INTERNATIONAL FINANCIAL SERVICES COMPANIES

15. INTERNATIONAL TRUSTEE SERVICES COMPANIES

16. INTERNATIONAL PUBLIC COMPANIES

17. INTERNATIONAL COLLECTIVE INVESTMENT SCHEMES

17.1 Definition and structures available

17.2 Regulatory framework

17.3 Confidentiality

17.4 Managers and trustees

17.5 Taxation

18. INTERNATIONAL TRUSTS

18.1 The Law of Trusts in Cyprus

18.2 The International Trusts Law 69 of 1992

18.3 Confidentiality

18.4 Taxation

18.5 Conclusion

19. SHIPPING COMPANIES

19.1 Legal Requirements

19.2 Provisional Registration

19.3 Permanent Registration

19.4 Parallel Registration

19.5 Tax Advantages

19.6 Vessel Registration and Age Limit

19.7 Shipping Companies' Headquarters

19.8 Future plans

20. INTERNATIONAL INSURANCE COMPANIES

20.1 International Insurance Companies

20.2 International Captive Insurance Companies

21. DOUBLE TAXATION TREATIES

21.1 General

21.2 Cyprus' Double Taxation Treaties with Central and Eastern European countries

21.3 Cyprus/ Russia Double Taxation Treaty

21.4 Cyprus / U.S.A. Double Taxation Treaty

21.5 Cyprus/ Austria route

21.6 Cyprus/ China Double Taxation Treaty

21.7 Cyprus/ India Double Taxation Treaty

22. CONCLUSION

Appendix List of further publications prepared by ANDREAS NEOCLEOUS & CO.

1. INTRODUCTION

Cyprus' strategic geographic location, excellent commercial infrastructure, political stability, favourable tax incentives and European-level standard of living are among the factors which have contributed towards the development of the island as an important financial centre.

The encouragement of foreign participation in the island's economy is a policy which is strongly endorsed by all official bodies and authorities as well as by the Cypriot people themselves. This open and liberal approach has successfully generated a growing awareness among foreign corporations and individuals of the unique advantages of using Cyprus as a business base.

The fact that Cyprus today is a booming regional financial centre is also due in no small part to the island's system of administration and its European tradition. To a large extent these were inherited from the British who controlled Cyprus before it became an independent sovereign republic in 1960.

The Turkish invasion of 1974, which left some 37% of the northern part of the island under Turkish occupation, did little to interrupt the unparalleled period of growth, prosperity and commercial expansion which followed independence. However, due to the authorities' expansionary economic policy and the initiative and enterprising spirit of the private sector, social and political security continue to form the cornerstone of Cypriot society. Indeed, although the Cyprus problem has not yet been solved, the rule of law and political stability in the Republic of Cyprus are guaranteed by the efficient functioning of democratic institutions and by dynamic economic development.

Today the authorities are demonstrating more clearly than ever before that they are seriously committed to refining and expanding the legislation and regulations in terms of which foreign involvement in the island's economy is secured. Therefore, an extremely favourable environment for all forms of inward business activity and international foreign investment has been created to ensure that they enjoy an infrastructure which has the maximum potential for success and growth.

2. POLICY AND PROSPECTS

The idea of promoting Cyprus as an international business base first developed after the Turkish invasion of 1974, when the island's authorities decided that an expansionary economic policy should be followed to encourage the inflow of foreign investment. An amendment to the Income Tax Laws in 1975 put these aspirations into practice and since then the way has been clear for Cyprus to assert itself as an international business centre.

From these early beginnings the Cypriot authorities have shaped economic policies to attract foreign investments of a high quality and to ensure that international business entities enjoy an existence which is as beneficial as possible. The aim has also been to increase incentives and to create an environment which lends itself to tax planning on a world-wide level. Consequently, applications for the registration of international companies have always been handled with speed and efficiency by all relevant authorities.

In 1977 the existing tax incentives were refined and extended by measures which further improved the tax rates enjoyed by international business entities and their employees.

Thereafter the number of international business companies being registered annually in Cyprus grew by leaps and bounds as did the volume of companies incorporated abroad and registering a place of business on the island. Today there are more than 40,000 international entities registered in Cyprus and a significant number of them maintain fully-fledged offices on the island.

Accordingly, it is anticipated that the status of the island as a major international business centre will continue to expand and flourish.

3. CYPRUS AS AN IDEAL LOCATION

Cyprus compares extremely favourably with similar jurisdictions because of the numerous advantages which it offers. Many of these advantages are inherent in the country's geographical position, while others have been tailored to suit the demands of foreign investors and international entities. The result is a most attractive package of incentives which covers every facet of business life.

Prominent among these incentives are straightforward registration procedures, constructive administrative measures, an impressive range of double taxation treaties and favourable tax benefits. However, the authorities have successfully maintained a balance so that the creation of a favourable commercial environment has not disturbed the impeccable reputation enjoyed by all international businesses on the island. Clearly, the fact that the island is a low-tax jurisdiction and not a tax haven is material and ensures that these businesses do not attract the suspicion of foreign revenue or tax authorities.

The tremendous growth in the number of foreigners participating in the Cypriot economy is ample testimony to the enormous appeal which Cyprus has to international investors. Certainly, there are few locations which are able to offer the same extensive and wide-ranging incentives that are offered in Cyprus with warmth, hospitality and pride.

The following advantages are perhaps the most appealing:

3.1 Stability

Though located in the often volatile Eastern Mediterranean area, Cyprus is a centre of democracy and stability where businessmen from all nations are able to conduct their affairs in a harmonious and friendly environment. The rule of law is a well-entrenched principle which is endorsed by free elections and a European-style parliamentary system. In addition, the authorities' desire to assist foreign businesses is strengthened by the friendly and enterprising spirit of the Cypriot people themselves.

3.2 Geographical Location

Cyprus is privileged to enjoy what is possibly one of the most strategic geographical locations in the world. The island is situated at the crossroads of Europe, Asia and Africa and also forms a gateway to the oil-rich Arab states and the rest of the Middle East. It is, therefore, a convenient springboard for business activities in any of the trade centres located in these areas.

In addition, the island shares the same time zone as other major centres in the area and is also within easy travelling distance of the rest of Europe and the Middle East. The international airports at Larnaca and Paphos offer daily flights to all major destinations in these areas.

3.3 Taxation

All Cyprus international business entities may take advantage of the many tax benefits which the authorities have designed specifically to provide maximum profit potential. Chief among these benefits are the low tax rate of 4.25% applicable to the net profits earned by international business companies and the total tax exemption for international partnerships. Foreign personnel enjoy equally favourable tax rates. In addition tax incentives have been introduced to attract foreign investment in respect of certain local companies and projects. The various tax benefits are examined in more detail in sections 4 and 9.

3.4 Double Taxation Treaties

Cyprus has concluded double taxation agreements with more than 40 countries which provide important tax advantages. Cyprus' double taxation treaties with the Central and Eastern European countries, China and India contain no anti-avoidance provisions and Cyprus international business companies may therefore be used beneficially as holding, licensing and finance investment vehicles in those countries. Of the treaties now in force, only Belgium, Canada, Denmark, Germany, France, Sweden, the UK and the USA contain "limitation of benefits" articles. With the exception of Canada and the USA which exclude Cyprus international business companies from all the provisions of the relevant treaties, in all other treaties Cyprus international business companies, albeit denied the reduced rates of withholding taxes, may still claim the benefit of other treaty provisions such as the permanent establishment clause or tax sparing credits. The "limitation of benefits" article contained in the above treaties only affects the flow of income from those countries to Cyprus and not income flows from Cyprus to other countries. The treaties and some of the ways in which they can be put to beneficial use from a tax planning point of view are discussed in section 21.

3.5 Respectability

While the policy of the authorities has been in favour of assisting and promoting all business sectors in Cyprus, this has not operated to affect adversely their respectability or good standing in the eyes of the international business community. The framework of control placed on most business activities serves to boost the reputation of all Cyprus-based entities while also allowing them to operate in an environment which is as free from onerous bureaucratic restrictions as possible.

In many sectors no specific legislation has been passed to give international business entities special advantages or benefits. For this reason, international business companies, international banking units (IBUs), captive insurance companies and international trusts are subject to the same laws and regulations as those pertaining to their local counterparts and so there can be no suggestion that they operate in accordance with inferior standards or in an unprofessional manner.

3.6 Registration Procedures

The procedure for the incorporation of a Cyprus legal entity can be completed within a period of two weeks at the most and enables the legal entity to start business forthwith. Applications for registration of captive insurance companies, international banking units and shipping companies as well as all other forms of international business entities are favourably considered. In certain instances, these companies may also be exempt from many of the regulations applying to their local onshore counterparts, although not to an extent which will endanger their respectability.

3.7 Commercial Infrastructure

The commercial infrastructure of Cyprus is well developed. It offers a civilized and respectable environment in which pleasant working and accommodation conditions are combined with low operational costs and living expenses.

Not only are there many well qualified lawyers who are experienced in company law and tax planning but also a number of international accounting firms are represented in Cyprus as well as many engineering, insurance, trust and shipmanagement companies. Furthermore, there is an ample supply of university graduates who are available to work in all sectors of the economy.

The English legal system, practice and procedures which the island acquired during the period of British rule are firmly embodied in the fabric of almost every commercial sector. As these procedures are widely used in most English speaking countries and certainly in the majority of former British colonies, they are usually readily understood by foreigners who have registered Cypriot international companies or are engaged in international tax planning exercises on the island. Although the official languages of the Republic are Greek and Turkish, English is spoken by the majority of the population. It is also a language which is taught extensively in schools and is widely used in commerce, industry and administration.

Telecommunications in Cyprus are of a very high standard, and Cyprus prides itself as one of the most developed countries in the world as regards its telecommunications infrastructure. The incumbent operator’s telephone network is 100 per cent digitalised. In addition, as part of its commitment to developing Cyprus as a prime location for e-commerce and Internet-based activities, the Cyprus Telecommunications Authority (“CYTA”) is investing heavily in the further upgrading of the island’s telecommunications capabilities. A public Asynchronous Transfer Mode Network for broadband telecommunications offering high-speed data, picture and voice transmission will be available from 2000. CYTA also continues with the installation of the Synchronous Digital Hierarchy Network and is set to offer Asynchronous Digital Subscriber Lines for high-speed Internet access in the near future. These technological developments are conducive to positioning Cyprus as a leading high-tech centre for low-cost (online) business.

Cyprus is served by two international airports situated near Larnaca and Paphos. They handle about 360 scheduled flights operated each week by 33 international airlines as well as flights operated by 28 charter airlines. The island is rapidly becoming a major international transit station for commercial air transportation with excellent conditions with the entire region. Seaborne traffic is served by the two multi-purpose ports of Limassol and Larnaca which are being used increasingly as regional warehouse, distribution and container transhipment centres. About 100 shipping lines include Cyprus in their regular schedules to and from six continents. More than 5,500 ships totalling 15 million net registered tons call at Cypriot ports every year.

3.8 International Relations

The fostering and promotion of good international relations with neighbouring states and countries further abroad is an express policy of the Republic of Cyprus and every effort is made to ensure that good relations are maintained with all international organisations. Cyprus maintains extensive diplomatic relations and is a member of the United Nations, the Council of Europe, the Commonwealth, the World Bank, the International Monetary Fund, and the Non-Aligned Group. It is also a signatory to various international conventions and bilateral cooperation agreements.

An association agreement was signed in 1972 between Cyprus and the European Union which provided for the abolition of all barriers to trade and the establishment of a customs union in two stages; the first was completed in 1997 and the second is due to be completed by 2003, by which time the free and unrestricted movement of industrial and agricultural products between the member states of the E.U. and Cyprus, the abolition of all quantitative restrictions and the Common Customs Tariff will be fully effective. In July 1990 Cyprus applied for full membership of the E.U; the accession process began in March 1998 and Cyprus hopes to complete it by 2003.

3.9 Exchange Control

Cyprus international business entities are all exempt from the prevailing exchange control regulations due to their non-resident classification. Accordingly, the island is an ideal location for the maintenance, transfer and conversion of funds which is facilitated by excellent telecommunication and efficient international banking services. For greater detail please refer to section 9.9.

3.10 Confidentiality

Confidentiality in all business transactions is an element which the Cypriot authorities have perfected in respect of the activities of nearly all commercial sectors. Laws and procedures governing financial and business conduct have been specifically drafted to ensure that this element is carefully protected and maintained. Thus the registration of Cypriot international business entities can be effected through the appointment of nominees to hold shares on behalf of the beneficial owners, whose identity remains secret. The identity of the beneficial owners need only be disclosed to the Central Bank of Cyprus which holds this information in the strictest confidence. Privacy of the constitution and membership of trusts as well as their transactions and activities is secured through an absence of registration or reporting requirements and even the identity of a settlor may be protected if required. In Cyprus the safeguarding of the confidentiality of a bank's customers and their transactions is a cornerstone of banking policy.

3.11 Access to international markets

Cyprus based entities have been increasingly expanding into international markets. There are already numerous multinational companies operating on the island and Cypriot businesses maintain good links with markets abroad. Naturally, the elements of respectability and confidentiality assist in foreign expansion and this is supported by the island's international relations.

3.12 Low costs

The incorporation costs of all Cypriot entities are quite reasonable when compared with those of other jurisdictions. In addition, all other administrative and official fees and levies are inexpensive. While office and living accommodation is both plentiful and of a high standard, it is not expensive. The overheads of all businesses can therefore usually be kept at a conservatively low figure.

4. DEFINITION OF "INTERNATIONAL BUSINESS"

4.1 In terms of the existing provisions of the Income Tax Laws, a company must comply with the following two requirements in order to enjoy international status:

4.1.1 its shares must belong directly or indirectly exclusively to non-Cypriots; and

4.1.2 its income must be derived from non-Cypriot based sources.

In other words, an international business entity, whether a company, a partnership or a branch of an overseas company, must be wholly owned by foreigners and it must be exclusively engaged in business carried on outside Cyprus.

4.2 Today international business entities in Cyprus can operate in the following legal forms, each of which is discussed in further detail below:

4.2.1 limited company;

4.2.2 branch of an overseas company; and

4.2.3 partnership.

Section 28A of the Income Tax Laws defines the term "international" business broadly, as any business which is lawful, is carried out abroad and has income generated abroad.

4.3 The numerous tax advantages enjoyed by international business companies are critical to their profit potential and it is of the utmost importance to ensure that their international business status is not jeopardised by conducting prohibited local business unintentionally. The result would be catastrophic for many reasons, not least because corporate tax would jump from 4.25 percent of net profit to the 20 percent (or the 25 percent as the case may be) rate paid by local companies. If the international status of a proposed business transaction is doubtful, it is recommended that the authorities be consulted before taking any action.

4.4 For the purpose of clarification, the following are examples of local activities in which international business entities may safely engage:

4.4.1 managing the affairs of the company, including employing staff and buying or leasing business or residential premises;

4.4.2 dealing with and executing orders and payments in respect of foreign goods or customers, including arranging orders for local goods by foreign customers, provided this is done through a local exporter;

4.4.3 drawing and designing plans and programmes in respect of construction activities taking place abroad;

4.4.4 editing and printing publications for distribution abroad;

4.4.5 engaging in the activities of international banking units or captive insurance companies; and

4.4.6 acting as ships' agents or managers provided that no local shipping work is undertaken.

5. LEGAL REQUIREMENTS FOR INTERNATIONAL BUSINESS LIMITED COMPANIES

International business limited companies are by far the most popular legal entities.

The legal requirements for the registration of a limited company in Cyprus are based on the Companies Law Chapter 113, which is almost identical to the British Companies Act of 1948.

5.1 The registration procedure for such a company is similar to that applicable to a local limited company except that the prior approval of the Central Bank is required. As in the case of any other international business entity, there are certain requirements which must be satisfied before such approval is granted, namely:-

5.1.1 Confidential bank or other references for the shareholders must be sent to the Central Bank;

5.1.2 All the shares in the company must belong, directly or indirectly, to foreigners. However, residents can act as nominees for foreigners where anonymity is desired;

5.1.3 If the company establishes an operational office in Cyprus, its minimum issued and paid-up share capital must be CYP10,000; and

5.1.4 All other companies must have a minimum paid up share capital of CYP1,000.

5.2 The approval of the Central Bank is readily granted but the following conditions are usually imposed:

5.2.1 The objects of the company must be confined solely to business outside Cyprus.

5.2.2 All local expenses of the company must be covered from funds imported from external sources.

5.2.3 The company may not obtain any finance from local sources.

5.2.4 The company must undertake to submit to the Central Bank its annual accounts as at the end of its financial year, duly certified by accountants practising in the Republic and authorised by the Minister of Finance. The accounts should also bear a confirmation from the auditors that the company did not carry out any transactions with residents other than local payments for administrative purposes.

5.3 Before initiating the incorporation procedure it is advisable to ascertain that the proposed name of the company is acceptable to the Registrar of Companies. This will avoid complications if the proposed name is either not suitable or is already being used by another company. On applying to the Registrar for approval of a name it is recommended that two or three possible names be submitted as this may avoid unnecessary delays. Applicants should however bear in mind that a name is not likely to be authorised if:

5.3.1 it is similar to the name of an existing company;

5.3.2 it is considered misleading or confusing;

5.3.4 it implies links with royalty; or

5.3.5 it includes the word "Imperial", "National", "Corporation", "Commonwealth" or "Co-operative".

5.4 Where a subsidiary company proposes to adopt the name of its parent company, the latter must furnish its written consent for the use of its name. Once the approval of the Central Bank has been obtained, the next step is the registration of the company. For a company to be registered, the following documents and information must be filed with the Registrar of Companies:

5.4.1 The Memorandum and Articles of Association. The Memorandum must state, among other things, the company's name and objects, and the number and the value of the shares authorised to be issued. The Articles of Association generally govern the company's internal procedures and functions.

5.4.2 A list of the directors and the secretary's name. A minimum of one director is required but there is no maximum. Although there is no necessity to have local directors, this is advisable especially where the provisions of a double tax treaty are to be utilised and it is important to show that the company is effectively managed and controlled from Cyprus and that all company decisions are taken in Cyprus. Also, for practical reasons, it is recommended that the secretary is a Cyprus resident.