Cyprus is a well-established international business and financial centre, strategically located at the crossroads of Europe, Africa and Asia. A British colony for much of the 20th century, Cyprus became independent in 1960. It joined the EU in 2004 and the Eurozone in 2008. It has a transparent, robust and independent legal system based on common law and a modern, business-friendly legal and taxation system. Tax rates are among the lowest in the EU and there is a wide network of double taxation treaties offering attractive planning opportunities.
Since joining the EU, Cyprus has consolidated its position as the natural portal for investment into the dynamic economies of Eastern Europe and established itself as a prime bridgehead for investors from outside the EU wishing to set up a base in Europe. While Russia and Eastern Europe remain the most important markets, in recent years there has also been a significant increase in business with China, India and other Asian countries. In a reversal of the accustomed direction of investment flows, Cyprus has also become a portal for investors from Russia, Eastern Europe and other countries investing overseas.
Cyprus is also a major shipping and ship management centre. The Cyprus fleet is in the world’s top ten in tonnage terms and Cyprus is home to the largest number of third party ship management companies in the world.
The economic backdrop
Cyprus has made a full recovery after the economic crisis of 2013, with no perceptible damage to the island’s role as an international financial centre. With its modern low-tax environment and business infrastructure and its high-quality professional services, Cyprus continues to attract cross-border investment projects involving an ever-widening range of jurisdictions.
The business and investment environment
For many years Cyprus has been an excellent location for holding companies, for a host of reasons, including its familiar and reliable common law legal system, excellent communications and world-class professional and financial services. Since joining the EU, Cyprus has consolidated its position as the main portal for investment between the EU and other Western economies on the one hand, and the dynamic markets of Russia, Central and Eastern Europe, India and China on the other.
The tax system is a particular source of competitive advantage. Cyprus’s modern, simple tax system is fully compliant with EU and OECD standards and tax rates are among the lowest in the EU. There are double taxation agreements covering 60 countries and the network of agreements continues to expand. There is a complete participation exemption and no taxation of capital gains except gains arising from real estate in Cyprus. Reorganisations and cross-border mergers are tax-exempt. Interposing an appropriate Cyprus holding or finance structure between investors in one country and the operating investee company in another can significantly reduce the tax burden, increasing post-tax income by 10% or more, and provide tax-efficient exit options.
With the world’s tenth largest fleet in terms of registered tonnage, Cyprus is also home to myriad shipping and ship management companies. Its tonnage tax system, introduced in 2010, significantly reduces the tax burden on international shipping and ship management companies and makes Cyprus one of the most attractive environments in the world for international shipping.
Cyprus’s “intellectual property box” regime provides an opportunity to achieve an effective tax rate of less than 2.5% on revenue from intellectual property, by far the lowest rate available in Europe. Furthermore, gains on disposal of intellectual property assets can effectively be fully sheltered from tax.
The economic citizenship programme, which was enhanced in 2016, allows individuals with substantial economic interests in Cyprus and their dependents to obtain Cyprus citizenship by naturalisation on an accelerated basis. Applicants must have a clean criminal record and own a residence in Cyprus, and must invest €2 million or more in Cyprus, or be the owner or a substantial shareholder of a company doing business in Cyprus. Since Cyprus is an EU member, Cyprus citizenship considerably simplifies international travel and visa requirements and is proving very attractive to high net worth individuals.
Continued reform and modernization of the tax system
The government has pressed ahead with its programme to support economic recovery, attract inward investment and boost Cyprus’s attractiveness as a competitive but reputable international financial centre. The network of double tax agreements continues to expand: new agreements with Bahrain, Georgia, India and Latvia entered into effect at the beginning of 2017, agreements with Iran and Jersey will take effect at the beginning of 2018 and new agreements with Luxembourg and Barbados have been signed during 2017.
The entry into force of the revised DTA with India at the end of 2016 restored tax relations between the two countries and removed bureaucratic disincentives for Indian companies with Cyprus holding companies.
As 2016 drew to a close the Cyprus Ministry of Finance also announced that the Russian government had agreed to defer the introduction of source-based taxation of capital gains on shares in “property-rich” Russian companies (companies whose assets mainly comprise real estate). This means that gains on the disposal of shares in Russian companies, including “property-rich” companies, will continue to be free of any tax.
It is also proposed to amend the criteria for determining tax residence in order to enable individuals who are not tax resident elsewhere and who have a base and activities in Cyprus to be treated as resident in Cyprus and to qualify for the benefits of the Cyprus tax regime (including exemption from any form of taxation on investment income such as dividends and interest and income tax exemptions for new taxpayers) without having to be physically present for more than half the tax year.
A preliminary conclusion
Cyprus’s programme of economic reform and modernisation is progressing well. The formal economic adjustment programme has been successfully completed and the international services sector is in a strong position to lead the recovery, with new, competitive offerings enhancing the benefits it provides to international investors.