General Traits, Legal System & the Cyprus Tax Regime
Geography & Economics
Despite its limited geographical size and small population of around 800,000 people, Cyprus’ geographical and political significance in the area has always been disproportionate. The reason for this has been the island’s strategic position in the east Mediterranean.
Cyprus is the third largest island in the Mediterranean, and lies on an axis of movement, both north-south and east-west. The island stands at the crossroads of three continents, Europe, Asia and Africa, and is located south of Turkey, west of Syria and Lebanon, north-west of Israel and Palestine, north of Egypt, and south-east of Greece.
Cyprus is a member of:
- European Union
- United Nations
- The Commonwealth of Nations
- World Bank
- International Monetary Fund
- Council of Europe
The country has signed the General Agreement on Tariffs and Trade (GATT) and the Multilateral Investment Guarantee Agency Agreement (MIGA). Cyprus has been a member of the European Union since 2004 and held the presidency of the Council of the European Union in the second half of 2012.
The country maintains worldwide diplomatic relations with missions in all major states. It has a stable democratic government and social system.
Cyprus has historically followed a non-aligned foreign policy. The Republic of Cyprus became a member of the European Union in 2004 and adopted the Euro in 2008 as its unit of currency.
Legal System in Cyprus
Although several laws and amendments have been enacted since the island gained its independence in 1960, the basic corpus of the law is still English Law as introduced and applied before that date. Practically the whole of the business and commercial legislation of Cyprus dates back to the time when Cyprus was a British colony. The legal system in Cyprus is based on English statute and English common law, with the UK 1948 Companies Act forming the basis of the Company law in Cyprus.
The Cyprus Tax System
A company is considered to be a tax resident of Cyprus if the management and control of the company is exercised in or from Cyprus. To satisfy the test of “Management and control”, it should be shown that the ‘effective management’ of the company as well as all important decisions and Board meetings are held in Cyprus. Cyprus tax resident companies are taxed on their worldwide income. On the contrary, a non-Cyprus tax resident company is taxed on income accrued or derived from a business activity carried out through a permanent establishment in Cyprus.
The Cyprus Tax System
1. The island’s flat corporate income tax rate of 12.5% is one of the lowest corporate tax rates in the European Union.
2. The provisions of the EU Parent – Subsidiary Directive and the Interest and Royalties Directive have full application in Cyprus, and therefore enable a tax-paying company in the European Union to receive dividends from its EU subsidiary while being exempt from having to pay withholding tax.
7. No capital gains tax or income tax on the liquidation of a Cypriot Holding Company.
8. No capital gains or income tax on the liquidation of participations.
9. The Cyprus Holding Company can be re-domiciled to a third country (provided it is allowed by that country’s law).