Other Types of Entities
Foreign companies
If a foreign company’s sole place of business is in Cyprus but all its business activities are abroad, it may be exempt from tax in Cyprus, but it will be excluded from any of the double taxation treaty benefits. The activities of the Cypriot branch or office which are permitted in order to preserve the tax exemption include:
The branch or office must be managed and controlled outside Cyprus to obtain full tax exemption. If it is not, the worldwide income from its international business activities is taxable in Cyprus in the same way as for Cyprus-incorporated IBCs (see below). This may be useful if the foreign company wishes to establish Cyprus residence for double taxation treaty purposes.
Cyprus-incorporated IBCs
Prior to the reform of the taxation system that took effect from 1 January 2003 Cypriot companies owned by non-residents of Cyprus and doing business exclusively outside Cyprus enjoyed a preferential tax status. These companies were known as International Business Companies (“IBCs”). The new tax system abolished tax distinctions between IBC’s and other companies and IBC’s are now subject to the 12.5% corporation tax rate applicable to all Cypriot companies.
The fundamental difference between a resident IBC and a non- resident IBC with a branch in Cyprus that is not managed and controlled in Cyprus is that the former is entitled to benefit from the Cypriot double taxation treaties but the latter is not. As well as enjoying the benefits of lower withholding taxes, a Cypriot company can ensure that its overseas activities will not be subject to local tax if they come within the activities of a permanent establishment permitted by an applicable treaty, a matter of great importance to a trading company.
Trusts
The Cypriot international trust was introduced in 1992 by the International Trusts Law, which enables a non-resident of Cyprus to create a trust of any property (except immovable property in Cyprus) for the benefit of non-residents (or any charity), with at least one Cyprus-resident trustee. The settler, any beneficiary or the local trustee (or any combination of those) may be a Cyprus IBC or partnership.
No foreign law relating to inheritance or succession will invalidate the trust or affect any transfer or disposition relating to its creation. It may not be set aside by the settler’s creditors unless it is proved that the trust was set up with intent to defraud those creditors when the property was transferred.
A trust is presumed to be irrevocable unless a power of revocation is reserved, and it may remain in force for up to one hundred years, notwithstanding any statutory provision to the contrary Subject to any specific provisions in the trust instrument there are no limitations on the investment of trust assets, so long as investment powers are exercised with reasonable prudence and diligence.
The Cyprus court may amend or repeal the terms of the trust or the powers of the trustees providing it is satisfied that the proposed changes will be in the interests of the person on whose behalf the application is made and will not substantially prejudice any other interested party.
The income and profits of an international trust derived from a source outside Cyprus are exempt from taxation in Cyprus, whether in the hands of the trustees or the beneficiaries. International trusts are exempt from any duty of registration, but the trustees are obliged to disclose all documents and information relating to the accounts of a trust to the beneficiaries, and the courts may order the disclosure of documents and information relating to a trust in connection with civil or criminal proceedings.
Investment companies
Cyprus-incorporated holding companies, finance licensing companies and real estate companies may receive income from abroad subject to the 12.5% corporation tax rate under the CFC rules. If the income originates from a country with a double taxation treaty with Cyprus, reduced rates of withholding tax may be available.
A Cyprus international collective investment scheme (ICIS) may take the form of a fixed or variable capital company, a unit trust or a limited liability partnership whose sole purpose is the collective investment of funds provided by unit-holders. It may only be established and operated by non-residents. Under the new tax regime, An ICIS is not liable to Cyprus tax in respect of dividend income from abroad, subject to compliance with the CFC rules, or profits on sale of shares and securities.
International business partnerships
An international business partnership is one in which all the partners (whether individuals or companies) are non-resident and all the partnership business is international. Neither the partnership itself nor the individual partners are liable to pay Cypriot tax.
Bank representative offices
Under the Banking Law of 1997 bank representative offices are not considered to be banking businesses and do not need a license, but they should be registered with the Registrar of Companies. They must observe the following conditions:
Finance companies
As non-residents are not subject to tax on any interest, it will still be beneficial to use Cypriot-resident companies as finance vehicles in countries with which Cyprus has concluded double taxation treaties that eliminate or reduce interest charges. Cypriot finance companies may also be used to lend funds to entities within the same group or to non-related third parties at an arm’s length, so that interest payments may be deducted from their taxable base.
Intermediary licensing vehicles
Cypriot companies can be used advantageously as intermediary licensing vehicles for the routing of royalties out of countries with which Cyprus has concluded double taxation treaties.
Foreign companies
If a foreign company’s sole place of business is in Cyprus but all its business activities are abroad, it may be exempt from tax in Cyprus, but it will be excluded from any of the double taxation treaty benefits. The activities of the Cypriot branch or office which are permitted in order to preserve the tax exemption include:
- Financial supervision, e.g. opening letters of credit, obtaining certificates of origin and placing and receiving orders
- Administrative services, e.g. book-keeping
- Storage of goods in transit and other warehousing activities
- Promotion of overseas trade
- Technical advisory services including preparation of drawings and services in connection with construction, building or engineering work performed abroad
- Acting as trustee or nominee for other international business or foreign companies and administering international business trusts
- Editing and printing journals, periodicals and other publications for sale and distribution abroad
- Acting as intermediary in shipping transactions, provided that the ships do not call at Cypriot ports
- Trading or otherwise dealing with other Cyprus IBCs or branches
The branch or office must be managed and controlled outside Cyprus to obtain full tax exemption. If it is not, the worldwide income from its international business activities is taxable in Cyprus in the same way as for Cyprus-incorporated IBCs (see below). This may be useful if the foreign company wishes to establish Cyprus residence for double taxation treaty purposes.
Cyprus-incorporated IBCs
Prior to the reform of the taxation system that took effect from 1 January 2003 Cypriot companies owned by non-residents of Cyprus and doing business exclusively outside Cyprus enjoyed a preferential tax status. These companies were known as International Business Companies (“IBCs”). The new tax system abolished tax distinctions between IBC’s and other companies and IBC’s are now subject to the 12.5% corporation tax rate applicable to all Cypriot companies.
The fundamental difference between a resident IBC and a non- resident IBC with a branch in Cyprus that is not managed and controlled in Cyprus is that the former is entitled to benefit from the Cypriot double taxation treaties but the latter is not. As well as enjoying the benefits of lower withholding taxes, a Cypriot company can ensure that its overseas activities will not be subject to local tax if they come within the activities of a permanent establishment permitted by an applicable treaty, a matter of great importance to a trading company.
Trusts
The Cypriot international trust was introduced in 1992 by the International Trusts Law, which enables a non-resident of Cyprus to create a trust of any property (except immovable property in Cyprus) for the benefit of non-residents (or any charity), with at least one Cyprus-resident trustee. The settler, any beneficiary or the local trustee (or any combination of those) may be a Cyprus IBC or partnership.
No foreign law relating to inheritance or succession will invalidate the trust or affect any transfer or disposition relating to its creation. It may not be set aside by the settler’s creditors unless it is proved that the trust was set up with intent to defraud those creditors when the property was transferred.
A trust is presumed to be irrevocable unless a power of revocation is reserved, and it may remain in force for up to one hundred years, notwithstanding any statutory provision to the contrary Subject to any specific provisions in the trust instrument there are no limitations on the investment of trust assets, so long as investment powers are exercised with reasonable prudence and diligence.
The Cyprus court may amend or repeal the terms of the trust or the powers of the trustees providing it is satisfied that the proposed changes will be in the interests of the person on whose behalf the application is made and will not substantially prejudice any other interested party.
The income and profits of an international trust derived from a source outside Cyprus are exempt from taxation in Cyprus, whether in the hands of the trustees or the beneficiaries. International trusts are exempt from any duty of registration, but the trustees are obliged to disclose all documents and information relating to the accounts of a trust to the beneficiaries, and the courts may order the disclosure of documents and information relating to a trust in connection with civil or criminal proceedings.
Investment companies
Cyprus-incorporated holding companies, finance licensing companies and real estate companies may receive income from abroad subject to the 12.5% corporation tax rate under the CFC rules. If the income originates from a country with a double taxation treaty with Cyprus, reduced rates of withholding tax may be available.
A Cyprus international collective investment scheme (ICIS) may take the form of a fixed or variable capital company, a unit trust or a limited liability partnership whose sole purpose is the collective investment of funds provided by unit-holders. It may only be established and operated by non-residents. Under the new tax regime, An ICIS is not liable to Cyprus tax in respect of dividend income from abroad, subject to compliance with the CFC rules, or profits on sale of shares and securities.
International business partnerships
An international business partnership is one in which all the partners (whether individuals or companies) are non-resident and all the partnership business is international. Neither the partnership itself nor the individual partners are liable to pay Cypriot tax.
Bank representative offices
Under the Banking Law of 1997 bank representative offices are not considered to be banking businesses and do not need a license, but they should be registered with the Registrar of Companies. They must observe the following conditions:
- They may not undertake any banking business;
- The office must be used exclusively to facilitate contact between the bank represented and the rest of the world;
- Information regarding the activities of the office must be provided to the Central Bank of Cyprus; and
- All expenses must be funded from external sources.
Finance companies
As non-residents are not subject to tax on any interest, it will still be beneficial to use Cypriot-resident companies as finance vehicles in countries with which Cyprus has concluded double taxation treaties that eliminate or reduce interest charges. Cypriot finance companies may also be used to lend funds to entities within the same group or to non-related third parties at an arm’s length, so that interest payments may be deducted from their taxable base.
Intermediary licensing vehicles
Cypriot companies can be used advantageously as intermediary licensing vehicles for the routing of royalties out of countries with which Cyprus has concluded double taxation treaties.