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International Offshore Jurisdiction Review: Cyprus as a Tax Haven

Overview

In recent years, Cyprus has been at the center of discussions regarding its tax policies and whether it qualifies as a tax haven. Historically, the island nation offered favorable tax conditions that attracted foreign investments, but its status has been in flux as global and European regulations have evolved. Cyprus made significant changes to its tax laws in response to international pressure, raising its corporate tax rate to a competitive but not particularly low 12.5%. The Organization for Economic Co-operation and Development (OECD) has since assessed Cyprus in line with many other European countries, which has impacted its reputation as a hub for tax avoidance.

The economy of Cyprus is service-oriented, with a significant contribution from the financial services sector. As an EU member state, Cyprus has had to balance its tax policies against the expectations and regulations set by the Union. The country has actively worked to align itself with international tax standards, a move necessary to maintain its economic stability and integrity within the broader international community. This repositioning addresses frequently asked questions about its compliance with global tax norms and its attractiveness to international businesses.

Key Takeaways

  • Cyprus has adjusted its tax laws due to international and EU standards, raising its corporate tax rate to 12.5%.
  • The island nation continues to offer some tax benefits, maintaining a role in the international financial services industry.
  • Cyprus's economic strategy includes aligning with EU and global tax norms while remaining an attractive location for businesses.

Is Cyprus A Tax Haven?

Cyprus is not officially considered a tax haven, as in 2019 they raised its corporate tax rate to 12.5% and the OECD gave them the same status as many other European countries. However, Cyprus still offers a number of tax benefits and advantages for individuals, investors, and companies looking to incorporate in the European Union. Since the country’s entry in the EU, they have restructured its financial regulations and its Company Law to conform to EU regulations and since 2004 have been offering a new form of resident and non-resident based businesses that are fully compliant with EU financial policies.

Cyprus provides many offshore company formation opportunities as well as Cyprus LLCs with the added advantage of having access to the European Union’s numerous economic and trade treaties. Cyprus tax system is a traditional tax-based structure with one of the lowest corporate tax rates in the EU at 12.5% and offers non-resident-based companies that are completely free from all local taxation.

Cyprus offers international company vehicles that are perfect for holding or investment accounts or trading purposes. Companies can easily be paired with an offshore bank account whether it's a local or overseas bank.

The country has several dozen double taxation treaties in place and offshore companies can benefit from only having to pay 12% on global trading income whereas non-resident companies can enjoy tax exemption on all foreign-sourced income. Cyprus has an ideal geographical location and environment, a semi-tropical climate, rich culture, and enticing financial incentives that have attracted tens of thousands of companies to the jurisdiction over the past twenty years. 

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Assessment of Cyprus as an Offshore Country

In evaluating Cyprus's status as a tax haven, one must examine the evolution of taxation policies, international compliance efforts, and their economic ramifications.

Taxation and Corporate Benefits

There is a Value Added Tax (VAT) that is set at 19%. There is also a corporate tax rate that is applicable for all resident companies at 12.5%, which is the lowest in the EU; though this does not apply to non-resident companies. Cyprus has signed nearly fifty Double Taxation Treaties (DTT) that are made available to all Cyprus resident companies; though non-resident companies do not have access.

Since 2003, the traditional offshore corporate structure was eliminated upon entering the European Union, though Cyprus still has maintained a flourishing financial market due to its tax incentives for a variety of different company types. All foreigners or non-resident companies are not required to pay any taxes on profits derived from foreign sources, this includes, but is not limited to:

  • No tax on profits
  • No tax on dividends
  • No royalty payments
  • No capital gains tax
  • No withholding tax
  • No wealth or inheritance tax

Double Taxation Treaties

Cyprus has an extensive network of double taxation treaties with over 60 countries. These treaties are crucial in preventing double taxation of the same income in two different jurisdictions, which can be advantageous for companies with cross-border operations. They are aimed at promoting foreign investment and reducing tax barriers for businesses.

International Reaction and Compliance

Internationally, Cyprus has been under scrutiny by organizations such as the OECD for its tax policies. In response, Cyprus has made substantial reforms to enhance transparency and comply with global standards, addressing key issues such as money laundering and the exchange of information. It is no longer listed as a Non-Cooperative Country and Territory by the OECD and has aligned with the Anti-Money Laundering directives of the European Union.

Economic Impacts and Dependencies

The Cypriot economy has faced challenges, notably during the financial crisis, leading to a bailout. The banking system, heavily reliant on foreign deposits, including those from Russian oligarchs, has had to navigate sanctions and asset freezes. Despite these challenges, the finance and real estate sectors contribute significantly to the economy, with changes in the tax haven status potentially impacting these areas.

Cyprus Within the Broader International Context

Cyprus, transitioning from a well-known tax haven status, has realigned its tax structure and practices with international standards, predominantly influenced by EU requirements and global economic dynamics.

Cyprus's Role in the Global Economy

Cyprus has traditionally been a focal point for international business due to its strategic location and favorable tax policies. The island nation's economy is largely service-driven, with tourism, shipping, and financial services as the main contributors to its GDP. Legislative reforms have aimed at realigning the banking industry and financial institutions with global regulatory frameworks, including the Global Forum on Transparency and Exchange of Information for Tax Purposes' expectations.

Strategic Partnerships and Alliances

The country's EU membership has fostered a stable economic environment, forging trade agreements and bolstering its service sector. Cyprus operates under the EU's umbrella of sanctions and treaties, impacting its relations with countries like Russia and Turkey. Relations with Russia, once buoyed by Russian money flowing into Cyprus's banks, are now under scrutiny due to sanctions and a shift in governance policies following the Sovereign Debt Crisis.

Principal Corporate Legislation

Cyprus corporate legislation is regulated through the Cypriot Companies Law, Cap. 113. This law was first passed in 1952 and modeled off of the 1948 UK Companies Act. However, the act has been amended several times over the years and since Cyprus became a member of the European Union, several pieces of its legislation was reformulated.

If a company is formed in Cyprus as a Non-Resident Company and does not engage in any business activities within the country then it can avoid paying any local taxes. If however, a company conducts its business within the country then the income that is locally sourced becomes subject to taxation.

Benefits of the Jurisdiction

  • Cyprus is a member of the European Union
  • Access to a number of EU conventions and agreements
  • Offer tax exemptions to all non-resident companies
  • Low 12.5% taxation for all resident-based companies (Lowest in the EU)
  • Single member ownership availability
  • Strategic geographical location
  • Cypriot Companies Act is based on the UK Company Law
  • Uncomplicated formation requirements
  • English is widely spoken
  • Mediterranean climate
  • Modernized transport system
  • Wide telecommunications networks
  • Nominee Services are available for use
  • Resident based Companies have access to a wide network of Double Taxation Treaties
  • Secure asset protection company legislation
  • Has successfully implemented all OECD and FAFTA financial regulations
  • Has a good reputation and is not on any “blacklist”
  • Has complied with all know your customer, money laundering and international financial regulatory policies  

Overview of Cyprus as a Jurisdiction

Cyprus, situated strategically at the crossroads of three continents, is recognized for its robust economy, adherence to European Union regulations, and well-established infrastructure, making it an attractive jurisdiction for businesses and investors.

Strategic Location and Economic Relationships

Cyprus is centrally located in the Eastern Mediterranean Sea, serving as a gateway between the European Union, Middle East, and North Africa. As an island nation, Cyprus has capitalized on its geographic position with a strong economy heavily focused on tourism and shipping. Its proximity to Greece and Turkey further enhances its strategic economic relationships in the Western and regional markets.

EU Membership and Compliance

As a member state of the European Union since 2004, Cyprus is subject to the regulatory framework of the European Commission, ensuring legal and financial compliance across a range of areas. The use of the euro as its currency facilitates trade and economic stability, bolstering the island's standing as a reliable jurisdiction within the EU marketplace.

 

   

 
 
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In-Depth Information

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Location

Cyprus is an island in the Eastern Mediterranean Sea, south of Turkey and east of Greece. It is the third largest island in the Mediterranean covering an area of 9,251 square kilometers

Political Structure

Cyprus is split into two areas as a consequence of the invasion of Turkey in 1974. Since then the Republic of Cyprus has controlled the southern two thirds of the island and the Turkish Republic of Northern Cyprus (only recognized by Turkey) claims the northern one-third.

Cyprus is a Republic with a unitary presidential representative structure of governance, whereby the President of Cyprus is recognized as both the head of state and the head of the government. The political structure is divided into the Legislative, Executive and Judiciary. The Executive branch is led by the President elected to office by popular vote for a five-year term, directly appointing a Council of Ministers who serve under him. The Legislative branch is made up of a House of Representatives, which has fifty-nine members who serve a five-year term elected through proportional representation; with three seats reserved for Roman Catholic, Armenian, and Maronite minorities. Though twenty-four seats have been allocated to the Turkish community under the constitution that sought to try and harmonize Turkish and Greek differences, they are currently vacant.

The Cyprus 1960 constitution envisioned a power-sharing arrangement between the Greek Cypriots and the Turkish Cypriots, though due to inter-communal strife that erupted in 1963, there is not a Turkish presence in the Cypriots government. The constitution is enshrined within the political governance and complex system of checks and balances to ensure a democratically harmonized system of governance.

Cyprus is a multi-party system with a Democratic and Socialist party leading the government with a number of coalitions that support the current president and the Democratic Rally. The main political parties are the Democratic Rally (34%), Progressive Part of the Working People (32%), Democratic Party (16%), and the Movement for Social Democracy (9%) with the rest of the House divided amongst the remaining, Popular, National, European and Ecological parties. Cyrus has been a part of the European Union since 2004 and is a member of a forty-six various international organizations and a number of international treaties and trade agreements.

   

 
 
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Economy and Infrastructure

The Cypriot economy has transformed from a traditional agrarian economy into a modern high-income economy since Cyprus gained independence from the United Kingdom in 1960. Though it was severely affected by the Eurozone financial crisis, as the three biggest banks in the country were hit by the Greek financial crisis, it has since stabilized and has continued a slow economic growth despite the prevailing global economic climate.

Cyprus has an open free market economy based primarily on services with a total GDP at PPP of USD $23.6 billion (2013). The GDP per capita is USD $24,761 (2013) with most of the economy dominated by services (81.2%), industry (16.4%), and agriculture (2.3%). Tourism, financial services and shipping are major sectors within the economy. Cyprus draws many foreign tourists due to its Mediterranean climate, contributing to almost 80% of the country’s GDP and more than 70% of its labor force. Since the dissolution of the Soviet Union, Cyprus has emerged as a prominent financial hub, acting as a gateway for non-residents between Europe and the Middle East and also as a portal for investments from the West into Eastern Europe. The business services sector has been the fastest growing sector in the country, before the beginning of the global financial crisis. After joining the European Union it adopted the Euro in 2008 as its main currency replacing the Cypriot pound and fixing the exchange rate at CYP 0.58 = EUR 1.00.

Cyprus has a modern infrastructure and transport system. The country has a wide network of roads, as well as public transport services. Cyprus has two international airports and two main harbours which service cargo and passenger ships. The main telecommunications company is state-owned though there are several private companies that have entered the market since the recent liberalization of the sector.

Population, Language, and Culture

Cyprus culture is divided between a Greek and Turkish identity, each maintaining its own separate rituals and customs with little interchange with each other. Greek culture has been on the islands since antiquity, and Turkish culture arrived in the later part of the 16th century. The island has many ancient artifacts and architecture going back 10,000 years with a rich tradition of arts and literature that has had a big impact on the development of Greek culture and thought.

The vast majority of Cypriots are Greek Orthodox, while the Turkish Cypriots are affiliated with Sunni Islam. Cyprus has two main official languages, Greek and Turkish, though English is widely spoken by approximately 80% of the population. Russian is also widely spoken amongst the many Eastern European minorities.

Cyprus has a population estimated at 1,117,000 (2011) with a density of 90.7 persons per square kilometer. An estimated 77% of people are considered to be Cypriot Greeks, 18% Cypriot Turks and 5% of the population are considered to be “others”.

Traditional folk music is a mix between Greek, Turkish and Arabic music with traditional dances such as the sousta, syros, and zeibekikos. Cyprus produced some of the earliest forms of Greek poetry back in the 7th century BC. Cyprus is also known for its Stoic Philosophy, which was formulated by Zeo of Citium.

Cyprus cuisine is known for having its seafood including red mullet, sea bass, squid and octopus. Other traditional dishes are smoked and dried meat in a wine and coriander seed marinade as well as souvlaki and sheftalia. Pickled vegetables and roasted potatoes are popular side dishes, as well as a variety of fruits and vegetables together with a variety of breads, yogurt, and dips. Cyprus is known for being the originator of halloumi cheese and for its mezze style feasts.

Exchange Control

There are no exchange controls in Cyprus. Residents are allowed to hold foreign currency denominations in bank accounts. Non-resident and foreign investors are freely allowed to repatriate income generated in Cyprus.

Type of Law

Cyprus has a mixed legal system combining elements of both Civil and Common Law, though Cyprus Company and Corporate law is primarily based off of the English Common Law system, going back to the late 19th century.

 

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Cyprus Offshore Company Formations and Products From Offshore Protection

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***Please Note: If you are a resident of a country that is a signatory of the Common Reporting Standard (CRS) (or a US citizen) your tax reduction possibilities are limited. Due FATCA, CRS, and CFC laws you may not be able to completely eliminate your taxes without moving your residence (or US citizenship.) While opening an offshore company can increase privacy and asset protection, your tax obligations remans tied to your ownership of overseas entities. Offshore company's are often not taxed in the country where they are incorporated, rather you as the owner are obligated to pay taxes in the country where you reside. Please make sure you know your tax obligations, as we are not tax advisors. Please seek a local tax professional for help regarding your situation. 

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