Cyprus Offshore

Legislation

Cyprus Companies Law, Cap. 113 (as amended in 2003 in connection with accession to the European Union) is the law under which Cypriot companies are currently registered; its model was borrowed from the United Kingdom in 1951.

Taxation

The 2002 tax reform put an end to Cyprus's «offshore» status and raised the corporate income tax rate for international Cypriot business companies from 4.25% to 10%, equalising it with the rate for resident Cypriot companies. At present this is the lowest corporate income tax rate in the European Union, apart from Bulgaria, where the rate is also 10%.

On the island, dividends received and paid, capital gains and securities transactions are not taxed at all. It should be borne in mind, however, that securities transactions on behalf of third parties may be treated as trading transactions, and any income is taxable if the sale price is disproportionately higher than the market value of the assets. Moreover, carrying out financial transactions requires a licence from the Central Bank of Cyprus.

Companies registered in EU countries that open a branch in Cyprus can pay tax not at the higher rate of their country of registration but at the lower Cypriot rate of 10%.

In international tax planning practice, it is common to use a Cypriot company together with a shareholder from an «offshore» jurisdiction, such as the British Virgin Islands, because Cyprus withholds no tax at all from such a shareholder of a Cypriot company when paying dividends to the «offshore».

Another significant benefit is that, when calculating taxable profit, expenses and losses incurred in the company's previous period of activity may be taken into account without limit.

To date, Cyprus has concluded more than 40 double taxation avoidance agreements with various countries, including Russia and Ukraine. To benefit from the concessions granted by such agreements, a Cypriot company must be a tax resident of Cyprus. This means that its management and control must be permanently located in Cyprus. The same requirement applies to Cypriot companies used as holding companies.

Tax notification in Cyprus

Companies must file a provisional statement of tax payable on their estimated income for the current year by 1 August and pay the tax accordingly.

If this provisional statement is not filed, the tax will be calculated by the tax authorities based on the previous year's data. This income tax is paid in three equal instalments on 1 August, 30 September and 31 December of the current year.

The provisional tax assessment may be revised at any time until 31 December of the current reporting year. Any underpayment can be settled until 1 August of the following year to avoid a penalty of 8% per annum from that date.

If the income declared for the provisional tax payment is less than 75% of the final income for the year, the taxpayer must additionally pay an amount equal to 10% of the difference between the provisional and final income tax payments.

Overpaid tax is refunded with 8% per annum.

Tax calendar

End of the following reporting month
Payment of employee payroll taxes (P.A.Y.E.).

31 January
Contributions to the defence fund

30 April
Filing of personal returns by individuals for the previous year (IRI)
Filing of the employer's payroll tax return (IR7) for the previous year
Payment of the first instalment of premium tax for life insurance companies

30 June
Payment of the first instalment of defence tax for the first 6 months of the current year
Filing of income tax returns by individuals after the audit report has been prepared

1 August
Filing of the provisional income tax declaration (IR6) and payment of its first instalment for the current year
Payment of corporate tax for the previous year under self-assessment
Payment of income tax for the previous year based on the Tax Commissioner's assessment

31 August
Payment of the second instalment of premium tax for insurance companies

30 September
Payment of the second instalment of income tax for the current year under self-assessment
Payment of immovable property tax for the current year

31 December
Filing of annual and financial reports (IR4) for the previous year
Payment of the third instalment of income tax for the current year
Payment of the second instalment of defence tax for the second 6 months of the current year
Third and final payment of premium tax for insurance companies for the current year

Penalties

If the above payment deadlines are missed, the taxpayer must make an additional payment of 9% per annum, in addition to the penalty charged in each specific case.

Tax returns

By law, every Cypriot company must file annual tax returns with the country's tax authorities by 31 December each year. Tax is calculated on the estimated taxable profit for the year. Tax is paid in three equal instalments — 1 August, 30 September and 31 December. The final amount of tax payable is fixed 1 or 2 years later.

If a company has determined and paid tax on its profit and the actual profit turns out to be 25% higher than declared, the Cypriot tax authorities charge an additional 10% on the difference between the declared and actual amounts.
The tax authorities charge 5% on the taxable amount if the Annual Return is not filed on time, and an additional 8% rate is applied to the overdue amount itself.

This information clearly shows the advantages Cypriot companies offer for international business, but it is just as important to know how to use them correctly.
Our firm has everything needed both to register Cypriot companies, including holding companies, and to service them successfully in subsequent years, so feel free to contact our offices for a consultation.