Cyprus International Company Structures
Clients are now moving away from common traditional HC jurisdictions, like Luxembourg or the Netherlands, and incorporate their HC in Cyprus, and due to an attractive tax environment and a solid place to set up business. Having said this, it may sometimes be better to combine a company formed in Cyprus with existing group jurisdictions, such as the traditional HC jurisdictions, rather than to substitute them completely.
To appreciate the merits of Cyprus as an optimal HC jurisdiction we only need to point out that it meets all the tax and commercial parameters set out above. Establishing a business in Cyprus is a tax-efficient way to conduct business in the EU and internationally, while at the same time to have access to a good infrastructure with a highly skilled workforce and to a great web of professional service providers such as financial, legal, audit etc.
With the UK now leaving the EU, Cyprus is the only EU member that follows the UK common law legal system and its company formation and its general legislation is efficient and bureaucracy-free. A Cypriot HC offers many competitive advantages to HC formed in other business centres and is one of the most attractive international business hubs in the world today. If an investor is looking for a tax-efficient and EU compliant environment for stable tax planning then he/she shall find that Cyprus offers significant prospects to mitigate tax and reduce losses. Cyprus has now become a location of choice for international businesses that are looking for a white list tax-efficient jurisdiction.
Entities that may be registered in under Cypriot company law (closely resembling the UK’s pervious Companies Act of 1948):
- Private limited liability company.
- Public limited liability company.
- Non-profit company limited by guarantee, and not having a share capital.
- Non-profit company limited by guarantee, and having a share capital.
- General or limited partnerships.
- European Company (SE).
Other Popular Cyprus Company Structures
The non-resident company (NRC) structure.
A company formed in Cyprus which is managed and controlled from outside of Cyprus is not deemed to be tax resident in Cyprus (NRC) and shall therefore not be liable to taxation in Cyprus. Such company structures may offer their services outside Cyprus e.g. the Cyprus company offering managerial or administrative services to a trading or manufacturing offshore company or the Cyprus company trading or manufacturing outside Cyprus and being managed by another company outside Cyprus.
Including Cyprus NRCs has the following benefits:
- The fact that it can be prestigious by being an EU registered company.
- May be eligible to receive an EU V.A.T. registration number.
- May bring its income to Cyprus.
The financing company (FC) structure:
A company formed in Cyprus is ideal for use in group financing activities. This is because Cyprus has no thin capitalization rules (for companies with a high leveraged debt i.e. where the company debt is more than their equity) and there is no withholding tax on interest.
Therefore, a Cyprus financing company (FC) can borrow money from an offshore (tax heaven or otherwise) HC and subsequently lend that money, for a small profit, to its foreign subsidiaries using interest-bearing loan agreements and at the same utilise the wide double tax treaty regime in Cyprus. Click here to read more on the Tax Regime in Cyprus.. This financing scheme shall have a bilateral consequence in tax savings especially if the loan scheme is tax efficient by choosing jurisdictions where the interest is tax deductible for the borrower in the receiving end and tax free for the lender in financing end. Read more about it in Offshore and Onshore bank accounts and Investment services. Profits that remain in the Cyprus FC will be subject to company income tax at the rate of 12.5%.
Including Cyprus FCs has the following benefits:
- Interest charged to the foreign subsidiary company decreases its profits and thus reduces its taxable income and tax burden.
- Low or zero tax withheld on interest paid to the FC
- Interest paid by the FC to the HC is deducted and decreases the profits of the FC and thus leaves only a very low small profit (e.g. 1%) to remain in the Cyprus FC which shall then be subject to 12.5% company tax after deducting operating expenses and any tax already withheld abroad on the interest paid to the FC.
- Zero tax is withheld on interest paid from the Cyprus FC to the HC.
The Intellectual Property (IP) or Royalty Income(RI) company structure.
Intellectual property includes mainly copyrights, patents and trademarks but it may also include other types of intellectual rights. A company formed in Cyprus which is used to collect either income from royalties (RI) e.g. from the use of a trademark or from the use of a music composition, or income from the sale of Intellectual Property (IP) e.g. the rights of a book, or a patent shall have many tax benefits. IP has a broad definition in the Cypriot law that encompasses IP in all its forms.
Royalty income (RI): The law allows 80% of the income of a Cyprus company coming from royalties (after the deduction of direct expenses), to be exempt from tax if these royalties come from the use of IP. The remaining 20% of the income coming from royalties shall only be subject to company tax at the standard rate of 12.5%. This means that the effective taxation on royalties from IP shall be 2.5% (after the deduction of direct expenses). Direct expenses are those that have arisen only and totally for the development (or acquisition) of the IP.
Intellectual Property (IP) income: The law allows 80% of the profits (gains) of a Cyprus company coming from the sale of IP rights (after the deduction of direct expenses), to be exempt from tax. There is a 5 year amortization period i.e. the expenditure that is related to the development (or acquisition) of the IP may be deducted from the first year in which the expense was incurred up to the subsequent four years. The remaining 20% of the income coming from sale of IP rights shall only be subject to company tax at the standard rate of 12.5%. Practically this means that the effective taxation on the sale of IP rights shall be less than 2.5%. There are no exclusions on acquisitions from related parties and no restriction on a minimum period for holding the IP.
Including Cyprus RI or IP companies has the following benefits:
- The royalty payments from a foreign subsidiary to a Cyprus IP or RI company are tax deductible, which decreases its profits and thus reduces its taxable income and tax burden.
- Low or zero withheld tax on royalty payments from the foreign subsidiary to the Cyprus RI or IP company.
- If the owner of the IP is the foreign subsidiary, then the royalty payments shall be considered as expenses of the Cyprus IP or RI company and therefore tax deductible. This which shall only leave a small profit to the Cyprus IP or RI company to be taxed at the standard 12.5% corporation tax rate after deducting expenses and any tax already withheld abroad on the royalties received.
- If the owner of the IP is the Cyprus company then only a small percentage (20%) of the royalties shall be taxed as explained in detail above.
Real Estate (RE) company structures
Purchase of real estate is a preferred type of investment because of the security that it offers its investors. A Cyprus HC may own foreign RI subsidiaries that possess real estate who in turn pay their income or dividends to the Cyprus HC. Alternatively Cypriot companies that own real estate abroad and are managed from abroad shall not be taxed on that income because it shall be considered as non-resident income.
Including Cyprus Real estate companies has the following benefits:
- Low or zero withheld tax on dividends paid to the Cyprus Company.
- No taxation in Cyprus on capital gains from selling the shares of the foreign subsidiary companies i.e. selling part or all of the real estate.
- Also in many cases there may be low or zero taxation abroad on capital gains from selling the shares of the foreign subsidiary. If capital gains tax is payable abroad from selling the shares of the foreign subsidiary then the Cyprus HC can have Cypriot RE subsidiaries that are intermediary between the Cyprus HC and the foreign RE subsidiary. In such a case the shares of Cyprus RE subsidiary intermediary company can be transferred to the buyer (thus in effect transferring the shares of the foreign RE subsidiary) with no taxation burden payable by the foreign RE subsidiary.
- No taxation in Cyprus on dividends paid to shareholders.
- No withheld tax in Cyprus for dividends paid to the foreign subsidiary.
Our services
Whether our client wants to expand internationally or need to set up a tax resident base in Cyprus, we can offer advice and help to set up their corporate structure.