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					                      TAX ENVIRONMENT IN CYPRUS
As part of the accession process to the EU and in compliance with the OECD requirements
against harmful tax practices, the Cyprus Tax Legislation has undergone major reforms.
These reforms greatly enhance Cyprus' competitiveness and make it an even more attractive
jurisdiction through which to conduct international business. The new legislation came into
effect on 1 January 2003. Cyprus accession to the EU offering enhanced business
opportunities in an enlarged European Common Market and the New Taxation System
renders Cyprus one of the most attractive International business centres.

Cyprus is a signatory to a treaty for the Prevention of Double Taxation with many countries
all over the world. A Double Taxation Prevention Treaty, in principle, enables offsetting tax
paid in one of two countries against the tax payable in the other, in this way preventing
double taxation for businesses and individuals.

Tax costs play a significant role in investment decisions, investors aim in maximising after
tax return on investment. Therefore, investment structures which have the least tax leakage
are preferred by investors and are recommended by professional advisers. As such, a Cyprus
investment vehicle can collect income which is a charge against high tax income.
Withholding tax is eliminated or reduced under double tax treaties or under EU directives.
The rate of tax in Cyprus is low compared to other EU countries. The income can then be
repatriated in any form the investor wishes without withholding tax.

A Cyprus entity is suitable both for EU inbound and outbound investments. There are no
investment activities which are inappropriate for the Cyprus tax environment. However, there
are investment activities which are indeed ideally suited to the Cyprus tax environment such

       Holding Companies
       Investment Funds and Companies
       Finance Companies
       Royalty Companies
       South Europe, Middle East, Russia, Central and Eastern Europe headquarter business


Cyprus is considered to be a country holding a quite significant position in international tax
planning as a number of fiscal benefits can be accumulated to foreign entities by using the
advantages offered from the use of a Cyprus offshore company for a successful application of
the theory of International Tax Planning. The actual theory of International Tax Planning
refers to the arrangement of financial and business affairs in a way so as to be able to
magnetise the minimum tax either locally or internationally, without being in any event in
conflict with any tax laws or without deceiving the Inland Revenue authorities by not
declaring profits or by other ways of fraudulent actions. The position held by Cyprus in the
field of International Tax Planning derives both from the favourable tax regime established as
well as for the wide network of double tax treaties.

Under the Double Tax Treaty (DTT) with Cyprus, dividends derived from a company which
is resident of the United Kingdom (UK) by a resident of Cyprus may be taxed in Cyprus.
However, where a resident of Cyprus is entitled to a tax credit in respect of such a dividend,
tax may also be charged in the UK on the aggregate of the amount of the dividend and the
amount of the tax credit at a rate not exceeding 15%. Still, dividends derived from a company
which is a resident of the UK and which are beneficially owned by a resident of Cyprus shall
be exempt from any tax in the UK which is chargeable on dividends. Please note that in case
the beneficial owner of the dividend is a company which either alone or together with one or
more associated companies controls directly or indirectly at least 10% of the voting power in
the company paying the dividend, the resident is not entitled to the tax credit.

In addition, interest received from one of the Contracting States by a resident of the other
Contracting State who is the beneficial owner thereof may be taxed in the first-mentioned
Contracting State at a rate not exceeding 10% of the gross amount.

The central purpose for the conclusion of these treaties is the avoidance of double taxation of
income earned in both in any of the two contracting states. According to these agreements:

i) either a credit is allowed on any tax paid in another country against the Cyprus tax

ii) or the income is totally exempted from tax.


A Cyprus Holding Company can be effectively utilised for International Tax Planning
purposes, and at the same time enjoy the status of being located at a reputable business centre.

All Companies tax resident of Cyprus are taxed on all their income accrued or derived from
all sources in Cyprus and abroad. A non Cyprus tax resident Company is taxed on income
accrued or derived from a business activity which is carried out through a permanent
establishment in Cyprus. A Company is resident of Cyprus if it is managed and controlled in

Corporate tax for resident Companies is imposed at the rate of 10% (ten percent) for each
year of assessment upon the taxable income derived from sources both within and outside

A Company is considered to be tax resident in Cyprus if its management and control is
exercised in Cyprus. In order to achieve tax residency, several factors are taken into
consideration by the Tax Authorities such as the make up of the Board of Directors, the place
where major decisions are taken and where major contracts are signed. Tax residency is
required in order for a Company to be taxed under the Cyprus tax laws and also for taking
advantage of all European directives as well as the Double Tax Treaty (DTT) network that
Cyprus has secured for tax resident persons.

Intercompany Dividends
Dividends paid from one Cyprus Company to another are free from withholding or any other
tax in Cyprus.
Dividends received from abroad
There is no withholding tax dividends received from other Cyprus resident Companies.
Dividends received from abroad are also tax exempt if the following two conditions are

    (A) The Company receiving the dividend must hold directly at least one percent (1%) of
        the share capital of the Company abroad paying the dividend, and

    (B) The Company paying the dividend
             (1) must not engage more than fifty percent in activities which lead to passive
                 income (non-trading income) OR
             (2) The foreign tax burden on the income of the Company paying the dividend is
                 not substantially lower than the tax burden in Cyprus.
                 (A tax rate of five percent (5%) or more in the country paying the dividend
                 satisfies this condition)


Passive Interest Income
Fifty percent (50%) of interest income is exempt from corporate tax and the rest is taxed at
ten percent (10%), thus effectively reducing the income tax to just five percent (5%), but the
whole gross interest income is subject to the Special Contribution tax at the rate of ten per
cent (10%) thus leading to an overall effective tax rate of 15%.

Active Interest Income
Active interest is the interest accruing from, or is closely connected with, the ordinary
carrying on of any business. Active interest income is taxed like any other income at the flat
corporate tax rate of ten percent (10%).


The taxation of gross amounts of royalties earned from sources within Cyprus by a company
which is not a resident of Cyprus is liable to ten percent (10%) withholding tax, If such right
however is granted to a Cyprus company for use outside Cyprus, then there is no withholding
tax and corporate rate is applied only on the profit margin left in the Cyprus company.

Income, generated by a Cyprus tax resident Company, arising from the letting of immovable
property is taxable both under the Cyprus Income Tax (10%) and the Special Contribution
Tax legislation (3%) as follows:
Income Tax
The net taxable rental income (after deducting all related expenses such as wear and tear
allowances, repairs, maintenance expenses etc.) arising in Cyprus is included in the taxable
base of the Company and taxed at the flat Corporate Income Tax (CIT) rate of ten percent
Special Contribution Tax
Under the Special Contribution tax, an amount of twenty five percent (25%) is deducted from
the gross amount of rental income. After such deduction has been effected, the taxable
amount of rental income is subject to tax at a rate of three percent (3%).

Capital Gains are not included in the ordinary trading profit of a business but instead are
taxed separately under Capital Gains Tax Law.
Capital Gains Tax from the sale of immovable property situated in Cyprus and/or sale of
shares in Companies (other than quoted shares) that own immovable property situated in
Cyprus, are taxed at a flat rate of 20% after allowing for indexation.
Capital Gains that arise from the disposal of immovable property held outside Cyprus or
shares in Companies which may include immovable property held outside Cyprus are
completely exempt from Capital Gains Tax.
Therefore, if a non resident shareholder decides in the future to dispose off its shares in a
Cyprus Company, he/she will not be subject to any tax in Cyprus.

There are no thin capitalisation rules in the Cyprus tax legislation. Special caution must be
exercised in relation to interest deductions in respect of loans of a non-trading nature as
interest on balances of a trading nature is allowed as a qualified expense, whilst interest on
balances not of a trading nature is disallowed.

There are no transfer pricing rules in Cyprus but a new provision was introduced based on the
"arm's length principle". Cyprus legislation incorporates the OECD model and a guideline to
determine what arms’ length is.

The Profits from a foreign PE held by the Cyprus Holding company are exempt from
corporate tax if one of the following two conditions is satisfied:

        (1) Passive income less than 50% or
        (2) The foreign tax burden is not substantially lower than that in Cyprus.

Although Cyprus is a full member of the European Union, there are no taxes on capital. Estate
or Inheritance tax was abolished as of January 1st, 2000. This is an extremely useful tool in
the hands of a tax advisor as it can save large amounts of money to the individuals involved.

Cyprus imposes no tax on wealth and it is not anticipated to do so in the years to come.

The tax losses incurred during a tax year and which cannot be set off against other income, is
carried forward and set off against future profits with no time restriction.

The current year loss of one Company can be set off against the profit of another provided
that the Companies are Cyprus tax resident Companies of a group (75% possession rule).

Transfers of assets and liabilities between Companies can be effected without tax
consequences within the framework of a reorganisation. Reorganisations include mergers,
demergers, transfer of activities and exchange of shares.

Cyprus does not have the concept of “CFC legislation” (Controlled Foreign Corporation),
according to which it would include profits realised by (certain low-taxed) foreign
subsidiaries, owned by Cyprus Companies, in the taxable bases of the latter Companies.

Shipping Companies
One of the main factors expected to drive forward the shipping industry in Cyprus is the
country’s favourable tax regime which has been maintained even after the accession to the
EU. The current tax regime offers a ship owner complete tax exemption on all profits and
dividends arising form the operation of Cyprus flag ships. Profits distributed by ship owning
Companies operating Cyprus flag ships are not considered as dividends for special
contribution for defence purposes.
Local or international ship management and crew management businesses (corporated or
unincorporated) have the option to be taxed either at the rate of 4,25% or at rates equal to
25% of the rates used to calculate tonnage tax of vessels under management which are
registered outside Cyprus. Dividends distributed out of profits generated from ship-
management activities are totally tax exempt and are not subject to the 15% special
contribution for defence which normally applies.
Insurance Companies
Profits of insurance Companies are liable to corporation tax similar to all other Companies
except in the case where the corporation tax payable on taxable profit of life insurance
business is less than 1,5% on gross premium. In this case, the difference is paid as additional
corporation tax.

Capital Gains arising from the sale of securities (including shares) are not subject to tax in
Cyprus. Therefore, if the non resident shareholder decides in the future to dispose of its shares
in the Cyprus Company (assuming it does not hold any immovable property in Cyprus) it will
not be subject to any tax in Cyprus.
In case of liquidation of the Cyprus Company the accumulated profits of the last five years
prior to the liquidation will be considered as dividends distributed to the shareholders. As
stated above there is no withholding tax on dividends payable to the non Cyprus resident
shareholder. Accumulated profits in excess of five years are considered to be capital
distributions again not subject to any withholding tax in Cyprus.
The new Cyprus tax laws provide significant benefits for all types of international business
activities. Cyprus resident Companies have the lowest effective tax rate of any EU member
and the treatment of dividends, interest, income and capital gains are amongst the most
beneficial of the world.

Benefits of Introducing Cyprus Entities (for Holding, Financing, Royalty and other
1. Very attractive tax regime for holding activities
     Capital gains exempt from taxation in Cyprus under domestic law
     Dividend income exempt from taxation in Cyprus (with minor limitations)
     Attractive Double Tax Treaty (DTT) network, reducing withholding taxes (WHT) on
        dividend income
      No WHT on payment of dividends paid abroad at all times
      EU Parent – Subsidiary directive applies as from 1 May 2004 thus eliminating WHT
       on dividend payments from all EU countries (under directive conditions)
      No CFC rules in Cyprus
      Very simple and tax efficient exit strategies available – no exchange controls

2. Group financing company can be tax efficiently located in Cyprus
     No thin capitalisation rules, therefore,
     Back to back financing through Cypriot company
     Taxed at 10% on thin spread only
     No withholding tax on payment of interest abroad at all times
     Attractive DTT network, reducing withholding taxes on interest income
     EU Interest and Royalties directive applies as from 1 May 2004 thus eliminating
       WHT on payments from all EU countries (under directive conditions)

Note: Useful information can also be provided for Norway and Sweden upon request.