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Cyprus Beyond the Holiday - A Thriving Hub of International Business

Author: Paul Mallis, international tax partner, Deloitte Limited, Nicosia, Email: pmallis@deloitte.com

The competitive tax system and open investment policies operating within a framework of European Union Law have catapulted Cyprus into a leading centre of international business. However the world is not static and while Cyprus enjoys its time in the sun, the island continuously acts to enhance and build on its existing business base.

Cyprus has a thriving business community of bankers, lawyers, accountants and company trustee professionals advising and servicing the multitude of new and existing business transactions undertaken in and through Cyprus each year. Together with English based financial and legal systems, a government sector willingness to support the business community and the underlying infrastructure constantly invested in to maintain world class standards, not too far from the beaches and tavernas of Cyprus lies a buzzing hive of business activity.

The foundation of international business harks back to pre-history where from that time, due to its geographic position, Cyprus was a major trading port for the Mediterranean and a cross roads between Europe, Africa and Asia. The Island continues to be a strategic hub, nowadays due mainly to its business and tax regimes.

Cyprus has always had very low corporate tax rates. Prior to 2003, the Island operated as a tax incentive centre for business, flourishing for decades from the foreign investment this attracted. With Cyprus's accession to the European Union on 1 May 2004 in sight, tax reforms were implemented in 2003 with a broad based tax system that is within the spirit of the European Union Code of Conduct and consistent with Cyprus's commitment to the OECD not to pursue or encourage harmful tax practices.

So what is it that makes Cyprus's tax system so attractive?

  • A 10% corporate tax rate and a 15% VAT rate - both the lowest in the EU
  • No withholding taxes on payments of dividends, interest and most royalties to non-Cypriots
  • Dividends received in Cyprus are generally exempt from Cyprus tax
  • Profits and gains made on the sale of foreign real estate and securities such as shares and bonds are exempt from Cyprus tax.

In addition to this Cyprus has a tax treaty with about 45 countries around the world ensuring that doing business with these countries is tax efficient. New links are continuously being forged with the constant conclusion of new tax treaties and similar agreements. Recently a new treaty has been signed with the Czech Republic and new Protocols with Russia and Italy agreed - making business relations with these countries more advantageous than before.

Whereas each tax treaty may have different implications, a couple of key treaties have given rise to important international business and social links.

Russia and Ukraine

The Slavic languages you hear on the streets of Nicosia and Limassol are not just tourists window shopping. Over the last 20 years or so, Cyprus and Russia have built a solid relationship whereby foreign investors directing their investment into Russia and the new Republics emerging from the Soviet Union were best treated if such investment flowed via Cyprus corporate structures. Earlier this year Cyprus and Russia re-confirmed this relationship with the signing of a Protocol to the tax treaty ensuring that this agreement remains what is largely considered to be one of the most advantageous treaties that Russia has signed.

India

Similarly, the tax treaty with India provides the best gateway between the EU and India due to Cyprus not utilizing the sole right it has to tax its residents on capital gains from the disposal of Indian securities. With the huge growth in investment by foreign investors in Indian property developments, Cyprus is fast becoming common place in these types of investment structures.

Not to forget the Island's historic past… Shipping

Cyprus controls one of the world's largest merchant fleets and administers a major international ship registry within the European Union. In addition to the strong regulatory framework and advanced maritime infrastructure, ship-owners and crew members benefit from minimal ship registration fees and low annual tonnage tax whilst being exempt from income tax, capital gains tax and stamp duties.

Cyprus already operates in the new world order of business transparency

The world financial crisis and the election of Barack Obama to the US Presidency lead to the historic G20 Summit in London in April this year and a new impetus to crack down on tax havens and non-cooperative jurisdictions. The Leaders' Statement emphasized that the era of banking secrecy is over and that countries must follow international standards for exchange of tax information.

Cyprus is well ahead on this front and in no way can be considered a tax haven or in conflict with international tax standards. This was irrefutably demonstrated by the OECD including Cyprus as one of only 40 countries in the world that have substantially implemented the internationally agreed tax standards. Being featured on its "whitelist" by this leading international organization is a major triumph for Cyprus's perseverance in providing a sound and reputable environment from which international business can easily operate from.

Back to that beach…

According to Eurostat, Cyprus has the highest per capita tertiary educated workforce under 35 in the European Union. Almost 80% of current tertiary students are studying outside Cyprus, principally in the UK, the USA and Greece. Chartered and Certified accounting training and qualifications and Bar admissions are often obtained in the UK and US. These people have the right idea when they return to Cyprus - the best of all worlds - when you next see that sun worshipper on the beach, she probably has a Blackberry in her pocket with a call scheduled at 5pm with a client in Houston and lawyers in London!

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