2002 Tax Reform
New Era in Tax Planning The new Tax legislation is in line with the European Aquis, (as Cyprus will be an EU member as from May 2004), the EU code of conduct and abide by Cyprus' commitment to the OECD to eliminate harmful tax competition. The main changes regarding the International Business Companies (Offshore Companies) are as follows: 1. As from 1/1/03 there is no distinction between offshore and local companies in all respects, including taxation.
2. As from 1/1/03 the corporate tax for all companies registered in Cyprus will be the flat rate of 10% on the net profit of the companies.
3. Offshore companies that are already established until the end of 2001 and still derive income, have the option to choose paying either 4, 25% until the end of 2005 or 10% as from the 1/1/03.
The Tax Reform created a modern tax system which transforms Cyprus, into a highly reputable financial center with the following, apart from the above noted, key attractions.
4. A uniform corporate tax rate of 10% (the lowest in the EU) which combined with the tax exemption of dividends and profits from permanent establishments abroad but also through other, relatively simple, tax planning techniques can effectively be reduced even to O%.
5. No withholding tax on dividends, interest and royalties paid by a Cypriot company to a non Cypriot resident (company or individual). This again in combination with the non taxation of dividends and profits from permanent establishments abroad but also with double tax treaty provisions and the Parent - Subsidiary Directive can result in a virtually tax free situation.
6. The exemption from taxation of profits deriving from the disposal of securities which combined with double tax treaty provisions can result in a no tax situation.
7. The exemption from Capital Gains Tax Law of any capital gain earned outside Cyprus which again in combination with double tax treaty provisions can result in a no tax situation.
8. The most modern rules on reorganizations which will enable existing structures to adopt to the new tax system at no tax cost.
9. The introduction of group relief provisions which will enable the set off of losses between group companies and the abolition of the time restriction in carrying forward of losses.
Other substantial changes in the Cyprus Tax System are the following:
a. For tax year 2002, expatriate employees of IBCs are taxed on a time-appointment basis at half of the normal tax rates as shown in the table below:
| For the year 2002 | | Chargeable Income | Tax rate | | £ | % | | Up to 9.000 | Nill | | 9.001-12.000 | 15 | | 12.000 Plus | 20 |
b. As from 2003, there is no longer the distinction between local and expatriate employees resident in Cyprus and there is no longer time appointment of taxable income. All individuals who are resident in Cyprus are taxed at the following rates:
| For the year 2003 | | Chargeable Income | Tax Rate | | £ | % | | Up to 9.000 | Nill | | 9.001-12.000 | 20 | | 12.001 - 15.000 | 25 | | 15.000 Plus | 30 |
c.
| For the year 2004 | | Chargeable Income | Tax Rate | | £ | % | | Up to 10.000 | Nill | | 10.001-15.000 | 20 | | 15.001 - 20.000 | 25 | | 20.000 Plus | 30 |
d. Personal allowances and most of the tax deductions currently available will be abolished except for social insurance, provident fund and life insurance contributions.
e. For non residents taking up employment in Cyprus a special exemption from income tax will apply for the first 3 years of their employment in Cyprus amounting to 20% of income earned or CY £5.000 per annum which is lower.
f. VAT has increased from 10% to 13% as from 1st of July, 2002.
g. Effective 1st of February 2002 a new VAT legislation is applicable. This legislation is based on the 6th European Directive and its purpose is to achieve harmonization with European Union provisions.
In accordance with this legislation there is no longer a distinction between local companies and IBCs and therefore IBCs are subject to the same registration provision as local companies. In practice this means that in most cases IBCs benefit as their activities invariably fall outside the scope of VAT whilst at the same time they can register on a voluntary basis and recover any input VAT on Cyprus expenses. It is a strong and firm opinion of the Cyprus Government but also of the International Tax Planning Community that Cyprus will continue to be a major International Financial Centre. Cyprus, according to a recent tax specialist study, will remain the perfect location for investment to and from Russia and Central and Eastern Europe and will take over Ireland's place as the Tax Haven in the Community since the overall taxation for companies in Cyprus is 10% whilst in Ireland it is 12%.
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