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CYPRUS: An Introduction

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Despite being one of the world’s smallest nations, Cyprus has become one of its most important financial and business centres. Located at the crossroads of Europe, Asia and Africa, at the centre of the shipping and air routes linking Europe with the Middle East, the Far East and Africa, Cyprus is a strategic hub for business activities in the region.

The Country 

Cyprus is a member of the EU and the Eurozone. It is in the Eastern European time zone, two hours ahead of GMT, seven hours ahead of New York and seven hours behind Tokyo. The island enjoys a Mediterranean climate and the quality of life is among the highest in the world. The population and workforce are highly educated and Cyprus is a world leader in terms of university degree holders as a percentage of the population. English is widely spoken and extensively used in commerce and government.

The Business Environment 

For many years Cyprus has been an excellent location for holding companies. There are a host of reasons for this, including its transparent and reliable legal system, excellent communications and world-class professional and financial services. Since joining the EU, Cyprus has consolidated its position as the main portal for investment between the EU and other Western economies on the one hand, and the dynamic markets of Russia, Central and Eastern Europe, India and China on the other.

Cyprus’s modern, simple tax system is a particular source of competitive advantage. It is fully compliant with EU and OECD standards and tax rates are among the lowest in the EU. There are double taxation agreements covering more than 60 countries and the network of agreements continues to expand. There is a complete participation exemption and no taxation of capital gains except gains arising from real estate in Cyprus. Reorganisations and cross-border mergers are tax-exempt. Interposing an appropriate Cyprus holding or finance structure between investors in one country and the operating investee company in another can significantly reduce the tax burden, increasing post-tax income by 10% or more, and provide tax-efficient exit options.

With the world’s tenth largest fleet in terms of registered tonnage, Cyprus is also home to myriad shipping and ship management companies. Its tonnage tax system significantly reduces the tax burden on international shipping and ship management companies and makes Cyprus one of the most attractive environments in the world for international shipping.

An economic citizenship programme allows individuals investing more than €2 million in Cyprus and satisfying specified criteria to obtain naturalisation on an accelerated basis. Since Cyprus is an EU member, Cyprus citizenship considerably simplifies international travel and visa arrangements and is proving highly attractive to high net worth individuals.

The Legal Environment 

Cyprus has a well-developed, transparent and reliable legal system based on common law. There is an independent and respected judiciary. Litigation can be protracted and time-consuming but effective interim remedies are available.

Recent Developments 

The government has pressed ahead with its programme to support economic recovery, attract inward investment and boost Cyprus’s attractiveness as a competitive but reputable international financial centre.

In July 2017 the tax residence requirements for individuals were amended, enabling individuals who are not tax resident elsewhere and who have a base and activities in Cyprus to be treated as resident in Cyprus, therefore qualifying for the benefits of the Cyprus tax regime (including exemption from any form of taxation on investment income, such as dividends and interest, and income tax exemptions for new taxpayers) if, during the tax year concerned, they maintain a permanent residence in Cyprus, have any business or employment in Cyprus and are present in Cyprus for at least 60 days. All three conditions must be satisfied and the individual concerned must not be a tax resident of any other country (for example by reason of a physical presence there for 183 days) for the tax year in question.

The network of double tax agreements continues to be extended: new agreements with Ethiopia, Iran and Jersey are now in force and new agreements have also been signed with Barbados and Luxembourg. A revised double tax agreement with India is now in effect, resolving previous difficulties.

One of the most important developments of the past year is the postponement of the introduction of source-based taxation of capital gains on shares in “property-rich” Russian companies. Under the double taxation agreement between Cyprus and Russia, gains on disposals of shares are taxable only in the country of residence of the person disposing of the shares. Since Cyprus does not impose any capital gains tax on disposals of shares in companies unless they own immovable property in Cyprus, this makes Cyprus a very advantageous location for holding shares in Russian companies. Under the 2010 Protocol, gains on the disposal of shares in companies which derive their value principally from immovable property in Russia (so-called “property-rich” companies) were due to be subject to tax in Russia from 1 January 2017. Shares in other companies were not affected by the change. However, the Russian government has agreed to postpone the application of this provision, and disposals of shares in property-rich companies will continue to be taxable only in the country of residence of the person disposing of the shares, in the same way as other shares.

Further legislative changes are in prospect, including a new, modern law on foundations and a strategic investment law aimed at facilitating investment into Cyprus by means of radical changes in the current law and practice, reducing red tape and simplifying procedures for proposed inbound investment projects above a certain size or which create significant new employment.

Prospects for the future 

Cyprus has emerged successfully from its formal programme of economic reform and modernisation, with the targets agreed with international lenders having been met and in some cases exceeded. The reforms made at the behest of international creditors will improve regulation and keep out undesirable practices, and so help to enhance Cyprus's reputation for transparency and reliability and its attractiveness to reputable investors. The government and the business services sector are committed to offering a competitive tax and business environment of the highest standards of probity.

Overseas confidence in Cyprus as an international finance sector was undamaged by the economic crisis, and privatisation and disposal of distressed assets by banks and others are currently providing significant investment activity and opportunities in the domestic market.

The government is continuing with economic reform, in order to secure and consolidate the progress made to date. The international services sector is in a strong position to lead the recovery, with new, competitive offerings enhancing the benefits it provides to international investors.

Looking forward, the discovery of substantial gas deposits offshore of Cyprus and the development of the island as a regional energy hub west of the Suez Canal offer substantial opportunities and grounds for optimism regarding the medium term.

While there are undoubtedly challenges ahead, the economy is growing well and businesses are looking forward with confidence. In summary, Cyprus is very much open for business.