International Trade – Case studies

Using Cyprus for International Trade

Changes in the tax laws in Cyprus which became effective on 1 January 2003 have abolished the distinction between local companies and international business companies. A uniform corporation tax rate of 12,5% now applies to all companies resident in Cyprus. Whether companies are classed as residents or non-resident is dependent upon the location of the management and control of the company.

There is no legal definition of ‘management and control’ but it is generally taken to mean where the board meetings take place or the majority of board members reside.

Resident companies are now taxed at 12,5% on their worldwide income and non-resident companies are only taxed on profits arising out of a permanent establishment in Cyprus. ‘Permanent establishment’ includes an office, a branch, a factory, and a construction site for a project exceeding three months. Companies, whose management and control are outside of Cyprus and having activities outside Cyprus, only, will not, therefore, pay any tax in Cyprus.

Cyprus resident companies can take advantage of the double tax treaty network. The anti-avoidance provisions will no longer apply under the new regime. Since joining the EU in May 2004, resident companies enjoy one of the lowest corporate tax rates in Europe.

Dividends paid to non-resident shareholders of Cyprus companies will not be subject to withholding taxes. In addition, dividends received by Cyprus companies are exempt from corporation tax. Cyprus resident companies receiving dividends from a foreign company are not liable to withholding tax provided the company receiving the dividend holds more than 1% of the share capital of the foreign company paying the dividend. (Other conditions are that not more than 50% of the paying company’s activities result in investment income and the tax paid in the jurisdiction in which the foreign company is registered is not significantly lower than the tax paid in Cyprus).

These provisions make Cyprus a good location in which to incorporate a holding company. If a subsidiary were incorporated in a jurisdiction other than Cyprus with 0% tax e.g. BVI and the holding company were a Cyprus resident company it would enjoy double-tax treaty benefits and subsequently minimize the taxable profit in Cyprus.

Non-resident companies may be best used where there is no intention to make use of the double-tax treaty network or to repatriate profits, e.g. where monies are transferred to a foreign bank account or left in a foreign currency account in Cyprus.

International Trade Cyprus case study

Mr. Tudor from Romania is a buyer of sportswear from China and sells to European Companies and has considered using an offshore company to mitigate his tax exposure on his profits, however, on research, Mr. Tudor has accepted that he requires to establish a company in a tax paying location that has a good image within the European Union, where his buyers are from.

Mr. Tudor decides to register a resident company in Cyprus which will buy the goods from China and sell them within the EU.

The goods are shipped from China to the order of the Cyprus Company to a port of the client’s choice for example the Netherlands. On arrival, the goods are trans-shipped without being imported and the documentation from China is replaced with new documents reflecting the Cyprus Company and if needs be the origin can be changed on the shipping documents from China to The Netherlands, even though the goods have not been imported.

The Cyprus Company, registered for VAT in Cyprus, will be obliged to quote their VAT number on their invoice to the European buying party, as well as the European buyers VAT number which will enable the Cyprus Company to zero rate the supply to buyer. The buyer will account for VAT on the supply in the usual manner within its own country.

The profits accrued within the Cypriot entity are subject to 12,5% taxation within Cyprus. However, there are ways to mitigate and reduce this amount. Should this be of interest please do not hesitate to contact one of our consultants.

Should you require additional information, have a quotation or might need to clarify any related matter, please contact one of our consultants who will be happy to assist with your enquiries.

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