International Trade – Case Studies
An Prime Option for International Trade
Changes to Cyprus’s tax legislation that came into effect on January 1, 2003, have eliminated the distinction between domestic companies and international business entities. Now, a uniform corporate tax rate of 12.5% is applicable to all companies residing in Cyprus. The determination of a company’s residency status hinges on the location of its management and control.
The term ‘management and control’ lacks a precise legal definition but is generally understood to be where board meetings occur or where the majority of board members are based.
Resident companies are now subject to a 12.5% tax rate on their global income, while non-resident companies are only taxed on profits generated from a permanent establishment within Cyprus. This ‘permanent establishment’ encompasses an office, branch, factory, or a construction site for projects lasting more than three months. Companies with management and control situated outside Cyprus and operating exclusively outside Cyprus will not be liable for any tax in Cyprus.
Cyprus resident companies can take advantage of the double tax treaty network, and the anti-avoidance provisions no longer apply under this new regime. Since joining the EU in May 2004, resident companies benefit from one of the lowest corporate tax rates in Europe.
Dividends paid to non-resident shareholders of Cyprus companies are not subject to withholding taxes, and dividends received by Cyprus companies are exempt from corporation tax. Cyprus resident companies receiving dividends from foreign companies are not subject to withholding tax, provided the recipient company holds more than 1% of the share capital of the foreign company paying the dividend. (Additional conditions include that not more than 50% of the paying company’s activities generate investment income, and the tax paid in the jurisdiction where the foreign company is registered is not significantly lower than the tax paid in Cyprus).
These provisions establish Cyprus as a favorable location for establishing a holding company. If a subsidiary is incorporated in a jurisdiction with a 0% tax rate, such as the British Virgin Islands, and the holding company is a Cyprus resident, it can benefit from double-tax treaty advantages, thereby minimizing taxable profits in Cyprus.
Non-resident companies may be preferable when there is no intention to utilize the double-tax treaty network or repatriate profits, for example, when funds are transferred to a foreign bank account or held in a foreign currency account in Cyprus.
Cyprus – A Case Study
Mr. Tudor, a sportswear buyer from Romania, sources his goods from China and sells them to European companies. Initially, he contemplated using an offshore company to reduce his tax liability on profits. However, after research, Mr. Tudor recognized the need to establish a company in a reputable tax-paying jurisdiction within the European Union, where his buyers are located.
Mr. Tudor opted to register a resident company in Cyprus, which would purchase goods from China and distribute them within the EU.
Goods are shipped from China to a port designated by the Cyprus Company, for example, in the Netherlands. Upon arrival, the goods are trans-shipped without formal importation, and the documentation from China is updated to reflect the Cyprus Company. If necessary, the origin can be adjusted on the shipping documents from China to the Netherlands, even if the goods have not been officially imported.
The Cyprus Company, registered for VAT in Cyprus, is obligated to include its VAT number on invoices to the European buyers, along with the European buyer’s VAT number. This enables the Cyprus Company to zero-rate the supply to the buyer, with the buyer accounting for VAT in the usual manner within their own country.
Profits generated within the Cypriot entity are subject to a 12.5% tax within Cyprus. Nevertheless, there are strategies available to mitigate and reduce this tax liability. If you are interested in exploring these options, please feel free to reach out to one of our consultants.
For further information, quotes, or clarification on related matters, do not hesitate to contact one of our consultants who will be pleased to assist you with any inquiries.
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