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Cyprus
Jurisdictions

General Information
Incorporation in Cyprus
Incorporation procedure
Share capital and shareholders
Directors of an IBC
Annual reports and payments

Taxation of Cyprus companies
Winding up
Shipping Companies and Yacht Registration
Insurance Companies in Cyprus

General Information

Cyprus is an island situated in the north eastern Mediterranean Sea. It covers the area of 9,250 sq. km and has the population of 771,657 (July 2003 est.). The capital city is Nicosia with population of about 200,000 people. The official languages are Greek and Turkish but English is widely spoken and mostly used in business, government and courts. Greek Cypriots form the largest ethnic community (78%), Turkish Cypriots comprise the second largest community (18%) and the remaining 4% represent other minorities. Cyprus has a literacy factor of 97%.

Cyprus independence from the UK was approved in 1960 with constitutional guarantees by the Greek Cypriot majority to the Turkish Cypriot minority. Currently Cyprus is divided into two parts: Greek-held area and Turkish-held area, the latter declared itself the "Turkish Republic of Northern Cyprus", but it is recognised only by Turkey.

The political system of Cyprus is based on Western democracies. Under its constitution, Cyprus has a presidential system of Government. President is both the Chief of State and the Head of government. The executive arm of the Government is the Council of Ministers appointed jointly by the President and Vice President. Legislative power is vested in the unicameral House of Representatives (80 seats; 56 assigned to the Greek Cypriots, 24 to Turkish Cypriots, but only those assigned to Greek Cypriots are filled; members are elected by popular vote to serve five-year terms). The judicial power is represented by the Supreme Court (judges are appointed jointly by the President and Vice President).

The economy of Cyprus is based on a free enterprise system. GDP is composed principally of the services sector 75,5% (trade, restaurants, hotels, finance, insurance and business services), industry (mainly export-oriented) contributes 19,9% (food, beverages, textiles, chemicals, metal products, tourism) and agriculture additional 4,6%. Currency of Cyprus is Cypriot pound (CYP).

Cyprus economic policy is focused mainly on meeting the criteria for admission to the EU, and in fact during the recent number of years, the economy of Cyprus has demonstrated spectacular growth and its currency has enjoyed relative stability.

Cyprus legal system is based on English common law, with civil law modifications. Constitution was adopted 16 August 1960. Principal corporate legislation is Companies Law, Cap. 113, as amended, which is modelled on the UK Companies Act 1948. Cyprus has tax treaties with about fifty countries, including Russia, Belarus, Ukraine, some other CIS countries, as well as Austria, France, Germany, Greece, Hungary, Italy, United Kingdom. Cyprus is a member of the UN, the Council of Europe, the Organization for Security and Cooperation in Europe and the British Commonwealth. Starting from 2004 Cyprus will be granted full membership in the EU.

Incorporation in Cyprus

The type of company for international trade and investment is a private company limited by shares which is incorporated pursuant to the Companies Law, Cap. 113.

There are a number of restrictions on the activities of a private company, and namely companies cannot:

- undertake the business of banking, insurance or rendering of financial services to the public unless a special permission is granted

- trade with resident individuals or companies situated in Cyprus other than in relation to the maintenance of premises, banking and professional services, unless they have special permission from the Central Bank of Cyprus.

Cyprus companies must maintain a registered office address within Cyprus and must also appoint a company secretary who, for practical reasons, should be resident in Cyprus.

Incorporation procedure

The first step in formation of a Cyprus company is to apply for approval of its name by the Registrar of Companies. The Registrar can decline any name it considers undesirable or any name that is identical or similar to an existing company’s name, or implies illegal activity or royal or government patronage. The following words or their derivatives are not for registration: Asset Management/Manager, Assurance, Bank/Banking, Broker/Brokerage, Capital, Credit, Currency, Custodian/Custody, Dealer/Dealing, Deposit, Derivative, Exchange, Fiduciary, Finance/Financial, Fund, Future, Insurance, Lending/Loan/Lender, Option, Pension, Portfolio, Reserves, Savings, Security, Stock, Trust/Trustee. Suffixes to denote limited liability are “Limited” or “Ltd.”

After the name of a proposed company is approved, the Memorandum and Articles of Association of the company must be signed by at least two members (subscribers) and for at least one share each. After incorporation the subscribers of the Memorandum will become members of the company. The Memorandum establishes the basic structure of the company and states its name, objectives, the amount of share capital and division thereof into shares of a fixed amount, and any other matters which affect the basic existence of the company.

The Articles of Association govern relations between various members of the company. They deal with the procedures for calling meetings of shareholders, passing resolutions and transferring shares including any restrictions which may apply. A company may alter or add to its Memorandum and Articles of association by passing a special resolution.

The next step of the incorporation procedure is to file the Memorandum and Articles of Association with the Registrar of Companies. As soon as the registration of the company is effected, the Registrar of Companies issues a Certificate of incorporation which specifies the name of the company, the date on which it was incorporated, and its reference number. Certificate of incorporation constitutes evidence of the company's legal existence and will be accompanied by the Certificate of the Registered Office address, Certificate of shareholders, Certificate of Directors and Secretaries.

The registration of a Cyprus company requires the Central Bank of Cyprus approval. For the purpose of issuing the relevant permit, the Central Bank of Cyprus will require a bank reference and a passport copy for each beneficial shareholder (i.e. for the real owners of the company and not nominees). The bank reference must be issued by a bank included in the Central Bank of Cyprus list of qualifying banks.

However as from June 2003 the Exchange Control Regulations have been abolished for European Union Nationals. This means that individuals holding a EU passport and legal persons registered in any EU country can register a Cyprus company either directly or indirectly through Cypriot nominees without Central Bank intervention. As a result there is no longer a need to provide a bank reference. The only documents to be provided is a passport copy or a copy of the Certificate of Incorporation.

Share capital and shareholders

Authorised share capital of a Cyprus private company must be equal or more than CYP 1,000. Shares can be divided into such number of classes and series as the directors can determine by their resolution. Bearer shares are not permitted. Usually the share capital is divided into 1,000 shares of CYP 1 each with power of the company to increase or reduce same and with power to issue any of the shares in the capital, initial or increased, with any preferential, special or defined rights as to dividend, repayment of capital, surplus assets, voting rights or otherwise.

Cyprus companies may have one or more shareholders, individuals or corporations of any nationality or residence (Cyprus residents can’t be shareholders unless they are nominees). Shareholders’ details appear on the public file but anonymity can be retained by the use of nominee shareholders. In this case a trust deed and an instrument of transfer is issued by the nominee shareholder. These information and details are kept confidential being protected by secrecy laws.

Directors of an IBC

The day to day management of a Cyprus company is undertaken by the directors. Unless otherwise specified in the Articles of Association, each director has full power to represent the company, and one director's signature is enough to sign a contract or other legal document on behalf of the company.

The initial directors are appointed by the subscribers to the Memorandum and Articles of Association, and thereafter these are elected by the Shareholders. However, where permitted by the Memorandum or Articles of Association, the directors may also elect directors for such term as they may determine.

A minimum of one director is required, who can be a natural person or a body corporate. Director’s details appear on the public file. There is no legal requirement that the directors be Cyprus residents but in order to obtain relief under the taxation treaties signed by Cyprus it is necessary that the company is seen as Cyprus resident and therefore have a majority of the directors based in Cyprus.

Annual reports and payments

Each year the company registered in Cyprus must prepare and submit to the Registrar of Companies Annual Return of the company containing the details of all shareholders, directors, registered office and share capital and any changes thereof. In case of non-compliance, the Registrar of Companies may strike off the company from the Register.

In addition every Cyprus company must annually prepare and submit its Audited Accounts to the Central Bank of Cyprus and Income Tax Authorities. This requirement is obligatory irrespective of whether the company had any dealings or not. In such case, Dormant Audited Accounts must be prepared.

In case of non-compliance, Central Bank of Cyprus may cancel the Licence of the company. In effect the company is dissolved. Also, Income Tax Authorities may take criminal court proceedings against the company.

If the company does not file the audited accounts with the Income Tax office until one year after the end of the company’s financial year, then there is a penalty tax of 5% on the due tax, if any.

Apart from annual reports, each company is obliged to file in the middle of each year fiscal year a temporary declaration of estimated profit for that year. On this estimated profit (if there is profit declared) a temporary tax is payable before the end of the year. If the company declares that it will not have tax for that year and later the audited accounts show that there is tax, then there is a penalty of 10% on the due tax.

When the audited accounts are prepared and the final tax is calculated, if temporary tax paid is more than 75% of the final tax, then no additional 10% tax is due. But if the estimated tax is less than the 75% of the actual tax due for the whole year, then there is a penalty of 10% for the difference between the estimated tax and the actual due tax.

Each year every company shall hold an annual general meeting not more than fifteen months following the previous annual general meeting. The company need not hold it in the year of its incorporation or in the following year, provided that it holds its first annual general meeting within eighteen months of its incorporation. Annual meetings and other meetings of the shareholders and directors of the company can be held either in Cyprus or abroad pursuant to the directors’ or shareholders’ resolution.

Taxation of Cyprus companies

In 2002 Cyprus House of Representatives adopted a new tax reform which brought fundamental changes to the previous tax system and was most substantial tax reform ever made since the Republic of Cyprus was established. The changes became necessary because of Cyprus’ application to join the European Union, and namely, because of the need to comply with the Code of Conduct and with the OECD’s recommendations against harmful tax practices. The new tax regime came into force on the 1 January 2003.

According to the new tax regime there will be no differentiation between local and international business companies. All companies will be taxed at the rate of 10%. An existing Cyprus company can opt for the application of the Previous Tax Regime (be taxed at 4,25%), if it had income in the year 2001. It follows that if the company was dormant and had no income in 2001 or if it was incorporated after 1st January 2002 this option is not available.

Companies which elect to continue with this preferential rate till 31 December 2005 may not take advantage of the various exemptions and favourable provisions introduced by the new regime.

For companies registered during the year 2002 the rate will be 4.25% for 2002 and 10% from 2003 onwards. These companies will be allowed to generate income from sources in Cyprus but they must apply to the Central Bank of Cyprus first for the change to their permit. For companies registered after 1st January 2003 the tax rate will be 10%.

Pursuant to the new legislation the following profits are exempt from corporation tax:

  • Dividends from Cyprus or abroad;
  • Profits arising from the disposal of shares and securities;
  • Profits arising from an overseas permanent establishment;
  • 50% of the interest income earned by a company resident of Cyprus.

Under the new legislation companies will be considered resident in Cyprus and taxed in Cyprus if they are managed and controlled in Cyprus. If the company is not managed and controlled in Cyprus or in case it ceases to be managed and controlled in Cyprus then no Cyprus tax will be imposed on the company’s income from sources outside Cyprus and the company shall be regarded as non-resident in Cyprus for tax purposes.

It is important to note that only resident companies will be entitled to tax credit under any relevant Double Tax Treaties as well as to unilateral tax credit in respect of any tax paid in any foreign country with which Cyprus does not have a Double Tax Treaty.

The proof of the fact that the company is tax resident in Cyprus can be a tax domicile certificate issued by the Cyprus Tax Authorities which states that "the company is resident in Cyprus and pays taxes in Cyprus on its worldwide income”.

A Cyprus company is subject to VAT if it provides services (e.g. consulting, marketing, etc.) to another Cyprus company irrespective of where the services takes place and if the annual income from such services exceeds CYP9,000. For sale of goods (outside Cyprus) to other Cyprus company’s or other foreign companies no VAT registration is applicable. Under the new regime the VAT standard rate of 10% increases to 13% from 1st July 2002 and thereafter to 15% from 1st January 2003.

Special Defence Contribution Tax is imposed only on income earned by Cypriot tax residents. Non tax residents are exempt from this tax. The following rules apply to resident companies:

  • Dividends received by a Cyprus resident company as explained above and dividends paid to non – residents are not subject to special defence contribution
  • There is a 10% special defence contribution on certain type of interest income subject to double taxation treaties and unilateral tax credit as explained above
  • There is a 15% Special Defence Contribution on dividend income received by resident individuals
  • There is 3% Special Defence Contribution tax on rents and which is imposed on the gross rents reduced by 25%
Winding up

The winding up of a company may be accomplished in one of the following ways:

  • by a court order
  • subject to the supervision of the court.
  • Voluntarily by Special Resolution issued by the shareholders of the company;

A company may be wound up by the Court if:

  • the company has by special resolution resolved that the company be wound up by the Court;
  • the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
  • the number of members is reduced, in the case of a private company, below two;
  • the company is unable to pay its debts;
  • the Court is of opinion that it is just and equitable that the company should be wound up.

For the purpose of conducting the proceedings in winding up a company and performing such duties in reference thereto as the Court may impose, the Court may appoint a liquidator.

However the above procedures are rather lengthy, complicated and costly. A simpler way is available for companies which do not have any assets or liabilities and when there is no disputes among shareholders. In this case the Director of the company informs the Registrar of companies that the company has stopped operation and does not have any assets or liabilities. Certain resolutions and letters must be prepared and signed by ultimate beneficiaries.

In consequence of this letter, the Registrar of Companies will strike off the name of the company from the register within 3 months time. The Registrar will publish its decision to strike the company off from the register in the official gazette. The Central Bank of Cyprus will also be notified in relation to this step as a consequence of which it will cancel the licence of the company.

It should be noted that audited accounts must be prepared until the date the company was involved in business and the audited accounts must show that the company does not have any assets or liabilities. The company will be liable to criminal prosecution if it does not submit audited accounts in time or at all. In this case the liability will be left to the local director. To avoid it, the director will resign his office immediately.

Shipping Companies and Yacht Registration

Maritime activities in Cyprus are governed by the Merchant Shipping Law which are based on corresponding British legislation. A non-resident may register a ship under the Cypriot flag by forming a private company with limited liability under the provision of the Cyprus Companies Law and by transferring the ownership of the ship to the Cypriot company. The appropriate authority for the registration of ships is the Department of Merchant Shipping of the Ministry of Communications and Works.

The Cyprus Merchant Shipping Law makes no distinction between “ships” and “pleasure crafts”, but the procedure for registering a yacht or other type of pleasure craft under the Cyprus flag is much simpler and straightforward.

Cypriot merchant shipping legislation allows for the provisional registration of a vessel and most owners usually opt to have their ship provisionally registered first. This will allow them time (up to 9 months, including a 3 month extension) during which they will be able to complete the administrative formalities for permanent registration.

In order to obtain a provisional registration certificate, relevant application is submitted to the Ministry of Communications and Works through the Registrar of Ships. The application must be accompanied by the following documents:

  • Certificate of Seaworthiness issued by a recognized surveyor
  • Bill of Sale (or builder’s certificate if the yacht is new)
  • Deletion of certificate from the previous registry (if applicable)
  • Director’s resolution resolving purchase and registration under the Cyprus flag
  • Declaration of ownership

The owner of the vessel is expected to ensure that the ship does not leave the port where she is lying unless she has been duly surveyed and certificated by her classification society on behalf of the Cypriot government.

The permanent registration under the Cyprus flag must be completed within 9 months after the provisional registration. It is not necessary for the vessel to be present in a Cyprus port. Certain additional documents have to be submitted to the Registrar of Ships in Cyprus for this purpose, and namely, Certificate of Survey and Cyprus Tonnage Certificate. After receipt of all the documents the Registrar of Cyprus Ships will proceed with the permanent registration of the vessel and the issue of the certificate of Cyprus Registry.

One more type of registration available in Cyprus is parallel registration. Cyprus legislation provides for the two forms thereof:

  • "Parallel in" registration allows a foreign flag vessel on bareboat charter to be registered in "parallel" under the Cyprus flag for a period of up to 2 years, which is renewable.
  • "Parallel out" registration allows a Cyprus flag ship to be bareboat chartered to a foreign person or company and registered "parallel" in a foreign register for the duration of the charterparty.

Profits of a Cyprus shipping company owning a ship under a Cyprus flag are not subject to corporation tax.

Insurance Companies in Cyprus

The law governing the registration of insurance companies in Cyprus is the Insurance Companies Laws of 1984 and 1990. The regulatory authority is the Superintendent of insurance at the Ministry of Finance.

The procedure of establishing an insurance company includes 2 steps:

  1. incorporation of an international insurance company with the Registrar of Companies and
  2. obtaining the required permit (license) by the Superintendent of Insurance.

The requirements for granting such a license under the law are the following:

  • share capital of the company that has to be paid up should not be less than £200.000
  • the company must be insured by another insurance company in respect of policies issued
  • the solvency margin of the company must be maintained at the greater of CYP100,000 or 16 % of the gross premium income
  • proposed insurance company is obliged to deposit to the Central Bank of Cyprus the amount of £300.000.

The application to the Superintendent of Insurance for a license must be accompanied with the following documents:

  • a guarantee supplied by either the parent company or one of its associates or a bank guarantee issued by the applicant of the company’s invested capital
  • a business plan of the company’s intended operations for the first three years
  • information relating to the administrative structure of the company’s head office and branches
  • approximate number of agents or intermediaries
  • information containing the revenue account
  • classes of the insurance business that the company is going to apply
  • specimens of contracts that the company will adopt in its business.

It is also possible to set up a captive insurance company – a company that is operated by a non-insurance parent in order to provide insurance cover for companies within a multinational group.

Any company formed and registered under the Companies Law with a view to engaging in insurance business in any part of the world other than Cyprus, is treated as an insurance company operating within the Republic.

 

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