FOREWORD

This booklet has been prepared for the use of clients, partners and staff of HLB International member firms. It is designed to give some general information to those contemplating doing business in Cyprus and is not intended to be a comprehensive document. You should consult us, therefore, before taking further action. The material contained in this booklet was compiled in November 2003 and, unless otherwise indicated, is based on information available at that time.HLB Afxentiou & Partners and HLB International cannot be held liable for any action or business decision taken on the basis of information in this booklet, listed on this site

© HLB Afxentiou & Partners November 2003. A member of HLB International A worldwide organization of accounting firms and business advisers.

Location and climate

Cyprus is situated in the eastern Mediterranean sea at the hub of three continents, Europe, Asia and Africa.  It spans an area of 9,251 square kilo­metres and it is the third largest island in the Mediterranean after Sicily and Sardinia. Topographically, the island features forest-clad mountains and sandy beaches.  Cyprus' time zone is exactly seven hours ahead of New York and seven hours behind Tokyo.  Hence, it is possible to work both with the west and the east when oper­ating from Cyprus during normal working hours.

Population, languages and currency

Political and legal systems

Cyprus is an independent and sovereign republic with a presidential system of government, which is modelled on western

democratic systems. Executive power is vested in the President, who is also the Head of State. The President is directly 

elected for a five-year term of office and is eligible for re-election. The President appoints the Council of Ministers, the main

executive instru­ment of the Republic. Legislative power lies with the House of Representatives, composed of fifty-six elected

members holding office for five years. The democratic multi-party system is based on proportional representation.

The economy

Cyprus is on course with its preparation for full accession to the European Union (EU) along with nine other countries of Eastern Europe on 1 May 2004. The Cyprus economy is characterized by robustness and macroeconomic stability which is evidenced by the favourable evaluations and comments of the European Commission, the International Monetary Fund and other international organizations. 

The Cyprus economy recorded real GDP growth of the order of 4.1% in the period 1999-2002, compared with an average growth rate of 2.9% in the accession countries and 2.1% in the euro area.  It is noteworthy that this growth was achieved in an environment of full employment conditions, low inflation, a stable and strong currency, as well as a relatively low fiscal deficit.  Furthermore, according to the 2002 annual report of the European Central Bank, Cyprus’ per capita GDP has reached 71% of the corresponding euro area average, while average per capita GDP in the accession countries is 44% of the euro area average.  Macroeconomic stability, combined with the progress achieved provides a strong foundation for the accession of Cyprus to the EU, as well as the participation of Cyprus in the euro area soon after accession.

The cost of living in Cyprus, as well as the quality of life, compares very favourably with other European countries.  In a recent survey, the island's per capita Gross Domestic Product was more than US$17,500. Taking into consideration other socio-economic indications such as the excellent housing conditions, the pollution-free environment and the low crime rate, it is arguable that the standard of living is better than that reflected by per capita income alone.

Banking and finance

In order to ensure a safe and stable financial system that would preserve public confidence and foster economic stability and growth, Cyprus maintains an effective mechanism of bank regulation and supervision.

 The Central Bank of Cyprus, the regulatory monetary body, grants a licence to carry on banking business and exercises supervision, the main objective of which is to minimize systemic risk and preserve the stability of the banking system so as to retain public confidence and to protect depositors.

The Central Bank of Cyprus has always been guided in its supervisory role by the recommendations of the Basle Committee on Banking Supervision and the EU Directives on banking regulation while following up closely new developments and having its prudential functions under constant review to take account of these developments and changing circumstances.

Transport and telecommunications

Due to its location and up-to-date seaport facili­ties, Cyprus has become an important shipping centre. The two major multi-purpose ports of Limassol and Larnaca serve both containerised and breakbulk cargo.  In addition, there is the industrial port of Vassiliko serving the cement export indus­try. Transit cargoes enjoy preferential treatment such as minimal customs formalities, free trade facilities, berthing priority and special rates for long-term storage.

There is a wide network for air routes connecting Cyprus with Europe, America, Asia and Africa.

Cyprus is a regional telecommunication servic­es centre, boasting one of the most advanced net­works of high quality optical fibre submarine cables and satellite links in Europe. The island's success as a telecommunication hub in the eastern Mediterranean and Middle East region is due, first and foremost, to the strength of its international network and the superb regional and international connectivity it offers.  Nearly every country in the world can be reached through the automatic sys­tem, while all other countries may be reached via the operator twenty-four hours a day. There are also telegraph, telex, facsimile, data transmission, internet and mobile phone and paging facilities available.

International associations

Cyprus will become a full member of the European Union from 1 May 2004 and is also a member of the United Nations, the Commonwealth and the Council of Europe.  Cyprus has diplomatic relations with a very large number of countries and is a signatory to a large number of international con­ventions, including thirty treaties for the avoidance of double taxation.

Introduction

Employment in Cyprus is governed by labour legislation which is supplemented by industry-wide collective agreements negotiated between trade unions and employers’ organizations.

Working hours and annual holidays

The working week lasts between 35 and 40 hours and it is a five-day week for most businesses, including the government, banks and other social services.

Employees are entitled to 20 days paid holidays per year.

Minimum wage and social security

The minimum wage is currently set by legislation at CY£318 per month for the first six months of employment, increasing thereafter to CY£340 per month.  Employers must contribute to the state’s Social Insurance Fund based on the monthly gross salaries as follows:

                                                    %

-                         Social Security          6.3

-                         Redundancy Fund          1.2

-                         Industrial Training Fund          0.5

-                         Social Cohesion Fund          2.0

In addition, employees are required to contribute 6.3 per cent on their monthly gross salaries.

Residence/work permits for EU citizens

EU citizens, as from 1 May 2004, will not require any formalities as regard the securing of residence or work permits. 

Residence/work permits for non-EU citizens

      Under the current regime expatriate executive and non-executive personnel of international business companies maintaining fully staffed offices in Cyprus may apply for tempo­rary residence / work permits (TRE permits).

Executive personnel

      The minimum acceptable annual salary for newly appointed executives is CY£I2,000. Applications for the first permit for executive personnel should be made to the Central Bank of Cyprus, which for­wards its recommendation to the Migration Officer in Nicosia. Within one month the Migration Officer should mail the first TRE permit, valid for two years, to the expatriate executive.

Non-executive personnel

      Applications for the first TRE permits for non­executive expatriate personnel should be made ini­tially to the Labour Department, Ministry of Labour and Social Insurance.  International busi­ness entities may employ expatriates in non-execu­tive position if comparable Cypriot personnel are not available. The first TRE permit is valid for two years.

Renewal of TRE permit

TRE permits may be renewed for additional three year periods after the initial two years. The per­mit is eligible for renewal if:

•    The expatriate's Local Disbursement Current (LDC) account shows annual debits of at least CY£6,000 for local payments in addition to purchase of duty free cars and real estate.

•    The company's LDC account shows annual deb­its in excess of CY£I2,000 in addition to purchase of duty free cars and real estate.

•    The company's annual turnover exceeds
CY£60,000, unless the company can demonstrate other commercial and economic activity to the Central Bank's satisfaction.

•    The expatriate spends considerable time in Cyprus which, in the case of one-man companies should, normally, exceed nine months per year.

      Applications for renewals of TRE permits should be filed, together with the relevant docu­mentation, with the Central Bank of Cyprus at least two months before the expiry of the current permit.  In the case of executive personnel, the Central Bank of Cyprus forwards its recommenda­tion to the Migration Officer in Nicosia who, with­in one month, should notify the expatriate con­cerned as regards the renewal of his TRE permit.

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Introduction

      Business entities may be regis­tered in Cyprus in the following legal forms under Cyprus company law which is almost identical to the United Kingdom's former Companies Act 1948:

•    Limited company

•    Partnership

•    Branch

      Limited companies make up the vast majority of business entities registered in Cyprus.  Branches and partnerships constitute only a small percentage, mainly because their legal sta­tus and financial liabilities are ultimately the same as those of their beneficial owners.

Limited company

The liability of a private company's members is lim­ited either by shares or by guarantee.  If a compa­ny is limited by shares, the liability of its members is limited to the nominal value of the shares sub­scribed to by them and if the shares are fully paid up, then the shareholders are not liable to con­tribute further.  If a company is limited by guaran­tee, the liability of its members is limited to the amount to which they have agreed to subscribe in the case of liquidation.  Companies limited by guar­antee are usually formed by non-profit-making businesses.

A private limited company means a company which by its articles:

•    Prohibits the issue of bearer shares

•    Prohibits any invitation to the public to sub­scribe for its shares or debentures

•    Limits the number of its members to a maximum of fifty with a minimum of one

      There are more stringent regulations from the Registrar of Companies and more requirements by law gov­ern public companies.  International business enti­ties are always registered as private companies because this legal form enjoys comparatively inex­pensive formation procedures, control over the membership and uncomplicated reporting requirements. Public companies cannot take advantage of these benefits. Many international business entities are subsidiaries or branches of well-known international corpora­tions whose shares are traded on recognised stock exchanges abroad.

A private company may be considered exempt if it complies with the following additional criteria:

•    The number of persons holding the company's shares does not exceed fifty

•    No corporate body is a director of the company

•    No corporate body holds any of its shares or debentures, unless it is itself an exempt private company

•    No person other than the holder has any inter­est in the shares or debentures.

The advantages of an exempt company are that financial statements are not required to be submitted to the Registrar of Companies and the company can give loans and guarantees to its directors.

Partnership

   A Partnership can be either general or limited and comprises two or more persons aiming to profit by carrying on a common business.

      Each of the partners of a general partnership is liable severally and jointly with the remaining part­ners for all debts and obligations of the firm. Furthermore, after a partner's death, his estate is also liable for all debts and obligations and is sub­ject to prior payment of his separate debts.

      Limited partnerships comprise general and lim­ited partners. The one or more general partners are liable for all debts and obligations of the firm and one or more limited partners must, at the time of entering into such a partnership, con­tribute a stated amount to its capital or property valued. The limited partners are not liable for debts and obligations of the firm above the amount contributed. A limited partner may neither take part in the management of the partnership nor bind it. A company can become a partner with another company or with individuals, provided that it is authorised by its articles.

Branch

A branch of a foreign company may be regis­tered in Cyprus with the Registrar of Companies under the relevant section of the Companies Law.   A branch does not constitute a legal entity different from that of its founding overseas company. There are two types of branches:

•    Local branch of a foreign company

•    International business branch of a foreign company

A local branch of a foreign company is a branch carrying our operations in Cyprus and offering services to locals.

An international business branch is a branch carrying on business outside Cyprus and offering services to non-residents.  It is not subject to any exchange controls.

Audit and accounting requirements

Limited liability companies are obliged by law to maintain proper books of account in respect of their income, expenses, assets and liabilities.

Financial statements are drawn up in accordance with International Financial Reporting Standards and must be audited annually by auditors who are licensed, under the Companies Law, to carry out audits in Cyprus.

Corporation tax

Companies that are tax residents of Cyprus pay tax in Cyprus on their worldwide income.  Companies that are not tax residents of Cyprus, but have a permanent establishment in Cyprus, are taxable only on the income earned from sources within Cyprus.

Tax residents of Cyprus are legal persons that have their management and control in Cyprus. Companies, including Cyprus registered companies, that are managed and controlled outside Cyprus are not considered Cyprus resident companies and are tax free in Cyprus.

Companies that are managed and controlled in Cyprus but are permanently established outside Cyprus are tax free in Cyprus.

The corporate tax rate is 10 per cent for all companies. For profits in excess of CY£1 million there is additional tax of 5 per cent for the years 2003 and 2004.

Corporation tax – International Business Entities

International business companies registered and operating in Cyprus before 31 December 2001 can opt to be taxed at 4.25% for the years 2003, 2004 and 2005.  In any case these companies will be subject to the tax rules described in the previous section as from 1 January 2006.

Treatment of dividends

Dividends which are paid by Cyprus companies to non-Cypriot resident shareholders are tax free in Cyprus. Dividends which are paid by Cyprus companies to Cyprus resident shareholders are subject to 15% defence contribution.

Deemed distribution of dividends

If a Cyprus company does not pay a dividend to its shareholders within two years from the end of the tax year then:

§       70% of its accounting profit is deemed distributed

§       The deemed distribution which is attributed only to Cypriot resident shareholders is subject to 15% defence contribution

§       The deemed distribution is reduced by the real dividends paid from the profits of the relevant tax year within the two years following the relevant tax year.

Treatment of interest

Interest which is earned in Cyprus is tax free if it is paid to a non Cyprus resident. Interest which is earned in Cyprus is subject to 10% defence contribution if it is paid to Cyprus residents.

Treatment of gains from trading in shares or other equities

The profits of a Cyprus company from trading in shares and other equities are tax free in Cyprus.

Dividends generated abroad and received in Cyprus

Dividends which are paid by a foreign company to a Cyprus resident company are tax free in Cyprus provided that the Cyprus resident company holds at least 1% of the paying company share capital and:

(i)         the paying company’s  revenue  derived directly or indirectly from investment activities does not exceed 50%of the total revenue, and,

(ii)        the corporation tax rate of the paying company is not substantially less than the Cyprus company’s tax rate.

Treatment of royalties

Shipping profits

A Cyprus shipping company which owns ships under the Cyprus flag and operates in international waters pays no tax on its profits or dividends. Also, there is no tax on the salaries of officers and crew of such ships.

International business ship management and crew management companies are liable to tax at the rate of 4,25 per cent.

Company losses and group relief

Tax losses can be set off against profits of the same tax year and any unutilized losses can be carried forward and set off against future profits without any time restriction.

The tax losses of a company can be set off against the profit of another company of the same group when the companies are tax residents of Cyprus.  A company is a member of the same group if:

(a)     it is at least 75% subsidiary of the other, or

(b)     each company is at least 75% subsidiary of a third company.

Tax administration

Tax year

The tax year is the calendar year, but corporations and unincorporated business entities may elect an accounting year ending on a date other than 31 December. In such a case, the taxable income is apportioned to the tax year from two accounting periods.

Filing of tax returns

Companies which follow the calendar year for their tax year must file an income tax return and financial statements within twelve months of their year end. 

Collection of tax

The tax on employees' salaries is collected under the PAYE system.  PAYE is paid by the end of the month following the relevant month. The tax on all other income is collected by means of a tempo­rary assessment filed during the tax year.  It is paid in three equal installments on I August, 30 September and 31 December. The final tax liabili­ty is paid on I August in the following fiscal year.

Capital gains tax

Residents of Cyprus are liable to capital gains tax only on their disposals of immovable prop­erty which is situated in Cyprus.

The tax rate is twenty per cent on gains from the disposal of immovable property or shares in a company which owns immovable property, except for shares in a company which is listed on any recognized stock exchange. 

Estate duty

There is no estate duty tax in Cyprus.

Immovable property tax

Immovable property tax is applicable to both phys­ical and legal persons.  It is levied on the market value of the property situated in Cyprus as at I January 1980 and is payable by the end of September each year.

Tax rates table

Property value                rate                                  tax                      accumulated tax

CY£                               %                                  CY£                       CY£

Up to 100,000                 0                                  0                               0

100,000-250,000             2.5                           375                             375

250,001-500,000              3.5                           875                             1250

Over 500,000                4

Value added tax

VAT is imposed on the provision of goods and services in Cyprus, as well as on the importation of goods into Cyprus.

VAT rates

There are three Vat rates:

•    Zero rate (zero per cent)

•    Standard rate (fifteen per cent)

•    Reduced rate (five per cent)

Zero rated goods and services include the follow­ing:

•    Exports

•    Food

•    Books, newspapers and magazines

•    Medicines

•    Children's clothing and footwear

Exempted goods and services from VAT include the following:

•    Rents

•    Medical services

•    Insurance and financial services

•    Disposal of immovable property

Reduced rated goods and services include the fol­lowing:

•    Hotel and catering services

•    Services provided by restaurants

Personal  taxation                       

Individuals that are tax residents of Cyprus pay tax in Cyprus on their worldwide income.  Individuals that are not tax residents of Cyprus pay tax in Cyprus on their Cyprus source income only.

Tax residents of Cyprus are individuals that reside in Cyprus for a period of more than 183 days in a tax year.

The individual tax rates are charged on a progressive basis.  The table below shows the tax rates:

Tax year 2003

Chargeable income                                rate                                tax                                accumulated tax

CY£                                                        %                                CY£                                CY£

0-9,000                                                     0                                0                                0

9,001-12,000                                              20                              600                            600

12,001-15,000                                             25                              750                            1350

Over 15,001                                             30

Tax year 2004

Chargeable income                                rate                                tax                                accumulated tax

CY£                                                    %                                CY£                                CY£

0-10,000                                              0                                0                                0

10,001-15,000                                     20                              1000                          1000

15,001-20,000                                     25                              1250                          2250

Over 20,001                                       30

Chargeable income is calculated after deducting income tax exemptions and allowances.

Treatment of foreign pensions

Paid from Cyprus                                                                       Received in Cyprus

Dividends Interest Royalties                                                         Dividends  Interest   Royalties

 %(1)    %(1)          %(2)                                                               %                                   %                 %

Notes

1   Under Cyprus legislation there is no withholding tax on the payment of dividends and interest to non Cypriot residents.

2   In the case where  royalty payments are for use within Cyprus, then there is withholding tax at 10%, otherwise it is nil.

3   5 per cent on film and TV royalties.

4   Nil if paid to a Government or for export guarantee.

5   Nil on literary, dramatic, musical or artistic work.

6   Nil if paid to the government of the other state.

7   This rate applies for patents, trademarks, designs or models, plans, secret formulas or
processes, or any industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

8   15 per cent if received by a company controlling less than 25 per cent of the voting power.

9   15 per cent if received by a company controlling less than 10 per cent of the voting power.

10        Nil if paid to a Government, bank or financial institution.

11 The treaty provides for withholding taxes on dividends but Greece does not impose any withholding tax in accordance with its own legislation.

12        5 per cent on firm royalties.

13        5 per cent if received by a company controlling less than 50 per cent of the voting power.

14        This rate applies to individual shareholders regardless of their percentage of shareholding.  Companies controlling less than 10 per cent of the voting shares are also entitled to this rate.

15        10 per cent for payments of a technical, managerial or consulting nature.

16        Treaty rate 15 per cent, therefore restricted to Cyprus legislation rate.

17        10 per cent if dividend paid by a company in which the beneficial owner has invested less than US$100,000.

18        If investment is less than 200,000 euros, dividends are subject to 15 per cent withholding tax which is reduced to 10 per cent if the recipient company controls 25 per cent or more of the paying company.

19        No withholding tax for interest on deposits with banking institutions.

20   Armenia, Kyrghystan, Moldova, Turkmenistan, Tatzikistan and Ukraine apply the USSR/Cyprus treaty.

21   Ten per cent for interest paid to a financial institution or when it applies to credit sales of industrial, commercial or scientific equipment or of goods.

22   This rates applies to royalties for work of literature, theatre, music and scientific work.  A withholding tax rate of 10% applies for the use, or the right to use industrial, commercial, or scientific equipment.  A withholding tax rate of 15% applies for patents, trademarks, designs or models, plans, secret formulas or processes.

23   The withholding tax rate applies to companies which own at least 25% of the share capital of the company paying the dividend.  In all other cases the withholding tax rate is 10%.

24   This withholding tax rate does not apply if the payment is made to a Cypriot International Business company by a Bulgarian resident who owns directly or indirectly, at least 25% of the Cypriot company’s share capital.

25   7% if paid to a bank or a financial institution.

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Introduction

Cyprus is a major international investment place for carrying out international operations.  The island's entrepreneurial environ­ment and support facilities compare favourably with those of the best established centres in the world and since the introduction of the first incen­tives in 1975, more than 58,000 international busi­ness entities have been registered in Cyprus, out of which 17,000 are very active.

International business entities in Cyprus con­duct a diverse range of business abroad including: marketing of consumer goods, transit and entrepot trade, holding of property and securities, business consulting and services, distribution and repair of equipment, architecture and town planning, electri­cal and mechanical engineering, road and airport construction, hotel ownership and management, travel and tourism, personnel recruitment and training, advertising design and graphics, mainte­nance of computer hardware and software, patent and trademark registration, gathering and distribu­tion of news, ship-management and other maritime services, general and captive insurance, as well as international commercial banking.

International business entities may contact each other and deal among themselves, provided the object of business is confined outside the island.
International business entities may pay each other from their foreign currency accounts, provided the goods or services involved are delivered outside the island.

International business appeal

The main advantages are summarized below:

§            Taxation at 10 per cent on net business profits

§            Lowest tax in the EU and 4.25 per cent tax rates until 31 December 2005 for those established before 31 December 2001

§            No tax on dividend income

§            No withholding of tax on dividends paid to non-resident shareholders

§            No tax on gains from sale of shares and securities

§            Full capital gains tax exemption on capital gains, except on the sale of immovable property situated in Cyprus

§            A wide network of double tax treaties

§            Membership of most international organisations and maintenance of friendly relations with the majority of developing and developed countries

§            Geographic location at the cross-roads of Europe, Asia and Africa

§            Low set-up and running costs

§            Highly qualified professionals

§            Freedom from exchange control

§            An excellent telecommunication system

§            Social, cultural and recreational facilities

§            Pleasant climate

The Cyprus government’s positive attitude towards international business in Cyprus, and its liberal and constructive approach, have contributed significantly to the development of Cyprus as a commercial, financial and business centre.

International business regulations

As such, they need not obtain any Central Bank of Cyprus permit to set up an entity in the island.  In the case of non-EU residents, the Central Bank of Cyprus permit is still required.  This imposes certain conditions regarding beneficial ownership, business activities, financial arrangements and reporting procedures with which the non-EU resident investor must comply:

§            International business entities are not allowed to derive any income from within Cyprus, either in Cyprus pounds or foreign exchange, by supplying any goods or services on the island to residents or non-residents except with a Central Bank permit.

§            International business entities must submit annual audited financial statements to the Central Bank of Cyprus.  These financial statements must be audited by accountants practicing in Cyprus and licensed as auditors under the Companies Law.

Establishment of a limited company

EU residents must file an application to the Registrar of Companies for the formation of a limited liability company.  The Registrar of Companies requires the following:

•    To approve the name of the company

•    Memorandum and articles of association must be submitted for filing.

In the case of non-EU residents, the Central Bank of Cyprus has to approve the establishment of the company and it requires the following conditions to be fulfilled, which are embodied in the requisite international business permit:

•    Business shall be confined to activities outside Cyprus

•    The ownership shall at all time be held benefi­cially by non-residents

•    Appropriate bank or other references should be provided for the beneficial owners

•    No finance shall be obtained from local sources other than from a Cyprus registered international banking unit

•    All local expenses shall be covered by funds to be imported from external sources

•    Audited financial statements shall be submitted annually.

Share capital requirements

The minimum authorised and issued share capital is CY£I,OOO. However, a share capital of CY£IO,OOO is recommended if the company will be maintaining offices in Cyprus.

Shareholders

At least one  shareholder is required for whom the following information is needed:

•    Full name

•    Nationality

•    Address

•    Number of shares to be held

•    The shares may be registered and held in the name of 

     nominees, if required.  No bearer shares are 

     allowed.

Appointment of directors

From a tax planning point of view, it may be important that the company's management and control is from Cyprus.  If this is the case, it is rec­ommended that the majority of directors appoint­ed should be Cyprus residents. The following information is required for each director:

•    Full name

•    Nationality

•    Address

•    Occupation

Appointment of secretary and registered office

 The existence of a secretary and a registered office address are mandatory and secretarial companies are allowed to act as secretaries for international business companies.

Required period of formation

The formation and registration procedures are normally completed within a period of one week.

Formation, annual and administrative costs

Total formation costs for a company with an authorised share capital of CY£10,000 including all out-of-pocket expenses are likely to be in the region of US$2,600. Annual domiciliary costs required for running a company, i.e. directors, secretary, nominee companies and registered office address are approximately US$400 each. Professional fees are based on the time spent and the level of the accountant/ consultant involved.

Establishment of a business partnership

The formation and registration procedure to set up an international business partnership is similar to that of an international business company.  Partnerships are not very often used, because of the disadvantage of the partners having unlimited liability.

Where investors require limited liability, it is possible to set up a limited liability partnership.  Under this set-up, individual partners can be limited liability partners, while a Cyprus international business company can be the general partner with unlimited liability as far as the partnership is concerned.

Partnership documents

The partners should have full partnership docu­ments, upon the registration of the partnership. These documents normally comprise:

•    Certificate of registration

•    List of partners and their authority to bind the partnership

•    Letterheads, invoices and other  partnership stationery

•    Any other information and documentation per­taining to the partnership's activities from the date of its establishment.

Formation and other costs

The formation costs for a partnership including out of pocket expenses such as stamp duties are in the region of US$2,000. Fees for professional services for the administration of the partnership are based on the actual time spent and the level of staff involved.

Establishment of a business branch

To set up a business branch, an application must be made to the Registrar of Companies and the Central Bank of Cyprus in the case of non-EU applicants as for an international business company.  Within one month of establishment, the branch must also file the following documents and information with the Registrar of Companies:

•    Certified copy of the charter, memorandum and articles of association or other instrument defining the constitution of the company (translated into Greek)

•    Particulars of the directors and secretary of the branch

•    Name and address of at least one person resi­dent in Cyprus, authorised to accept, on behalf of the branch, any notices required to be served.

The above documents must be certified and apostiled in the country of origin by a notary public.  Alternatively, certification is required both by a notary public and the consul of the Republic of Cyprus in that country.

Formation and other costs

The formation costs for a business

branch are in the region of US$2,600. Fees for professional services for the administration of the branch are based on the actual time spent and the level of staff involved.

Employment of expatriate personnel

International entities intending to employ expatri­ate staff are subject to several additional condi­tions:

•    They must operate from suitably distinct prem­ises, not part of a private residence, equipped with normal office and telecommunication facilities and staffed with full-time personnel.  International busi­ness entities with common ownership of fifty per cent or more may share a fully-fledged office and
offer administrative services to each other in
Cyprus.

•    They must submit a confidential annual report, summarising their current status together with audited financial statements, to the Central Bank of Cyprus within six months from the end of thefinancial year.

•    They and their expatriate personnel must each keep a Local Disbursement Current (LDC) account with an onshore bank for the purpose of meeting all their payments to Cypriot residents.

•    LDC accounts may only be credited with amounts transferred from

•    convertible accounts held in Cyprus or abroad.

As from the accession of Cyprus in the EU, the above will no longer hold in the case of EU citizens who are free to settle and work in Cyprus.

Direct  investment in local enterprises

EU investors are allowed 100 per cent equity participation in any enterprise in Cyprus without any minimum level of capital investment.  Non-EU investors may participate in the equity of a local company from 49 per cent up to 100 per cent, depending on the nature of the business sector with minimum prescribed levels of investment.  There are still, however, restrictions on foreign investments in the banking sector and in land development.

Government incentives

The government provides various tax incentives for investments carried out in certain sectors of the economy, including thematic parks, IT and technology related projects.

Sources of finance

There is a great number of local banks as well as international banking units operating in Cyprus offering a very wide range of banking services and in particular financing corporate and individual needs.

The Cyprus Stock Exchange, which was established in 1996, provides an additional funding source for companies wishing to list their shares publicly.

Introduction

 The term “International Banking Unit” (“IBU”) is not a legal term but it is used to describe those banks which are owned by non-residents and which deal primarily with non-residents and in currencies other than the Cyprus pound.

International banking expertise

HLB Afxentiou & Partners is closely involved in providing services to international banking units and, indeed, it has a large clientele.  In this respect, the firm has built up a wealth of experience in the field of banking.

Application for a banking licence

Applications for establishing an IBU must be submitted to the Central Bank of Cyprus in accordance with the provisions of the Banking Law of 1997. Such applications should be supported by relevant documents and information prescribed by the 

Central Bank of Cyprus. Banking business licences are granted subject to certain conditions, which depend on various factors such as the applicant’s intended legal form, its financial standing and its international reputation.

IBUs - subsidiaries and branches

IBUs can be established in Cyprus either as sub­sidiaries or branches of foreign banks. The main differences between a 

branch and a subsidiary company are as follows:

•    The supervision exercised by the Central Bank of Cyprus on the banking operations of a branch may be less stringent 

than in the case of a sub­sidiary.

•    If the IBU is a branch, it is not subject to any liq­uidity or capital to risk asset ratios. An IBU oper­ating as a subsidiary of 

a foreign bank will normally be subject to such ratios.

IBUs - representative offices

These offices do not obtain a banking licence and are not allowed to carry out banking business. Their function is to provide a liaison between clients and their head office or branches abroad.

As in the case of IBUs, the Central Bank of Cyprus will only grant a permit for a representa­tive office to recognised banks enjoying a good reputation internationally.

ABUs

Administered Banking Units (ABUs) may only be established as branches or subsidiaries of foreign incorporated banks, to be registered in Cyprus. ABUs are required to carry on banking business in their own name, but their day-to-day administra­tion should be carried out, on their behalf, by another bank known as the "administering bank" which is already licensed by the Central Bank to operate in or from within Cyprus.

Applications for the establishment of ABUs are the same as those for IBUs. ABUs should operate wholly on an international basis and their dealings should be with non-residents of Cyprus and denominated in currencies other than the Cyprus pound.

ABUs are expected to operate as if they had a full physical presence in Cyprus. Their books and records should be kept in Cyprus and all docu­ments and correspondence relating to their bank­ing business should be in English.

Taxation of IBUs

IBUs are subject to corporation tax at 10 per cent.

Of specific relevance to IBUs is the absence of any withholding tax on interest paid to non-resident depositors.

An IBU is classified as non-resident for exchange control purposes. As such, it can oper­ate freely without any exchange control restric­tions provided, of course, it does business in for­eign currency and with non-residents only.

Anti-money laundering measures

Banks as well as other persons engaged in financial business are required to adhere to prescribed procedures for customer identification, record keeping and internal reporting, as well as to ensure that employees handling financial business are aware of their obligations under the Law and receive adequate training designed to assist them in recognizing money laundering transactions.  They are also required to appoint properly qualified persons as “Money Laundering Compliance Officers”.  Failure to comply with these requirements amounts to an offence punishable with imprisonment, a fine or both.

The Central Bank of Cyprus’ requirements under the provisions of the Prevention and suppression of Money Laundering Activities Law are as follows:

·            Banks should seek and obtain satisfactory evidence of a customer’s identity at the time of establishing an account relationship and prior to the execution of any banking transactions.

·            The identification of both personal and corporate customers (companies) should be made by obtaining documents issued by reputable sources.

·            Identity of the natural persons who are the company’s ultimate beneficial shareholders and controllers and in all cases the identity of all signatories to the account.

·            Banks are prohibited from accepting cash deposits in foreign currency notes from a customer or group of connected customers in excess of US$100,000 or equivalent per calendar year without the prior written approval of the Central Bank of Cyprus.

Investment Firms Act 2002

The Investment Firms Act 2002 governs the setting up and operation of CIFs.  The Cyprus Securities and Exchange Commission (“SEC”) is their regulator.

Application

A company wishing to be granted an authorization to operate as an Investment Firm must submit an application to SEC in which detailed information must be provided on the following:

(i)         Services to be provided

(ii)        Applicant’s organisational structure

(iii)       Place of establishment

(iv)      Main shareholders

(v)       Main members of staff

(vi)      Methods and procedures ensuring the applicant’s sound operation

(vii)     Representatives or independent agents with whom the applicant intends to cooperate

(viii)    Applicant’s financial situation

(ix)      Agreements for the usage of the place of establishment and premises

(x)       Statements on the origin of funds for participation in the share capital

(xi)      Plan of operations procedures

(xii)     Manuals for computer systems

(xiii)    Deposit of share capital in a blocked bank account

(xiv)   General information such as the experience and qualifications of shareholders, directors and management, creditworthiness, auditors, past convictions, etc.

Authorisation

The following substantive conditions apply for the granting of authorization by the SEC to operate as a CIF:

(i)         the organizational adequacy and administrative structure of the applicant,

(ii)        the efficiency of the internal control mechanism,

(iii)       the adequacy of staffing,

(i)         the suitability of the applicant’s shareholders,

(ii)        the technical and financial resources of the applicant,

(iii)       the capital adequacy

The SEC shall inspect the application file and shall carry out interviews with the applicant on matters requiring clarification and further explanation.

Activities/operations

CIFs are authorized to carry out the following activities, which are distinguished between main investment services and non-core services.  Main investment services include the following:

(i)         reception and transmission of orders for carrying out of transactions on behalf of third parties in relation to financial instruments such as transferable securities and collective investment schemes, money-market instruments, financial futures contracts, FRAs, interest rate, currency and equity swaps, options, etc.

(ii)        trading of financial instruments for own account,

(iii)       management of investment portfolios for clients where such portfolios, include any of the financial instruments referred to above,

(iv)      underwriting issues and disposals of financial instruments,

(v)       financial advice to clients.

Non-core services include:

(i)         safekeeping or administration of financial instruments,

(ii)        safe custody services,

(iii)       granting of credits or loans to third parties (clients) for the carrying out of transactions involving financial instruments, where the firm which grants the credit or loan participates in the said transactions,

(iv)      services related to underwriting,

(v)       investment advice relating to financial instruments or to capital structure and business strategy

(vi)      foreign exchange services connected with the provision of investment services.

Minimum share capital requirement

The Investment Firms Act 2002 stipulates the minimum fully paid up share capital of a CIF as follows:

i.                 Where the CIF has been granted authorization for the reception and transmission, on behalf of its clients, of orders in relation to financial instruments and/or the execution of clients’ orders in relation to financial instruments only, the minimum fully paid up share capital shall amount to at least 125,000 Cyprus pounds (approximately US$250,000).

ii.                Where the CIF’s authorization includes the investment service of managing client investment portfolios, the minimum fully paid up share capital shall amount to at least 150,000 Cyprus pounds (approximately US$300,000).

iii.               Where the CIF’s authorization includes the sale or purchase of financial instruments for own account and/or the provision of underwriting services in respect of issues of financial services, the minimum fully paid up share capital shall amount to at least 600,000 Cyprus pounds (approximately US$1,200,000).

The share capital must be deposited in a blocked bank account in Cyprus and cannot be withdrawn at any time during the duration of the licence.

Duration of the examination of the file submitted by an applicant

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The sole object of an ICIS is the collective invest­ments of funds of the unit holders.

ICISs can take the following legal forms:

•    International fixed capital company

•    International variable capital company

•    International unit trust scheme, and

•    International investment limited  partnership

ICISs are taxed as follows:

•    Profit derived by ICISs from the disposal of gilts, shares, bonds or other securi­ties whether or not listed in the Cyprus Stock Exchange is exempt from tax. 

•    The income from securities (dividend, interest) not listed on the Cyprus Stock Exchange is taxed at 10 per cent.

•    The income from securities (dividends, interest) listed on the Cyprus Stock Exchange is exempt from taxation in Cyprus.

Furthermore:

•    There is full exemption from tax on the profit of individuals, partnerships and companies provid­ing services of managers or trustees to such schemes.

•    ICISs set up in Cyprus can utilise the double tax treaty network of Cyprus.

The framework and regulations as well as the tax regime governing ICISs are currently under review.

Formation and other costs

The formation costs for the establishment of an ICIS are in the region of US$3,500. Fees for professional services of an administrative nature are based on the actual time spent.

Introduction

An international captive insurance company is an insurance company which has its own captive busi­ness emanating from the parent company or asso­ciation of companies or individuals.  It is a sub­sidiary company established by a non-insurance parent company for the purpose of participating in the risks of the parent and its associates. It is owned beneficially by non-residents of Cyprus and carries on business exclusively outside of the island. The risks assumed by the captive can be all, or part of those which could otherwise have been insured in the normal way.  Captives can also be used to insure risk for which insurance coverage is not generally obtainable or where the cover avail­able is costly. There are also certain types of risks which are more suitable for captive treatment than others, for example, those related to property.

Formation

Applications should be made to the Superintendent of Insurance, the Council of Ministers and the Registrar of Companies. The incorporation process takes about ten days. The application must be accompa­nied by a business plan or a feasibility study of the proposed captive and certain conditions must be fulfilled:

•    A minimum subscription of share capital of CY£IO,OOO

•    Adequate cover regarding claims
Adequate cover means that re-insurance or adequate guarantees by the parent company must exist for covering insurance claims by third parties, notwithstanding any other claims by the parent or associated companies. Alternatively, a bank guar­antee of at least CY£IO,OOO from a bank in Cyprus will suffice.

•    The captive not to obtain finance from local sources.

•    All local expenses of the captive to be covered by funds to be imported from external sources.

•    A captive can underwrite, at acceptable costs, risks for which it is extremely difficult to obtain coverage at an economical price on the conven­tional insurance market.  Such risks often include loss or damage resulting from flood, earthquake, labour strikes, pollution and war.

•    A captive insurance company has the advantage of direct access to reinsurance markets which enjoy much lower acquisition costs than direct insurers and can therefore provide risk coverage at a lower cost.

•    Tax is levied on chargeable annual profits at
10 per cent. Interest received on local bank deposits is not taxable and there is no withholding tax on divi­dends.

•    There is no exchange control for captives.

•    Maintenance of the solvency margin is not
required provided that the captive is reinsured in full in respect of third party policies or has guaran­tees.

•    Captives are not required to maintain any deposits with the Central Bank of Cyprus.

•    There is no requirement for captives to invest in approved investments.

Formation and other costs

The formation costs for an international captive insurance company with an authorised share capital CY£10,000 including out of pocket expenses are in the region of US$3,500. Fees for professional services of an administrative nature are based on the actual time spent.

A trust is established by an individual "the settlor" and is a means whereby property "the Trust Property" is held by one or

more persons "the Trustees" for the benefit of another or others "the Beneficiaries" or for specified purposes 

Trusts have traditionally been very important tax planning devices. Even today, a very high pro­portion of tax saving schemes involves trusts.

International trusts are governed by the International Trusts Law of Cyprus.  International trusts are not taxed in Cyprus. 

In fact, Cyprus international trusts enjoy important tax advantages, providing significant tax planning possibilities.

The following advantages are indicative of the possible options for tax minimisation.

•    All income, whether trading or otherwise, of an international trust (ie a Trust whose property is located and income is

derived from outside Cyprus) is not taxable in Cyprus.

•    Dividends, interest or other income received by a trust from a Cyprus international business com­pany are neither taxable nor subject to withholding tax.

•    Gains on the disposal of the assets of an international trust are not subject to Capital gains in
Cyprus.

•    An alien who creates an international trust in
Cyprus and retires in Cyprus is still exempt from tax if all the property settled and the income earned is abroad, even if he

is a beneficiary.

•    The assets of an international trust are not sub­ject to estate duty in Cyprus.

•    Trusts are usually used by wealthy individuals
for the purpose of protecting their estate from
inheritance or capital gains taxes in their home
country. They can also be used by expatriates, set­tling into a trust before repatriating, assets
acquired while working abroad in order to protect such
assets from the tax net of their home country.

Formation and other costs

The formation costs for an international trust in Cyprus are in the region of US$2,000. Fees for professional services of an administrative nature are based on the actual time spent.

 INTERNATIONAL TRUSTEE SERVICES COMPANIES

The term ITC is used to denote either a branch of foreign incorporated company or an international company incorporated in Cyprus the main object of which is to act as a professional trustee.  A professional trustee is an international business enterprise, which is authorized by the Central Bank of Cyprus to offer trustee services to the public at large.

Normally, the Central Bank of Cyprus accepts applications for the establishment of an ITC from legal persons established in overseas jurisdictions, where, in the opinion of the Central Bank of Cyprus there is adequate regulation, and which already provide either trustee or financial or banking services to the public at large in their country of incorporation.

ITCs may make use of the 1992 International Trusts Law which provides for the formation of international trusts.  This Law offers considerable incentives to non-residents clients of ITCs, since apart from the tax incentives, confidentiality or liquidation of his property in any action or proceedings against the settlor at the suit of his creditors.

Nicosia headquarters

Contact:

Costas A Afxentiou, Managing Partner Vassos C Theophylactou, Partner Polyvios A Polyviou, Partner

Marios F Hadjihannas, Tax Partner Stelios C Prodromitis, Partner

Synyka Building

Corner of Nikis Avenue & Kastoros Street

CY-1087 Nicosia, Cyprus

P 0 Box 16006, CY-2085 Nicosia, Cyprus

telephone+357 22513533

facsimile+357 22513330

email: nicosia@hlb.com.cy

website: www.hlb.com.cy

Limassol office

Contact:

Costas A Afxentiou, Managing Partner

Emelle Building

2nd Floor, Office 21

135 Arch. Makarios III Ave.,

CY-3050 Limassol, Cyprus

P 0 Box 53791, CY-3317 Limassol, Cyprus

telephone+357 25736433

facsimile +357 25736257

email: limassol@hlb.com.cy

Larnaca office

Contact:

Nick Plastiras, Associate Partner

Livadhiotis Building No 5

Office Suites 104-106-107

10 Gr. Afxentiou Ave.,

CY-6023 Larnaca, Cyprus

P 0 Box 42631, CY-6501 Larnaca, Cyprus

telephone +357 24620600

facsimile+357 24620601