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.