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Company Formation Cyprus
Cyprus has double taxation agreements = DTA with most countries. Freedom of establishment in the European Union is applicable. From a European point of view, NO commercially equipped business operation is required for approval of a permanent establishment regarding the tax legislation in Cyprus, and neither is the proof of active business in Cyprus. The profit tax in Cyprus amounts to only 10%, irrespective of the amount of profits. Distributions of profits are not taxed.
Company Formation Cyprus: Corporate Income Tax Corporate
Incomes for all companies are liable for 12,5 % annual Corporate Income Tax, this is the lowest rate in the EU. An Exemption to this rule are ship management Companies, who are liable to 4.25% annual Income Tax. Corporate expenses are tax deductible (Tax is levied on Net Income) with the exemption of entertainment expenses (hotels, restaurants, bars etc) for which there is an annual ceiling. Expenses that surpass the ceiling are not tax deductible. Corporate losses can be brought forward for a number of years, and thus reducing the tax burden of the following year. Please also note that corporate profits fall under double taxation – taxed at the corporate level when the company earns them, and taxed again in the personal level (Personal Income Tax) when the corporation distributes its profits as dividends (Under Special Defence Contribution).
Cyprus Limited as Holding: no taxation!
Cyprus Holding (legal form of a Limited company) is not subject to taxation. In addition to the characteristics of a permanent establishment according to tax laws, it requires pure holding tasks and that the shareholders/co-partners perform active operations in their respective countries and are taxed or that the right of taxation is utilised, respectively. Example: an entrepreneur has independent enterprises in the form of limited liability companies in several countries, i.e. for example, an English Limited, a German GmbH and a Spanish S.I. All companies carry out active business in their countries and are subject to tax or the right of taxation is used, respectively. Now a Cyprus Limited is established, which becomes shareholder in the foreign companies. The foreign companies’ profits flow tax-free into the Cyprus Limited. Provided that they are European companies (directive on parent companies and their subsidiaries in the European Union), no withholding tax is imposed in the countries of the co-companies. That means that any profits may be received completely tax-free!
Basic considerations and the way to go
To fulfil a legal solution and benefit from Cyprus low taxes, one should consider the following key issues. Most countries have laws that prevent the abuse of incorporation practices, we choose to distance ourselves from so-called cheap company formation, in which only a mailbox is established in the foreign country and/or, as part of a nominee scheme, a person who is not even an attorney or tax adviser enters into hundreds of nominee relationships. These types of structures become quickly transparent to local financial authorities and often result in a disaster for the client.
Company Formation Cyprus: Place of management
If all income earned worldwide is to be taxed in the foreign country, the requirements for a “permanent establishment” in accordance with the DTA rules must be fulfilled. This is essentially the “place of management.” There are several structural options for this purpose:
In addition to these solutions, there is also the option of appointing an attorney/tax adviser/employee from the formation advisory office in the company’s country of residence as General Manager, i.e., with an employment contract (no nominee relationship) and a “regular salary.”
The “regular salary” amount must be line with income levels in the company’s respective country of residency and would need to be between EUR 600 - EUR 1,800 per month, depending on required expenses/time.
This internal relationship can be set up such that the foreign-based General Manager operates only under instruction, or the client becomes a secondary director, in which case both parties possess only joint signing authority. In special cases, “internal agreements” may be established in which the foreign-based General Manager “reduces” a part of his salary, if necessary and advisable.
As a matter of course, the foreign-based General Manager declares his income when submitting his tax return and pays wage taxes and/or social security contributions in accordance with the laws of his country of residence. The foreign-based General Manager's income is considered part of the foreign company's expenses and is correspondingly deductible.
In many countries (also Cyprus), a legal entity may be appointed as the General Manager, which is often more useful for both sides. In these cases, a General Manager's Contract is signed between the foreign company and the "Director’s Limited Company.” No nominee relationships come into play in this scenario.
These laws may be circumvented by establishing in the foreign country a production site, a mine, a quarry or any other site for the extraction of natural resources or by conducting construction or installation activities over a period longer than 12 months. In accordance with Article 5 of the DTA, these are then considered permanent establishments in the foreign country, regardless of the company director’s identity or country of origin.
Company Formation Cyprus: Regular Place of Business in the foreign country
A “mailbox” is never considered an ordinary place of business in the foreign country. Rather, the company in the foreign country must be reachable by mail, including certified mail, and by phone. The minimum requirements include a deliverable postal address (including for certified mail), accessibility by telephone during normal business hours, accessibility by fax. So-called “Registered Offices” are generally not sufficient, as these are readily apparent to local financial authorities, or the foreign company’s country of residence may deny the issuance of a tax ID number (for example, in the UK). Along with Registered Offices, we offer so-called "Head Office solutions" that provide credible documentation for an ordinary place of business in the foreign country.
Company Formation Cyprus: Our services
Aligning to the marks set above, we offer the following services on Cyprus: