TIMKAS
CHARTERED ACCOUNTANTS
One of the main reasons why Cyprus has became a very popular jurisdiction for establishing a base for international business is the availability of a large number of double tax treaties. Many of the well-known international tax jurisdictions impose low or nil income tax on the company profits. However the problem with those jurisdictions is that they do not have double tax treaties. Cyprus offers a basket of incentives including the low tax on the net profits and the double tax treaties.
Most of the tax treaties follow the OECD model. The treaties aim to avoid double taxation of income earned in these countries. This is achieved usually by either exempting the income from tax, by providing a tax credit for the amount of tax paid in the other contracting country or by a reduced withholding tax.
WITHHOLDING TAX
One of the most important tools in the area of international tax planning is the use of the withholding tax rates specified in each of the double tax agreements.
Notes:
(1) 10% if received by a company holding directly 25% or more of the capital.
(2) 10% if received by a company holding directly 10% or more of the capital.
(3) 10% if received by a company holding at least 25% of the capital of the paying
company. However, if German corporation tax on distributed profits is lower that on undistributed profits and the difference between the two rates is 15%
or more, the withholding tax is increased from 10% to 27%. In all other cases the withholding tax is 15 %.
(4) 5% if received by a company holding directly 25% or more of the capital.
(5) Nil if received by a company controlling 50% or more of the voting power.
(6) If received by a company controlling less than 10% of the voting power, thus entitled to refund of excess Advanced Corporation Tax deducted in the U.K.
If company controls more than 10% of the voting power, it is not entitled to the refund.
(7) 5% if received by a company controlling 10% or more of the voting power.
(8) Nil on literary, dramatic, musical or artistic work
(9) Nil for literary, artistic or scientific work, film, and TV royalties.
(10) 5% on film and TV royalties.
(11) Nil if paid to a Government or for export guarantee.
(12) Nil if paid to the Government of the other State.
(13) Nil if paid to the Government of the other State, in respect of bank loans, in connection with the sale on credit of any industrial commercial or scientific
equipment or any merchandise.
(14) Nil if paid to a Government, banks or financial instructions.
(15) Nil if royalties are on literary, artistic or scientific work including films, TV films
or radio broadcasting.
(16) According to the personal tax rates 0-40%. First C 2,000 taxed at nil. If recipientof Dividends is a foreign corporation, any tax withheld under the provisions of
the treaties refunded on application by a foreign corporation to be made within six years from receiving the dividend.
(17) At the rate applicable in accordance with domestic law.
(18) Zero if received by a company holding at least 25% of the capital of the paying company.
(19) 10% on copyright of literary, artistic or scientific work including cinematography films, and films or tapes for TV or radio broadcasting.
** Withholding tax shall not exceed the tax chargeable on the profits out of which the dividends are paid.
Note: Dividends, interest or royalties are not subject to any withholding tax when paid by a Cyprus international business (offshore) company.
ROYALTIES
The definition of royalties includes the use or the right to use industrial commercial or scientific equipment. In addition most of the treaties do not require that the recipient of the royalties is the beneficial owner. Therefore this allows the use of Cyprus companies as a vehicle for sub-licensing/sub-leasing.
CONSTRUCTION AND ASSEMBLY PROJECTS
The treaties between Cyprus and the other countries provide that a construction or assembly project is not considered a permanent establishment if it is for a limited period. Therefore a Cyprus company could undertake a contract for a project of this nature without being considered that it has established a permanent base in the other country therefore not subject to any tax in the other country.
That limitation period means:
CYPRUS DOUBLE TAX TREATIES
Double taxation treaties with Kazakztan and Finland are currently being negotiated.
Notes:
a. This rate applies to individual shareholders regardless of their percentage of shareholding. Companies controlling less than 10% of the voting shares are also entitled to this rate.
b. 1. 5% on TV and film royalties.
2. 5% on film royalties.
3. 5% on patent royalties.
c. 10% if the recipient company holds at least 10% of the capital of the paying company.
d. 15% if received by a company controlling less than 25% of the voting power.
e. 15% if received by a company controlling less than 10% or more of the voting power.
f. 10% if received by a company controlling 10% or more of the voting power.
g. 1. Nil if paid to the government of the other state.
2. Nil if paid to a government, bank or financial institution.
3. Nil if paid to a government or for export guarantee.
h. 1. If controlling 25% or more of the voting power.
2. If controlling less than 25% of the voting power.
i. Nil on literary, dramatic, musical or artistic work.
j. If investment is less that 200,000 dividends are subject to 15% withholding tax that is reduced to 10% if the recipient company controls 25% or more of the paying company.
k. No withholding tax for interest on deposits with banking institutions.
l. This rate does not apply if the payment is made to a Cyprus company by a Bulgarian resident owning directly or indirectly at least 25% of the share capital of the Cyprus company.
m. 5% if received by a company controlling less than 50% of the voting power.
n. The treaty provides for withholding taxes on dividends, but Greece does not impose any withholding taxes in accordance with its own legislation.
o. 10% for payments of a technical, managerial or consulting nature.
p. 10% if dividend paid by a company in which the beneficial owner has invested less than US100,00.
q. 7% if paid to a bank or financial institution.
r. 10% on interest received by a financial institution or when it relates to sale on credit of any industrial, commercial or scientific equipment or merchandise.
PROFESSIONAL SERVICES AND SALARIES
The Cyprus treaties provide that individuals of one country (say Cyprus) that provide services in another country (say Russia) will not be subject to the tax in the other country (Russia).
• Provided he stays in the other country (Russia) less than 183 days.
• The employer is based in Cyprus (or anywhere else) but not based in Russia.
Many of the treaties also allow that the resident of the country can stay and work in the other country up to 365 days without tax obligations provided he/she is providing technical specialist services.
In addition, wages paid to Cyprus employees by the companies that are exempted because they provide construction, assembly or international transport services in the other country are also exempt.
All the above exemptions also apply, the same way, to employees of the contracting state that work in Cyprus.
TAX CREDITS AND TAX SPARING CREDITS
A tax credit allowed by the foreign country for the tax paid in Cyprus will not exceed the tax actually paid in Cyprus.
However some treaties provide that any tax "spared" (tax reduction) in Cyprus is still credited against his tax liability in his country.
Tax sparing credits are allowed in the following treaties: Canada, Czech Republic, Slovakia, Denmark, Germany, Greece, Ireland, Italy, Romania, Sweden, United Kingdom and Yugoslavia.
INTERNATIONAL BUSINESS COMPANIES AND THE USE OF DOUBLE TAX TREATIES
All the tax treaties apply to Cyprus companies with the exception of some restrictions by some treaties. The treaty with United Kingdom does not apply on dividend, interest and royalty income. The treaty with France does not apply to dividend, interest, royalty and shipping profits. The treaty with Germany does not apply to shipping profits if there is more than 25% non-Cypriot participation, and finally the treaties with Canada and USA do not apply to international entities.
However irrespective of the above exemptions there is no withholding tax deducted by the Cyprus international business companies on dividends, interest and royalty payments to anywhere in the world.