The Country

• The estimated population is 746.000 of which 85 percent belongs to the Greek Cypriot community and 12 percent to the Turkish Cypriot community.

• Greek and Turkish are the official languages of the Republic but English is widely spoken and understood, and is regularly used in commerce and government.

• The structure of government is similar to that in other western style democracies where human rights, political pluralism and private property are safeguarded.

• It is a member of the United Nations and its specialised agencies, the Council of Europe and the British Commonwealth.

• As of May 2004 it is a full member of the European Union.

• It has a free market economy and per capita GNP, at approximately USD14.000, is one of the highest in the Mediterranean.

• The legal tender is the Cyprus Pound. Its ultimate market maker is the Central Bank which aims to keep it stable against the Euro. Commercial banking arrangements and practices follow the British model.

• As far as telecommunications are concerned, Cyprus is one of the most developed countries in the world.

• It maintains public elementary and secondary school systems of a very high standard. Also, in every city there exists a selection of good quality private schools which are addressed mainly to the needs of foreign speaking pupils. It ranks among the leading countries of the world in terms of the proportion of university graduates. In 1992 the University of Cyprus opened its doors to its first students and currently has 4 faculties.

• The Cyprus legal system is based on the same principles as those applicable in the United Kingdom and all statutes regulating business matters and procedures are based essentially on English law. English case law is cited in the Cyprus Courts and is of persuasive authority. Most members of the Cyprus judiciary and many leading lawyers are English trained barristers. Most laws are translated into English.

Private Company Limited by Shares

The relevant legislation is Cyprus Companies Law, Cap. 113, which is virtually a copy of the English 1948 Companies Act. A private company is one which by its articles:

• Restricts the right to transfer its shares
• Limits the number of its members to 50
• Prohibits any public subscription to shares or debentures

The Companies (Amendment) Law of 2000 (Law 2(I)/2000) introduced single-member companies. The Companies (Amendment) (No. 3) Law of 2000 (151(I)/2000) introduced new provisions as to the validity of transactions of companies and as to the information which must be included in the official documents of companies. The Companies (Amendment) Law of 2001, Law 76(I) of 2001 provided for a new system for the certification of companies’ auditors and for the recognition of Bodies of Auditors and the grant of approval to auditors with foreign qualifications and also the recognition of accountants' companies by the Council of Ministers.

When 100% foreign-owned, a private company used to be referred to as an 'offshore company', although recently the expression International Business Company has come into favour. However, as from 1st January, 2003, an offshore company (IBC) no longer has a separate taxation status, and is taxed according to the same principles as a regular company. IBCs are now allowed to trade inside Cyprus. However, a pre-existing IBC which makes an irrevocable commitment not to trade inside Cyprus until 2006 is able to claim the existing low tax rate for the three years 2003, 2004 and 2005.

In order to form a foreign-owned company, a bank reference and copy of the owner's passport is required for the registration. The bank reference must be issued by a bank included on the Central Bank of Cyprus's list of qualifying banks.

The following information will be required for the formation of a standard Cyprus offshore company:

• Name of the company with two alternatives;
   
• Objects of the company (description of principal activities of a Cypriot off-shore company);
   
• Capital: a minimum of CYP 1,000 for a company with no offices in Cyprus, or CYP 10,000 for a company with offices in Cyprus. Payment of the capital can be extended in time.
   
• Full personal details of shareholders will be necessary.
   
• Full personal details of directors (minimum two) will be necessary.

Registration of a standard Cyprus offshore company takes three weeks typically.

In Cyprus, a company's formation documents and its annual return must be filed in Greek; the same applies to accounts when these need to be filed.

Amendments made in 2003 to the Companies Law as part of the EU accession process included the following changes:

• Every company must prepare a full set of financial statements in accordance with International Financial Reporting
  Standards, and every parent company that has one or more subsidiaries, other than a company which is itself a wholly owned subsidiary, should present consolidated financial statements.
• Under article 120, every company must complete an annual return within a period of 42 days from the date of its Annual General Meeting and must file immediately with the Registrar of Companies a copy of the annual return, signed by a director and the company secretary. Under article 121, the annual return filed with the Registrar of Companies must be accompanied by the full set of financial statements.

Exempt Private Company

A private company limited by shares is exempt if:

• No body corporate other than another exempt company holds any of its shares or debentures
• The number of debenture holders is not more than 50
• no body corporate is a director of the company.

The main advantages of an exempt private company are:

• It need not file accounts with its Annual Return
• It is not subject to the statutory restrictions on loans to directors

Public Company Limited by Shares

Any company registered under the Act whose Articles do not contain the restrictions applicable to private companies is a public company. A public company may obtain a listing on the Cyprus Stock Exchange.

Company Limited by Guarantee

As in England, companies limited by guarantee are normally used only for charitable or non-profit-making purposes. Apart from their share structure, they are similar to other types of private company and also fall under the Cyprus Companies Law.

Branch of Overseas Company

Any overseas company may operate in Cyprus as a branch. Within one month of establishment of such a branch, the following documents must be filed (in Greek) with the Registrar:

• A certified copy of the Memorandum and Articles of Association
• A list of the directors and secretary
• The names and addresses of persons residing in Cyprus authorized to accept all notices on behalf of the Company.

Companies with branches in Cyprus must also file their accounts annually, together with certified Greek translations.

Company law changes implemented in 2003 as part of the EU accession process include the following rules covering branches:

• Every foreign corporation that maintains a branch in the Republic must submit, for every financial year, copies of its financial statements as presented in its last AGM and published in accordance with the laws of the country of incorporation, except that EU corporations that publish audited financial statements in their countries of registration and submit these financial statements to the Registrar of Companies are exempted from preparing and submitting separate branch financial statements.

General Partnership

Partnerships fall under the Partnerships and Business Names Law Cap 116, basically similar to the equivalent English legislation. They must be registered with the Registrar of Partnerships within one month of formation, giving name, purposes, place of business, full particulars of the partners etc. Foreigners may belong, but need exchange control consent.

A general partnership may have between 2 and 20 individual members (up to 10 only, if it intends to conduct banking business).

Partnerships do not need to file accounts or to be audited.

Limited Partnership

These are similar to general partnerships except that they have one or more general partners with unlimited liability and one or more limited partners (whose liability is limited to the amount declared in the partnership return filed with the Registrar).

Limited partnerships, used in conjunction with offshore companies offer good tax planning possibilities.

Sole Proprietorship

A Sole Proprietorship falls under the Partnership and Business Names Law Cap 116, being essentially similar to the English sole partnership. It is subject to broadly the same rules as a General Partnership.

A sole proprietor has unlimited liability for his debts, and any business name (other than his own) must be registered with the Registrar of Partnerships.

Local Trusts
A 'local trust' is governed by the Cyprus Trustees Law Cap 193, which closely follows the English Trustee Act 1925. The settlor and beneficiaries are normally residents of Cyprus, and the trust and its property are subject to exchange controls, although these are vestigial since Cyprus joined the EU.

Offshore Trusts
Offshore Trusts are the same as local trusts, but their beneficiaries must be non-resident, and all the trust's activities must be outside Cyprus. As with 'offshore' companies, the special tax status of offshore companies has ceased with Cyprus's accession to the EU.

International Trusts
The International Trusts Law of 1992 brought Cyprus trust law into line with that of other major international trust jurisdictions. Both settlor and beneficiaries must be non-resident, although one Trustee must be Cypriot. International trusts may have many tax and legal advantages.

The offshore regime in Cyprus has changed as part of the island's accession to the EU, and as a result of agreements with the Organisation for Economic Cooperation and Development (OECD). Cyprus was excluded from the OECD's June 2000 'harmful' tax haven blacklist in return for pledging a commitment to amend its tax practices.

In July, 2002, as part of the Income Tax Act No. 118(I) of 2002, Parliament approved a uniform 10% corporate tax rate, to apply to both onshore and offshore companies, plus a 2% levy on wage bills (meant to subsidise pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, the rules are complex.

The 10% corporate tax gives Cyprus the lowest rate in the EU, after Ireland (12.5%), with the exception of the Isle of Man, which has announced a nil rate - but the IOM isn't really in the EU anyway for most purposes.

The new regime introduces a 'residence'-based system of taxation, and was in operation from 1st January 2003.

Further proposals include the exchange of tax and finance information, as well as the signing of double tax treaties, between Cyprus and additional OECD member countries. Cyprus has proposed to maintain its company and trust management regime, although the identity of the beneficiaries will have to be disclosed to the tax authorities when a company is registered or when a change of ownership takes place. The new rules came into effect from December 31, 2003 for new companies registering in Cyprus, while those that are already registered on the island will have until December 31, 2005 to comply with the new requirements.

After the EU finally agreed its Tax Directive in June, 2003, the Commission said it intended to give the ten acceding states, of which Cyprus is one, until 2007 to implement the Directive, which includes a 'Code of Conduct' on 'harmful tax practices' and rules to avoid the double taxation of royalty and interest payments. However, a statement released by the Cypriot Ministry of Finance said that Cyprus would adopt the new code in full in 2004. The royalties and company interest directive was in place from January 2004, according to the ministry, which pointed out that it was already compliant with the Code of Conduct rules as a result of its recent tax reforms.

The remainder of this section describes the offshore regime prior to implementation of the changes outlined above. As far as taxation is concerned, it is now mostly of historical interest, except that offshore companies in existence before the end of 2002 are allowed to continue to make use of the 4.25% corporation tax rate until 2006 if they so choose.

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! It is again important that the Cyprus Limited (Holding) company meets all requirements of a permanent establishment according to tax laws:

·        Place of business management: A Cypriot must hold the business management, at least to the outside (nominee solution)

·        No bogus company in its sense, but a regular registered office (deliverable postal address, availability by telephone and fax during normal business hours, company sign). Any office or employees (commercially equipped business operation) are not required, since the freedom of establishment in the European Union is applicable

·        Bank account in Cyprus

If the member companies are non-EU companies, withholding tax is usually imposed in case of a flow of profits into the Cyprus Limited. This withholding tax varies greatly within the individual countries.