This is an introductory note dealing with the main features of the Tax reform (the “New Tax Regime“) which will inevitably affect in one way or the other and either immediately or after 31st December 2005, Cyprus offshore Companies.
The main points arising from the Tax Reform which are relevant to an existing Cyprus offshore company are the following:
A Cyprus Offshore Company shall be entitled, if it so opts, to continue in effect to be governed by the tax regime which was until now applicable (the “Previous Tax Regime“) until the 31st December 2005. After the said date the rules set out in paragraphs 2 or 3 hereunder will apply. In order for such company to be so entitled it must exercise its option and once such option is exercised the Previous Tax Regime will apply to such company for the entire period until 31st December 2005 and there will be no possibility to change in the meantime. The Law does not provide whether the option will be exercised by default or whether a statement in this respect will be required. It is expected that Cyprus Tax Authorities will soon issue a circular setting out the terms under which the option may be exercised. An existing Cyprus offshore company shall only be entitled to opt for the application of the Previous Tax Regime if it had income in the year 2001. It follows that if the company was dormant and had no income in 2001 or if it was incorporated after 1st January 2002 this option is not available.
If a company does not exercise its option to be governed by the Previous Tax Regime or in case the company does not qualify for this option as explained above, then the New Tax Regime will apply to such company as from 1st January, 2003. Under the New Tax Regime if the company is not managed and controlled in Cyprus or in case it ceases to be managed and controlled in Cyprus then no Cyprus Tax will be imposed on the company’s income from sources outside Cyprus and the company shall be regarded as non resident of Cyprus for Tax purposes. The Cyprus Company shall be regarded as not managed and controlled outside Cyprus if the majority of its Directors are non residents of Cyprus and if it doesn’t have any operational office in Cyprus, if the board of the Directors does not meet in Cyprus and generally there is no management of the day to date operations of the company in Cyprus. It must be pointed out that if the company is not or it ceases to be managed and controlled in Cyprus, and thus becomes not taxable in Cyprus, it shall not be able to avail of the benefits of the Double Tax Treaties which Cyprus has with various countries all over the world.
If a company does not exercise the option explained in paragraph 1 above and is and remains or becomes managed and controlled in Cyprus, and thus tax resident in Cyprus, then it shall be liable to tax in Cyprus under the New Tax Regime the provisions of which that are relevant are as follows: