The Legal 500

Cyprus is an island of 9,251 square kilometres in the Eastern Mediterranean at the crossroads of Europe, Asia, the Middle East and Africa. It has a population of about 760,000 of whom 80 per cent are Greek Cypriots, 18 per cent Turkish Cypriots and Turks and the remaining 2 per cent foreign residents and workers. The official languages are Greek and Turkish, and English is also widely used, especially in business.

The island was invaded in 1974 by the Turkish army and about 37 per cent of the territory remains under Turkish occupation. The so-called Turkish Republic of North Cyprus is recognized only by Turkey, and all the references in this brochure to Cyprus relate to the legitimate government of the Republic of Cyprus. Political uncertainty continues to surround 'the Cyprus problem', but it is hoped that there will be a satisfactory resolution in the near future.

Cyprus is very well placed as an international business and financial centre. Apart from its strategic geographical location, relaxed way of life and attractive climate, it offers an excellent commercial infrastructure, an educated English-speaking labour force, numerous tax incentives, a high standard of living and a low rate of crime. The local costs are moderate, and good airline connections and telecommunications and increasing alignment with the European position in matters of culture and trade enable it to be an effective bridge between West and East. Its time zone is 7 hours ahead of New York, 2 hours ahead of London, 1 hour behind Moscow and 5 hours behind Beijing.

Cyprus is an independent, sovereign republic with a presidential system of government and a written constitution which safeguards the rule of law, political stability, human rights and the ownership of private property. It is a member of the British Commonwealth, Council of Europe, IMF, UN, World Bank and WTO, and on 1 May 2004 it became one of the twenty five member states of the EU.

The legal system, modelled on the English common law system since independence in 1960, is becoming fully harmonized with the acquis communautaire of the EU. Cyprus is a signatory to a large number of international conventions and treaties, including an extensive network of double taxation treaties.

The island is a low-tax jurisdiction, not a tax haven, and its fiscal and regulatory regimes are now aligned with the EU's acquis communautaire and Code of Conduct for Business Taxation and the requirements of the OECD, the FATF and the FSF. The framework of controls imposed on business activities maintains the respectable and responsible reputation of Cyprus while allowing the activities to be conducted in an environment as free from onerous and bureaucratic restrictions as possible.

Commercial environment

Cyprus has an open, free-market, service-based economy with some light manufacturing; its GDP per capita is one of the highest in the Mediterranean region.

The government's economic policy is aimed at promoting and maintaining favourable investment conditions and supporting private initiatives; foreign participation in the economy has been officially encouraged and liberalized for some time. This has led to a growing awareness among foreign corporations and individuals of the particular advantages of using Cyprus as a business base for both inward and outward investment.

In recent years the inflow of approved foreign investment has increased considerably. Cyprus already has 15 bilateral treaties for the encouragement and reciprocal protection of investments and 40 more are under negotiation. The purposes of the treaties are to create and maintain favourable conditions for investments made by nationals of one treaty state in the other treaty state for their mutual benefit on a long-term basis, to guarantee the protection of such investments (including the repatriation of profits) and to establish procedures for settling any related disputes. They are also intended to contribute to the development of mutually beneficial trade and economic, scientific and technical cooperation. Cyprus is a signatory to the convention which in 1988 established the Multilateral Investment Guarantee Agency, a member of the World Bank Group.

There are many well-qualified lawyers who are experienced in all aspects of company law and tax planning. A number of international accountancy firms practise in Cyprus, as well as insurance, ship management and trust companies.

A high standard of modern telecommunications prevails in Cyprus at very competitive prices. CYTA, the local company, operates fixed and mobile networks with a full range of voice and data services. In mobile telephony, the opening up of the market demands continuous improvement; to meet this need, CYTA has changed its name of its mobile arm to Cytamobile and has signed a Partner Network Agreement with Vodaphone.

The Agreement provides products and services both to Cytamobile customers and to Vodaphone customers visiting Cyprus, by giving access at preferential rates to services in all the 39 countries where Vodaphone has either a presence or a partner network.

The government has plans to establish a Software Technology Park to stimulate and encourage the flow of knowledge and technology among research, development and educational institutions, corporate bodies and other players in the IT market.

Two international airports, at Larnaca and Paphos, which serve numerous international airlines, will shortly be reconstructed and upgraded. Seaborne traffic is served by the two multi-purpose ports of Limassol and Larnaca which are used as warehouse, distribution and container transhipment centres.

Taxation. The Income Tax Law which came into force on 1 January 2003 and other amending legislation brought about widespread and major changes to the Cypriot taxation system. Until then it had been based on the UK system and involved high taxation of resident individuals and companies and low taxation of foreign employees and international business companies (IBCs), with a complicated system of allowances and deductions. By contrast the new system, which is intended to provide economic and social stability and stimulate the growth of the Cypriot economy, has eliminated discrimination and differential treatment and is simple and transparent. The corporate tax rate is now only 10 per cent and uniform, and the tax rate for resident individuals does not exceed 30 per cent.

The distinction between local and international companies has been abolished. Active IBCs have been allowed to retain the preferential tax rate of 4.25 per cent until the end of 2005 so long as they have qualified under certain transitional provisions; this arrangement is known as the grandfather regime.

Exchange control. The Movement of Capital Law (Law 115(I) of 2003) has, subject to certain exceptions, removed all restrictions on the movement of capital and payments between residents of Cyprus and residents of member states of the EU or third countries. Residents are individuals or corporate bodies.

Immigration. Cyprus has amended its Aliens and Immigration regulations in accordance with the EU's acquis communautaire on matters such as entry and stay of third country nationals for self-employment and study purposes and long-term residence. From 1 January 2007 nationals of non-EU countries who have been residing in Cyprus for at least five years will be entitled to Long-Term Residence Permits which will have an indefinite limit; their issue is a requirement imposed on all EU member states.

Readmission agreements have been signed with Lebanon and Italy and are under negotiation with Egypt, Portugal, Romania and Syria.

Visa obligations for foreign nationals are in line with EU obligations.

It is unlikely that Cyprus will join the Schengen Group for some time as the basic prerequisites have not been met and are unlikely to be met in the near future.

Work permits. Citizens of EU member states can work freely in Cyprus. If they are employed in Cyprus, they must obtain residence permits, although there is no right of refusal of such permits to such citizens.

Nationals of other countries can work in Cyprus if they have employment permits. Such permits are granted for employment by a specific employer and are normally issued for one year, although they can be renewed.

Permits for professional and clerical staff, as opposed to executives and managers, are granted only if no suitably qualified local personnel are available.

 

Foreign investment

Foreign investment in Cyprus used to be regulated by the Central Bank of Cyprus, which usually imposed conditions such as the following:

• The enterprise must confine its activities to those for which permission is granted.
• The paid-up share capital of a company must be commensurate with its financial requirements
• Capital introduced by non-residents must come from external funds.
• Interest paid on foreign loans should be at market rates.
• Audited financial statements must be submitted annually to the Central Bank.

However, the Movement of Capital Law of 2003 has relaxed the restrictions on the movement of capital and payments between residents of Cyprus and residents of member states of the EU or third countries.

Investment from EU countries

Direct. There are no restrictions on the amount of the investment.

Portfolio. Up to 100 per cent of the share capital of a company listed on the Cyprus Stock Exchange may be acquired. In the banking sector, the maximum equity participation is 50 per cent and no individual may own, directly or indirectly, more than 9 per cent of a bank's share capital without the Central Bank's approval.

Investment from non-EU countries

Direct. Important changes have been made with effect from 1 October 2004. Foreign direct investment in Cyprus from non-EU countries has been fully liberalized, and the minimum amounts of investment and the maximum percentages of participation have generally been abolished, but licences may be still be required for certain specific investment activities. There is now no difference between companies carrying on business outside Cyprus (previously known as offshore or international business companies) and companies carrying on business inside Cyprus.

One of the practical effects of the liberalization is that foreigners wishing to register companies in Cyprus or buy shares in existing Cypriot companies no longer need to seek approval from the Central Bank. Applications for such activities should be submitted directly to the Registrar of Companies and Official Receiver. Applications for licences under the Movement of Capital Law should be made to the Ministry of Finance.

In the tourist sector the current policy, introduced in 1995, provides for participation up to 49 per cent in projects such as hotels and tourist villages. For projects that enrich the tourist product, such as golf courses and theme parks, up to 100 per cent participation is permitted.

Portfolio. Up to 49 per cent of the share capital of a company listed on the Cyprus Stock Exchange may be acquired. In the banking sector, the maximum equity participation is 50 per cent and no individual may own, directly or indirectly, more than 9 per cent of a bank's share capital without the Central Bank's approval.

Restricted investments. For both EU and non-EU countries, there are still restrictions on acquisitions in the areas of real estate, tertiary education, public utilities, radio and television stations, newspapers and magazines and airlines. Each application is considered on its merits.

Incentives. Incentives for locating a business in Cyprus include:

• A favourable business environment, with skilled labour at reasonable rates of pay and very good support facilities and services.
• A virtual absence of exchange controls, allowing profits, interest and dividends from approved investments, capital invested and any capital gains from the disposal of shares in such investments to be freely remitted overseas.
• The accession of Cyprus to the EU on 1 May 2004, providing a base for the production and export of goods to the large EU market.
• Industrial estates, and the Industrial Free Zone (IFZ) near Larnaca, close to the port and international airport, where industries can import their machinery, equipment and raw materials free of customs duty. Products manufactured in the IFZ may enter the Cypriot market on payment of the lowest preferential tariff.
• Bonded factories and warehouses, which have the same customs status as the IFZ.

Immovable property. The location of Cyprus, its stable legal system and infrastructure coupled with reliable communication with all parts of the world, the relatively low cost of living, its excellent climate and the friendliness and hospitality of its people, are just some of the reasons why Cyprus is attractive to foreign investors.

Foreigners who seek to invest in immovable property in Cyprus may be classified in the following main categories:

• Retired residents
• Employed residents
• Holiday makers
• Business investors

The small area of Cyprus and the great demand for immovable property, especially in recent years, have led to a considerable increase in the cost of land and accommodation. However, despite the increase, the prices are still significantly lower than those in most comparable European countries or holiday resorts.

Under the Acquisition of Immovable Property (Aliens) Law, no foreigner can acquire immovable property in Cyprus without the prior permission of the Council of Ministers. Normally permission is granted to bona fide foreigners to acquire a flat or a house, or a piece of land not exceeding three donums (about 4000 m²) for the erection of only one house, for use as a residence only by the purchaser and his family.

However, since Cyprus joined the EU on 1 May 2004, citizens of EU member states are no longer considered aliens for the purposes of this law, except in relation to the acquisition of a secondary residence in Cyprus, and even this restriction does not apply to EU citizens who live permanently in Cyprus.

Transfer fees are payable by the buyer on the purchase price or, under certain circumstances, on the current market value Liability for transfer fees on a company reorganization involving immovable property is uncertain. It seems that they are payable on a merger or division, where the property is transferred from the name of one company to the name of another company, but not on a transfer of assets or exchange of shares, where the property remains in the same company's name, but the ownership of that company changes.

Foreigners are now also entitled to borrow money for the purchase of immovable property upon mortgaging such property to the bank from which they borrow the money.

A tax is levied on all immovable property in Cyprus, based on its assessed value on 1 January 1980 if it was acquired before that date, otherwise on its estimated market value. The first CYP 100,000 of value is free of tax, the next CYP 150,000 is taxed at 0.25 per cent, the next CYP 250,000 at 0.35 per cent and the remainder above CYP 500,000 at 0.4 per cent.

Certain property is exempt from this tax, including property used for charitable purposes, agricultural land, property owned by a municipal corporation and property owned by a foreign state and used as an embassy, consulate or official residence.

Immovable property is also subject to small charges for local services, such as sewerage fees, refuse fees and municipal taxes.

The complexity of the legislation on immovable property and the formalities which need to be considered when dealing in real estate make it advisable for foreigners wishing to invest in immovable property in Cyprus to obtain reliable and efficient legal advice from the outset in order to avoid unpleasant results and future undesirable consequences.

Intellectual property

The importance of Cyprus as an international commercial centre has increased greatly following the accession of the island to the European Union on 1 May 2004 and there has been a corresponding increase in the need to protect intellectual property rights in Cyprus.

Today the authorities are demonstrating more clearly than ever before that they are seriously committed to refining and expanding the legislation and regulations in terms of which intellectual property rights in Cyprus are protected. The registration and protection of national and EU trade marks and designs, the validation of EU patents in Cyprus, the registration and protection of trade names and the protection of copyright form the backbone of intellectual property in Cyprus.

Trade marks. The registration and protection of trade marks in relation to goods and services is governed by the Trade Marks Law, Cap.268, as amended by Laws 63/62, 69/71, 206/90 and 176(1)/2000 and by the Regulations of 1951-1992 as amended. The international classification of goods applies whereby goods and services are categorized into 34 classes and 8 classes respectively. In recent years, there has been a substantial increase in the volume of foreign trade mark applications in Cyprus and this trend is expected to continue.

A trade mark must be registered by the Registrar of Trade Marks. The initial period of registration is 7 years which may be renewed on application for 14 years periodically. As a member of the EU, Cyprus has become a full member of the Office of Harmonization of the Internal Market (Trade Marks and Industrial Designs). Applications for the registration of Community Trade Marks (CTM) may be filed directly with the Registrar, and all CTMs registered or applied for before 1 May 2004 will be extended automatically to Cyprus.

Patents. The registration and protection of patents is regulated by the Patents Law 16(1)/98, as amended by Laws 21(I)/99, 153(I)/2000 and 163(I)/2000 and by the patent regulations of 1999 and 2000. On 1 April 1998 Cyprus became a member of the Patent Corporation Treaty (PCT) and the European Patent Convention. Many PCT and European applications have

Cyprus as one of their designated countries. Following the European grant and upon entry into the national phase, the patent must be translated into Greek and filed with the Registrar of Patents in Cyprus. The Registrar will not accept a PCT application if it is not a granted European patent.

A patent can last for 20 years but must be renewed annually. The patent law in Cyprus is in line with the Paris Convention for the Protection of Industrial Property in relation to priority rights for patent applications already filed with other signatory states.

Trade names. A trade name may be registered in Cyprus with the Registrar of Companies under the provisions of the Partnerships and Business Names Law, Cap.116, as amended by Law 77/1977. It remains on the register until an application for removal is filed by the trader.

Copyright. Copyrights are regulated by the Rights of Intellectual Property Law, 59/76, as amended by Laws 63/77, 18/93, 54(I)/99, 12(I)/2001, 128(I)/2002 and 128(I)/2004. With the modern legislation enacted in Cyprus, copyright is well protected in the country as there are civil as well as penal remedies. The most important aspect of copyright in Cyprus is that the author or the owner requesting copyright receives the exclusive right automatically. It is recognized and protected for artistic, literary, musical and scientific works including films, photographs, computer software and an original database.

Designs. The Protection of Industrial Designs and Samples Law 4(I)/2002, as amended by Law 170(I)/2003, was enacted to harmonize the protection of designs with the standards of the EU. It accordingly applies to designs and samples registered with the Registrar of Companies or under International Conventions ratified by Cyprus.

Registrations are valid for periods of 5 years, for a maximum of 25 years. As with CTMs, applications for the registration of Community designs may be filed directly with the Registrar of Trade Marks and all Community designs registered, protected or applied for before 1 May 2004 will be extended automatically to Cyprus.

Shipping in Cyprus

Cyprus has come a long way since achieving independence in 1960, and is now considered one of the world's leading maritime centres, with a merchant fleet exceeding 26 million gross tonnes that ranks sixth in the world.

In 1963 modern shipping legislation was introduced in Cyprus, closely modelled on its British counterpart. The way was paved for the Cypriot flag to become the well-respected flag that it is today, flown by vessels from almost every nation.

In recent years, Cypriot legislation has been amended to harmonize with the acquis communautaire of the European Union, to which Cyprus acceded on 1 May 2004. The changes introduced will further reinforce the quality of the Cypriot-registered fleet, whilst maintaining the competitiveness of the flag.

Taxation of shipping activities. Under the benign tax environment in Cyprus:

• Ship management companies are exempt from income tax, enjoying a different and more favourable tax regime altogether. Until 2020 they can choose annually to be taxed either at 4.25 per cent or at 25 per cent of the tonnage tax which is based on the weight and age of the vessel.
• No tax is payable either on profits from the operation of Cypriot-registered vessels or on dividends received from a ship owning company.
• No capital gains tax is payable on the sale or transfer of a Cypriot-registered vessel or the shares of a ship owning company.
• No estate duty or inheritance tax is levied following the death of a shareholder.
• No stamp duty is payable on ship mortgage deeds or other security documents.
• Emoluments of seamen employed on board Cypriot-registered vessels are exempt from tax.

International relations. Cyprus is an active member of numerous high profile organizations and has ratified many multilateral and bilateral international conventions relating to shipping and taxation that enhance the island's high standing and competitiveness in the shipping community.

Registration of ships. The registration of ships under the Cypriot flag is achieved by quick, easy and straightforward procedures. Parallel registration is also an option under Cypriot law.

Shipping companies with vessels registered under the Cypriot flag are required to pay initial registration fees and annual tonnage tax thereafter. Both these levies are reasonable and considerably lower than those in comparable jurisdictions.

Professional services. In Cyprus, the commercial infrastructure is well developed, with all the professional services required for successful shipping operations offered at a high standard.

Crewing. Since 1 May 2004 the requirement of a minimum Cypriot crew content has been abolished. The primary requirement by the Cypriot authorities now is that all crew members possess a valid certificate of competence issued by one of the countries whose certificates are recognized. There is, therefore, every opportunity to employ foreign crew and a large number of crewing companies operate in the island.

Protection of competition. The EC Treaty provisions on the protection of competition are now directly applicable. In addition, Cyprus has the Protection of Competition Law, enacted in 1989, which forbids any agreement having as its object or effect the elimination, restriction or distortion of competition or the abuse of a dominant market position.

With regard to the shipping industry, two block exemptions have been adopted, one concerning liner conferences (PI 210/97) and the other in relation to liner consortia (PI 211/96). Both exemptions are contained in regulations based on EU Regulation 4056/1986 on Liner Conferences and Regulation 823/2000 on Liner Consortia. Their application is limited to international scheduled cargo services; tramp and passenger operations are excluded.

Furthermore, EU Regulation 3577/1992 gives freedom to provide maritime transport services within a member state (cabotage services) to ship owners operating ships registered and flying the flag of the member state in which they operate.

The ISM Code. The incorporation of the International Safety Management (ISM) Code for the Safe Operation of Ships and for Pollution Prevention of the International Maritime Organization in Chapter IV of the International Convention on Safety of Life at Sea (SOLAS) makes the Code enforceable via port state control and it is mandatory for ships flying the Cypriot flag or entering the jurisdiction to comply with it.

The object of the Code is to ensure safety at sea, prevention of human injury and loss of life, and avoidance of damage to the environment and to property.

The company that undertakes the operation of a ship must develop and maintain a Safety Management System and issue detailed manuals that cover a wide variety of matters. The ship must have on board a Document of Compliance and a Safety Management Certificate.

Business entities

The most common forms of business entity used by foreign investors to conduct business in Cyprus are a limited liability company, a branch of an overseas company, a partnership and a sole proprietor.

Limited liability company

The governing statute is the Companies Law (Chapter 113) as amended. Under it, a company may be limited by shares or by guarantee and may be private or public.

A private company, which must have at least one and not more than fifty members (other than employees or ex-employees) and which must restrict the right to transfer its shares, may be classified as an exempt private company if:

• No corporate body holds any of its shares or debentures unless that body is itself an exempt private company
• No person other than the holder has any interest in the shares or debentures of the company
• The number of persons holding debentures of the company does not exceed fifty
• No corporate body is a director of the company

An exempt private company need not annex copies of its accounts to the annual return filed with the Registrar of Companies, may make loans to its directors and may appoint as its auditor a person who does not have the statutory qualifications to act as auditor of a public company.

Registration formalities. After approval of the company's name, a Memorandum and Articles of Association must be submitted to the Registrar of Companies, with details of the share capital, directors, secretary and registered office. There must be at least one shareholder. A certificate of incorporation is usually issued within a month, unless expedited.

Share capital. There is no minimum share capital for a private company. For a public company the minimum is CYP 15,000.

Directors' liability. A director's duties are owed to the company. Common law duties include fiduciary duties (to exercise powers for the benefit of the company, retain freedom of action and avoid conflicts of interest) and a duty of skill and care, not to act negligently in managing the company's affairs. There are also statutory duties, some imposing criminal penalties, and duties to creditors.

Reporting requirements. The directors of every company are responsible for keeping the books needed for the preparation of financial statements and adequate for the presentation of a true and fair view of the company's affairs and an explanation of its transactions. They must present a full set of financial statements to the annual general meeting of the company, with their report and the auditors' report; if a company has subsidiaries, consolidated financial statements are required.

All financial statements must be audited in accordance with international auditing standards by an auditor practising in Cyprus and filed with the Registrar of Companies with the annual return; there are special filing requirements for branches of overseas companies. A company must also file annual income tax returns accompanied by the financial statements, and report charges over its assets and any changes in its Memorandum and Articles, registered office, directors, secretary, members and share capital to the Registrar.

IBCs must also file their annual financial statements with the Central Bank of Cyprus with a special report detailing their expenditure in Cyprus.

Branch of an overseas company

A branch of an overseas company may be registered under the Companies Law provided that satisfactory bank references are supplied, permission is obtained from the Central Bank and the following documents (translated into Greek) are filed with the Registrar of Companies within one month:

• Certified copy of the charter, Memorandum and Articles or other instrument defining the constitution of the company
• Particulars of the directors and secretary of the company
• Name and address of at least one person resident in Cyprus authorized to accept service of any notice on behalf of the company
• Approval of the Central Bank

Partnership

A partnership in Cyprus is governed by the Partnership and Business Names Law (Chapter 116). It can be either general (in which every partner is liable jointly and severally with the other partners for all the debts and obligations of the partnership incurred while a partner) or limited (in which a limited partner contributes a stated amount to the capital and is not liable for the debts and obligations of the partnership beyond the amount contributed).

The number of partners cannot exceed 20. A company may be a general or limited partner in a partnership.

Non-residents of Cyprus can become partners in a Cypriot-registered partnership if they obtain approval from the Central Bank of Cyprus. Non-EU residents require work permits, which are usually given if the business of the partnership is export-orientated or is breaking new ground.

Although not required by law to prepare audited accounts, partnerships are required to keep proper books of account which are open to inspection by the partners.

Joint ventures are treated as a form of partnership.

Sole proprietor

Cypriot citizens and foreign investors may carry on business in their own name or under a business name registered under the Partnership and Business Names Law. Non-EU residents must secure prior permission under the Aliens and Immigration Law (Chapter 116) Regulations and must comply with any relevant exchange control restrictions.

Taxation

The tax year is the calendar year.

Individuals

In 2002 the old remittance-based concept was replaced by a system of taxation of worldwide income for residents in Cyprus and of Cypriot-sourced income for non-residents. Individuals are considered to be resident if they stay in Cyprus for more than 183 days in the relevant calendar year.

Cypriot-sourced income includes gains or profits from any office or employment, trade, business, profession or vocation in Cyprus, including farming and husbandry and the value of any benefits in kind, regardless of where the services are performed.

Investment income received by resident individuals is subject to the special defence contribution which is deducted at source.

The Income Tax Law of 2002 regulates the tax charged on the income of individuals. Personal allowances and deductions have been abolished, except relief allowed for life insurance premiums and contributions to pension, social security and welfare funds. Spouses are taxed separately. Relief may also be available under a double taxation treaty

The current rates are nil on an income up to CYP 10,000, 20% on the next CYP5,000, 25% and 30% on income over CYP20,000.

Employment. Under the Social Insurance Scheme, the employer and employee each contribute 6.3 per cent of the employee's earnings up to a current maximum of CYP 1,911 per month, a total tax rate of 12.6 per cent, and the government pays a further 2 per cent for private employees (4 per cent for others).

A self-employed person contributes 11.6 per cent and the government pays 4 per cent.

Voluntary contributions are levied at 13.5 per cent on insurable income; the contributor pays 10 per cent and the government pays 3.5 per cent.

Employers must also pay 2 per cent of their employees' earnings to the Social Cohesion Fund, which is used to make social grants, and 1.7 per cent up to a maximum of CYP 1,911 per month to the Human Resource Development Fund and Redundancy Fund.

The gross emoluments of tax-resident employees who were resident outside Cyprus before the start of their employment, arising from Cyprus, are eligible for annual tax relief of 20 per cent or CYP 5,000, whichever is the lower, for a period of three years from the 1st January following the year in which the employment starts.

Employees of foreign companies seconded to Cyprus from abroad for a period or periods exceeding 183 days a year are treated as Cypriot residents for tax purposes and therefore liable to Cypriot income tax on their worldwide incomes.

Companies

In 1975 the Cypriot Government introduced measures to promote Cyprus as an international centre for business and professional services. Among those measures was a regime for the taxation of an international business entity and its foreign employees at reduced rates, provided that the income of the entity was derived entirely from sources outside Cyprus and its shares belonged, directly or indirectly, exclusively to non-Cypriots.

The Income Tax Law of 2002 completely changed the system of company, as well as personal, taxation. There is now:

• A single corporation tax rate of 10 per cent for all companies registered in Cyprus.
• No geographical limitation on the exercise of a company's activities. Its income may be derived from any source, including a Cypriot-based source.
• No restriction on the ownership of a company's shares.

The new taxation of companies is also based on residence. As in the case of individuals, the old remittance-based concept has been replaced by the taxation of worldwide income of companies that are resident in Cyprus and of Cypriot-sourced income of non-resident companies.

A company is regarded as resident in Cyprus if it is managed and controlled in Cyprus. The test of management and control has not been defined, but the following factors are expected to be important in determining whether or not the management and control of a company are exercised in Cyprus:

• Does the board of directors have a majority of Cypriot residents ?
• Are all the strategic decisions affecting the company made, and can they be shown to have been made and implemented, by the board of directors and in Cyprus ?
• Does the company maintain its headquarters in Cyprus ?
• Does the company operate an account with a bank in Cyprus ?

Registration or incorporation in Cyprus alone will not be enough to render a company liable to tax in Cyprus.

A company resident in Cyprus is taxable on its worldwide income derived or accruing from:

• Gains or profits from any trade or business
• Interest or discount
• Rents, royalties, premiums or other profits arising from property
• Any other income, e.g. gain on sale of goodwill

Corporation tax is charged at 10 per cent on the income profits of a company's business and gains on trading investments in Cypriot immovable property. For 2003 and 2004 only, the profits of a local company or an IBC which has not elected for the grandfather regime which exceed CYP 1 million are subject to an additional tax of 5 per cent.

The Cypriot branch of a foreign company will be taxed at 10 per cent on its worldwide income if the management and control of the branch is in Cyprus. If the management and control is overseas, all the branch income is exempt from tax in Cyprus.

Non-resident companies are liable to corporation tax on income profits accruing or arising in Cyprus from a permanent establishment in Cyprus.

A subsidiary, whether incorporated in Cyprus or not, will only be subject to Cypriot corporation tax on its worldwide income if:

• It is managed and controlled in Cyprus, or
• Income profits accrue or arise in Cyprus from a permanent establishment in Cyprus

Under the OECD model double taxation treaty, the definition of a permanent establishment includes a place of management, a branch, an office, a factory, a workshop, a mine and a building site or construction or installation project if it lasts for more than three months. It excludes the retention of a law firm in Cyprus for management, domiciliation, legal or other services and the opening of an account with a bank in Cyprus.

Income arising from services provided by Cypriot tax residents to a foreign permanent establishment of their resident employers or to a non-resident employer outside Cyprus will be exempt from Cypriot income tax, provided that the aggregate period of their visits abroad is not less than 90 days in a year.

From 1 January 2003 trading losses by one group company may be set off against trading profits by another group company to give group relief, provided that the losses and profits have occurred in the same year of assessment and both companies are resident in Cyprus and members of the same group for the whole of that year.

Two companies are deemed to be members of a group if one is the 75 per cent subsidiary of the other or both are 75 per cent subsidiaries of a third company. 75 per cent subsidiary means holding at least 75 per cent of the voting shares with beneficial entitlement to at least 75 per cent of the income and 75 per cent of the assets on liquidation.

Payments for intellectual or industrial property rights used by a company that is tax-resident in Cyprus to a foreign company are liable to a 10 per cent withholding tax, subject to relief under any applicable double taxation treaty. If the rights are used outside Cyprus, no withholding tax applies.

Special Defence Contribution

A special defence contribution (SDC) is the additional tax generally payable by all residents of Cyprus, individuals and companies, on their unearned income, at 15 per cent on dividends, 10 per cent on interest and 3 per cent on rents.

Dividends received by a resident company or a permanent establishment of a non-resident company from a non-resident company are exempt from the SDC if the Controlled Foreign Company (CFC) provisions apply, i.e. if:

• the shareholding in the paying company is at least 1 per cent, in accordance with the EU Parent-Subsidiary Directive.
• Investment income is less than 50 per cent of the paying company's activities, and
• The foreign tax burden on the income of the paying company is not substantially lower than the Cypriot tax burden.

It remains to be seen how the Cypriot authorities will interpret the CFC provisions. The interpretation will determine whether Cyprus remains competitive as a holding company regime or not. If liberally interpreted, the new taxation system, coupled with its double taxation treaty network, will improve Cyprus' standing as a holding company jurisdiction.

Dividends received by one resident company from another resident company are exempt from the SDC. Dividends received by a foreign shareholder (individual or company) from a resident company are also exempt, and this gives Cyprus a real advantage over other European holding company regimes which generally impose a withholding tax, even when reduced by a double taxation treaty, of at least 5 per cent.

If a resident company does not pay a dividend within two years of any year of assessment, it will be assessed to the SDC at 15 per cent on a deemed distribution of 70 per cent of its accounting profits left after deduction of 10 per cent corporation tax and permitted transfers to reserves. The SDC will be refunded on actual distribution of such profits as dividends.

Interest which is active, i.e. received in, or closely related to, the normal course of business, is liable to corporation tax of 10 per cent on the whole, but is exempt from the SDC. Passive interest, i.e. interest not received in or closely related to the normal course of business, is liable to tax of 10 per cent on half and to the SDC of 10 per cent on the whole, making an effective total tax rate of 15 per cent on the whole.

Rents attract an SDC of 3 per cent on 75 per cent of the gross rent.

Royalties relating to the use of Cypriot-based assets are subject to a withholding tax of 10 per cent, or 5 per cent if they relate to films.

Relief or credit may be available under a double taxation treaty for dividends or interest already taxed abroad.

Capital Gains Tax

Subject to certain exemptions and reliefs, net gains from the sale of immovable property in Cyprus and shares of private companies owning immovable property in Cyprus are taxable at 20 per cent. Gains from the disposal of other securities are exempt

Many of the Cypriot double taxation treaties tax capital gains only in the country of the resident (company or individual) disposing of the asset. The exemption from capital gains tax in Cyprus could therefore lead to double non-taxation, for example in the case of a capital gain made by a Cypriot-resident company from a sale of its foreign subsidiary's shares, which will be exempt from tax both in Cyprus and in the country where the subsidiary and the shares are based.

As the gain from a sale of goodwill as such is taxable at 10 per cent, goodwill should be transferred to another company. Any capital gain on the sale of the shares of that company (which will include the value of the goodwill) will be exempt from tax.

 

Value Added Tax

The standard rate is 15 per cent from 1 January 2003. Only those Cypriot IBCs that have trading activities within the EU must register for VAT.

Stamp duty

Stamp duty is payable on contracts relating to property or business in Cyprus, and on the incorporation of a company in Cyprus.

Double taxation treaties

Cyprus has concluded double taxation treaties with 38 countries, treaties are under negotiation, or awaiting ratification, with 23 more. All the treaties provide relief from double taxation by applying the credit method to the taxation of dividends and interest, i.e. by allowing tax payable in the other country as a credit against tax payable in Cyprus, including the SDC, so that the taxpayer only pays the higher of the two rates of tax and is not taxed twice on the same income.

Advantages

The double taxation treaty network of Cyprus, coupled with the Cypriot holding company and the fiscally beneficial entities described below, allow international transactions to be structured in the following ways, to achieve the optimum benefits:

• As an intermediary company for joint venture or other participations, particularly in Eastern European countries, to avoid or reduce withholding taxes
• To finance joint venture or other acquisitions to reduce or eliminate withholding taxes and extract profits that would otherwise be subject to significant foreign taxation
• As a holding company whose income may be exempt or subject to a tax rate of 4.25 per cent (the grandfather regime), otherwise 15 per cent
• As an operating company which can claim treaty protection to avoid the creation of a permanent establishment in a foreign country, with the facility of having an office in that country to perform limited functions
• As a Cypriot international trust administered by a Cypriot company as trustee which may be entitled to benefit from treaty protection
• To operate shipping companies from Cyprus with treaty protection
• To benefit from the non-discrimination clause of a treaty, e.g. to avoid the French 3 per cent tax on IBCs owning real estate in France

Where tax has been paid on income from a foreign country with which a double taxation treaty is not in force and such income is subject to Cypriot tax, unilateral relief from Cypriot tax not exceeding the amount of tax paid in the foreign country will be granted by means of exemption, credit or deduction.

 

Europe, Canada and the USA

For dividends receivable, the Greek, Italian and US treaties provide reductions in their standard withholding taxes. In the US treaty, the standard reduction is 15 per cent, but the withholding tax on dividends from a US company of which at least 10 per cent is owned by a Cypriot company is 5 per cent, provided that not more than 25 per cent of the US company's gross income is passive income (other than from its own subsidiaries).

Some of the treaties, e.g. with Belgium, Canada, France, Germany, the UK and the USA, contain anti-avoidance provisions in the form of 'excluded persons' or 'limitation of benefits' clauses, but these have been ineffective since 1 January 2003. Apart from the transitional arrangements affecting some IBCs, no Cypriot companies now enjoy preferential tax treatment and all of them can reap the benefits of the double taxation treaties if they meet the residence test, i.e. if they are managed and controlled in Cyprus.

Under the UK treaty, interest payable by UK residents to a Cypriot company may be subject to tax at the reduced rate of 10 per cent. In respect of royalties, the rate of withholding tax from the UK will be reduced to nil, except for film royalties payable by UK companies where the rate may be 5 per cent.

Russia and Eastern Europe

The Eastern European countries' treaties give Cypriot-incorporated IBCs a considerable advantage in joint venture activities in Eastern Europe, primarily because of the reduction in the impact of withholding taxes on the distribution of joint venture profits.

For example, the taxation of joint ventures in what was the Soviet Union involves a corporation tax liability and a withholding tax liability on profit distributions. The standard withholding tax on distributions to joint venture partners is 15 per cent, reducible by double tax treaties. The current Cyprus/Russia treaty provides for a withholding tax of 5 per cent on the gross dividends where the beneficial owner has directly invested not less than the equivalent of US$ 100,000 and 10 per cent on the distributions in cases of smaller investments. It is apparently accepted by the Russian tax authorities that profit distributions from a joint venture would be treated like dividends, so that the 5 per cent rate of withholding tax would apply.

Assuming that dividends from a Russian subsidiary are subject to the SDC at 15 per cent because the CFC provisions do not apply, any Russian withholding tax will be credited against the SDC. Under the Cyprus/Russia treaty, the credit will take into account both the Russian withholding tax and the underlying tax, i.e. the Russian corporation tax on the profit out of which the dividends are paid. Thus all dividends paid from Russia would not suffer any tax in Cyprus.

Although the Russia/USA treaty signed in 1992 may have reduced the tax benefits of Cyprus as a useful intermediary jurisdiction for US corporations, it is still advantageous to use Cyprus because the permanent establishment article in that treaty is a very broad one, whereas the corresponding article in the Cyprus/Russia treaty gives a much narrower definition, thus restricting potential Russian tax liabilities and creating tax planning opportunities.

Cypriot companies that do not meet the test of residence cannot enjoy the benefits of the treaties but are not subject to the exchange of information requirement.

Holding companies

Function

Holding companies exist for legal, commercial and tax reasons.

A multinational group requires four things from a holding company:

• The holding company should be able to take dividends out of the operating company free of withholding tax or at a lower rate of withholding tax by virtue of a double taxation treaty or under the EU Parent/Subsidiary Directive.
• The holding company should be able to dispose of its investment in the operating company without any liability to capital gains tax or its equivalent in the operating country.
• The domestic law of the holding company's jurisdiction should wholly or largely exempt such dividends and capital gains from local tax.
• The group should be able to take dividends out of the holding company without any charge to tax in the holding company's jurisdiction.

Additional tax considerations include the CFC provisions, thin capitalization, and the ability to obtain interest deduction in full, corporation and local tax rates in respect of other income and other taxes such as capital gains tax and stamp duty.

Cypriot holding companies

A Cypriot holding company is generally set up as an ordinary company resident in Cyprus which, besides participating in domestic and/or foreign companies, may also have other functions such as trading, manufacturing or financing; there are no restrictions on its activities. It is taxable in Cyprus on its worldwide income, provided that it is managed and controlled in Cyprus.

The attractive features of the Cypriot holding company regime include:

Tax treatment of incoming dividends. Cypriot law provides full international participation exemption from local taxation of dividends received by a holding company from a foreign subsidiary if the Cypriot company's holding in the foreign company exceeds 1 per cent. A domestic participation is also available, which does not involve any particular holding period or amount. Generally, a 15 per cent SDC applies to dividend income paid to Cypriot residents

Tax treatment of capital gains on the sale of shares. The exemption from tax of trading gains and capital gains made by a Cypriot holding company from the sale of shares in a foreign subsidiary puts Cyprus on a par with the traditional European holding company regimes; no minimum participation threshold is required. Gains from local subsidiaries are also exempt, but gains from shares in companies owning immovable property in Cyprus are not.

Withholding tax on outgoing dividends. Outgoing dividends remitted by a Cypriot holding company to its ultimate parent company are not subject to withholding tax in Cyprus.

Withholding tax on interest. The EU Interest and Royalties Directive has been incorporated into Cypriot domestic law. The result is exemption at source of interest whose beneficial owner is a non-resident of Cyprus but resident in an EU member state.

Interest deduction for borrowing costs. Generally, interest expenses payable by a Cypriot company are fully deductible.

Thin capitalization. Cypriot tax legislation does not contain specific provisions relating to thin capitalization of companies, i.e. a debt:equity ratio requirement. A Cypriot holding company may therefore be capitalized with loans without any risk that interest paid at arm's length to its parent company will not be deductible.

Controlled Foreign Company (CFC) legislation. Compared with many other jurisdictions, Cyprus' CFC legislation is rather limited, targeting only certain types of income that is not derived from real business activities to create a distinction between participation (active income) and investment (passive income). The CFC provisions will only be triggered if more than 50 per cent of the non-resident company's activities result directly or indirectly in investment income, and the foreign tax burden on the income of the non-resident company paying the dividend is substantially lower than the tax burden of the company which is receiving the dividend and is tax-resident in Cyprus.

Double taxation treaties. Cyprus' double taxation treaty network ensures that dividends received by a Cypriot holding company from its foreign subsidiary are either exempt from or subject to low withholding tax in the subsidiary's place of residence.

Other benefits of a Cypriot holding company. Cypriot corporate tax on business profits is at the relatively low rate of 10 per cent. Cyprus does not have any rules stating that holding companies cannot perform operating activities. Companies enjoy indefinite carry forward of losses and treatment of foreign taxes as expenses.

Interest income. Any interest received by a Cypriot holding company that is deemed not to be from or closely related to its ordinary business activities is subject to 10 per cent tax on half the interest received and to a special defence contribution of 10 per cent on the whole of the interest received, thus giving a total tax burden of 15 per cent.

The absence of thin capitalization rules, combined with the tax treatment of interest, make it more favourable to finance Cypriot holding companies through debt to capitalize foreign companies by way of loans rather than through equity. The advantages are that borrowings are less likely to be challenged under thin capitalization rules, Cyprus' double taxation treaties usually protect interest receipts from withholding taxes applicable in the source country and there is no withholding tax on interest payable to non-Cypriot residents.

Liquidation. If a Cypriot holding company is liquidated, all the profits of the last five years which have not been distributed or deemed to have been distributed are then deemed to have been distributed and are therefore subject to the SDC if applicable. This does not apply to a liquidation in the context of a reorganization.

The EU Parent/Subsidiary Directive. This Directive, as amended, was transposed into Cypriot law in the form of the Income Tax Law and the Special Contribution for the Defence of the Republic Law. These Laws establish a liberal system of double taxation avoidance. The new tax regime extends to non-EU countries, as the Laws distinguish only between residents and non-residents of Cyprus.

On the taxation of dividends, the Cypriot tax laws are even more liberal than the Directive. Foreign dividends are exempt when a Cypriot-resident company holds at least 1 per cent of the share capital of a foreign subsidiary. For holdings below 1 per cent, there may be a foreign tax credit available under a double taxation treaty or, if there is no treaty, unilateral relief at the discretion of the Commissioner of Inland Revenue.

On a holding period, the second derogation of the Directive allows a member state not to apply the Directive, either to parent companies in that state that have not maintained a qualifying holding in a subsidiary company in another member state for at least two years or subsidiary companies in that state in which a parent company in another member state has not maintained such a holding for the same period, both in respect of incoming and outgoing dividends.

Cyprus has not exercised this option, to impose a holding period and thus restrict the applicability of the Directive, but the derogation may have an impact on a Cypriot holding company if another member state exercises the option in relation to a subsidiary company in that state of the Cypriot holding company, or vice-versa. For example, Austria will impose qualifying thresholds, of a one year holding period and a 10 per cent holding amount, from 1 January 2005 in respect of foreign subsidiaries of Austrian parent companies.

Company reorganizations. The new tax rules for reorganizations of companies such as mergers, divisions, transfers of assets (including immovable property) and exchanges of shares follow the EU Merger Directive. They extend the Directive to domestic reorganizations, cross-border reorganizations involving member and non-member states and reorganizations abroad with tax implications in Cyprus. Such reorganizations do not lead to recognition of income at company and shareholder level and any gains made are exempt from any Cypriot tax. Losses incurred before a reorganization may be carried forward indefinitely by the new entity, and losses from one activity may be offset against profits from another. No stamp duty is payable on documents effecting a reorganization.

Conclusion. The EU has not decided whether holding company regimes are acceptable or not. Exchange of information and transparency are present in the Cypriot holding company regime, as are the transfer pricing guidelines which determine arm's length terms of business between related entities.

It is hoped that the advance ruling practice will be developed in Cyprus as far as possible, so that the Revenue authorities will be able to give binding advance decisions to taxpayers on the tax consequences of proposed transactions.

Other fiscally beneficial entities

Foreign companies

If a foreign company's sole place of business is in Cyprus but all its business activities are abroad, it may be exempt from tax in Cyprus, but it will be excluded from any of the double taxation treaty benefits. The activities of the Cypriot branch or office which are permitted in order to preserve the tax exemption include:

• Financial supervision, e.g. opening letters of credit, obtaining certificates of origin and placing and receiving orders
• Administrative services, e.g. book-keeping
• Storage of goods in transit and other warehousing activities
• Promotion of overseas trade
• Technical advisory services including preparation of drawings and services in connection with construction, building or engineering work performed abroad
• Acting as trustee or nominee for other international business or foreign companies and administering international business trusts
• Editing and printing journals, periodicals and other publications for sale and distribution abroad
• Acting as intermediary in shipping transactions, provided that the ships do not call at Cypriot ports
• Trading or otherwise dealing with other Cypriot IBCs or branches

The branch or office must be managed and controlled outside Cyprus to obtain full tax exemption. If it is not, the worldwide income from its international business activities is taxable in Cyprus in the same way as for Cypriot-incorporated IBCs (see below). This may be useful if the foreign company wishes to establish Cypriot residence for double taxation treaty purposes.

Cypriot-incorporated IBCs

The grandfather regime is available to existing IBCs which received all their income from non-Cypriot business before 31 December 2001, allowing them to continue to benefit from the 4.25 per cent tax rate until the end of 2005. To qualify, each company must make an irrevocable election for 3 years and continue to earn only non-Cypriot income and its shares must be owned by non-residents. However, by making this election, an IBC will not be able to benefit from many of the new tax reforms.

Existing IBCs which do not, or cannot, make the election, and all new IBCs, will be subject to the 10 per cent corporation tax rate applicable to all Cypriot companies.

IBCs and their foreign employees are allowed to keep bank accounts in any currency, in Cyprus or abroad, but must open a local disbursement current account (LDCA) with a local bank, out of which to pay their living expenses in Cyprus.

The important difference between a Cypriot-incorporated and resident IBC and a non-resident IBC with a branch in Cyprus which is not managed and controlled in Cyprus is that the former (and every Cypriot company, whether an IBC or not) is entitled to benefit from the Cypriot double taxation treaties but the latter is not. As well as enjoying the benefits of lower withholding taxes, a Cypriot company can ensure that its overseas activities will not be subject to local tax if they come within the activities of a permanent establishment permitted by an applicable treaty, a matter of great importance to a trading company.

Article 5 of the Cyprus/UK treaty is an example of the provisions generally found in the Cypriot treaties. It permits a Cypriot company, regardless of the residence of shareholders or the benefits afforded to the company under Cypriot tax law, to have a fixed place of business in the UK used for storing, displaying or delivering goods belonging to the company, for purchasing goods or collecting information on behalf of the company and for advertising, supplying information, scientific research or other associated activities on behalf of the company. Without a treaty, a non-resident company would have to be more cautious before operating a fixed place of business in the UK.

Trusts

The Cypriot international trust was introduced by the International Trusts Law in 1992. It enables a non-resident of Cyprus to create a trust of any property (except immovable property in Cyprus) for the benefit of non-residents (or any charity), with at least one Cypriot-resident trustee. The settlor, any beneficiary or the local trustee (or any combination of those) can be a Cypriot IBC or partnership.

No foreign law relating to inheritance or succession will invalidate the trust or affect any transfer or disposition relating to its creation. It may not be set aside by the settlor's creditors unless it is proved that the trust was set up with intent to defraud those creditors when the property was transferred. The settlor's insolvency after any transfer has no effect. A claim against the trustee(s) must be brought within two years from the date of sale or transfer of property to the trust.

A trust is presumed to be irrevocable unless a power of revocation is reserved, and it may remain in force for up to one hundred years, despite any statutory provision to the contrary. The income can be accumulated for the whole of the perpetuity period. The rule against perpetuities does not apply to charitable or purpose trusts.

There are no limitations on the investment of trust assets, if the investment powers are exercised with reasonable prudence and diligence and subject to any provisions in the trust instrument.

The proper law of the trust can be changed from or to the law of Cyprus, if the terms of the trust instrument so permit, so long as the new law recognizes the validity of the trust and the interests of the beneficiaries. This provision ensures flexibility in the event of a change in tax or other policy.

The Cypriot courts may amend or repeal the terms of the trust or the powers of the trustees, if they are satisfied that the proposed arrangement will be in the interests of the person on whose behalf the application is made and will not substantially prejudice any other interested party.

The income and profits of an international trust derived from a source outside Cyprus are exempt from taxation in Cyprus, whether in the hands of the trustees or the beneficiaries.

International trusts are exempt from any duty of registration, but the trustees are obliged to disclose all documents and information relating to the accounts of a trust to the beneficiaries, and the courts may order the disclosure of documents and information relating to a trust in the event of civil or criminal proceedings.

Investment companies

Cypriot-incorporated holding companies, finance licensing companies and real estate companies may receive income from abroad subject to the 10 per cent corporation tax rate under the CFC rules. If the income emanates from countries with double taxation treaties with Cyprus, reduced rates of withholding tax may be incurred abroad and Cypriot companies may therefore be advantageous for tax planning purposes.

A Cypriot international collective investment scheme (ICIS) can take the form of a fixed or variable capital company, a unit trust or a limited liability partnership whose sole purpose is the collective investment of funds of unit-holders. It can only be established and operated by non-residents. Under the new tax regime, dividend income from abroad, subject to compliance with the CFC rules, and profits derived by ICISs from the disposal of shares and securities are not taxable in Cyprus.

International business partnerships

An international business partnership is one in which all the partners (whether individuals or companies) are non-resident and all the partnership business is international. Neither the partnership itself nor the individual partners are liable to pay Cypriot tax.

Bank representative offices

Bank representative offices are not considered to be businesses as defined in the Banking Law of 1997 and do not need a licence, but they should be registered with the Registrar of Companies. They must observe the following conditions:

• No banking business may be carried on.
• The office must be used exclusively to facilitate contact between the bank represented and the rest of the world.
• Any information requested by the Central Bank of Cyprus about the activities of the office must be provided.
• All expenses must be covered from external sources.

As the captive is entitled to IBC status, it is liable to a maximum tax of 10 per cent on its taxable income, and can enjoy all the other advantages of an IBC.

Finance companies

As non-residents are not subject to tax on any interest, it will still be beneficial to use Cypriot-resident companies as finance vehicles in countries with which Cyprus has concluded double taxation treaties that eliminate or reduce interest charges. Cypriot finance companies may also be used to lend funds to entities within the same group or to non-related third parties at arm's length, so that interest payments may be deducted from their taxable base.

Intermediary licensing vehicles

Cypriot companies can continue to be used advantageously as intermediary licensing vehicles for the routing of royalties out of countries with which Cyprus has concluded double taxation treaties.

Further opportunities and challenges in Cyprus

Liberalization of utilities

Following the admission of Cyprus to the EU there will be pressure for further liberalization of the utilities such as electricity, telecommunications and water services, and the airline services, to open them up to competition in line with the EU regulations.

Improvement of infrastructure

There will also be projects for improvement of the medical and sewerage services and the building of new roads. This will create substantial opportunities for entrepreneurial companies and the associated professional services of accountants, architects, engineers, lawyers and surveyors. It will also help to redirect the economy away from its heavy reliance on tourism.

EU credit institutions

A credit institution incorporated in another EU member state and authorized and supervised by the competent authority of that state may provide banking and investment services, including non-core investment services, in Cyprus without requiring a licence from the Central Bank of Cyprus. The institution may either establish a branch or offer on a cross-border basis services which have been authorized by that authority.

The services may be provided two months after the Central Bank has received notification from that authority of the institution's programme of operations, its capital base and solvency ratio, the address of its branch in Cyprus and the names of those responsible for the management of the branch. Any changes in these details must be notified to the competent authority in the home state and to the Central Bank at least one month in advance.

The branch in Cyprus must observe all the rules for the protection of depositors and investors in Cyprus and the rules of the Cypriot investment market. In particular it must:

Within four months of the end of each financial year submit to the Central Bank a copy of its balance sheet and profit and loss account for that year, certified by an approved auditor, with a signed copy of the auditor's report, in the form prescribed by the Central Bank.

• Maintain its accounting system and official books, records, documents and correspondence in the Greek language and in the Cypriot currency (pound), unless it was operating in Cyprus before 1 May 2004, in which case it may use the English language and the USA currency (dollar).
• Appoint a Money Laundering Compliance Officer.
• Employ at least two people approved by the Central Bank who participate and concur in the effective direction and management of the business.
• Provide its customers with information about the schemes for the compensation of depositors and investors of which it is a member.

If the credit institution offers services on a cross-border basis, it must observe the same rules and requirements.

Non-EU credit institutions

The EU Banking Consolidation Directive (2000/12/EC) governs the relationship of EU member states with third countries on banking matters.

The Central Bank of Cyprus will consider an application for a licence to establish and operate one or more branches in Cyprus from a bank incorporated in a country outside the EU whose competent banking supervisory authorities, in its judgment, exercise proper licensing and banking supervision and which subscribe to the principles embodied in the Basle Concordat on Banking Supervision of 1983 as supplemented in 1990, 1992, 1996, 1997 and 2001.

Those authorities should, in addition, subscribe to and implement robust anti-money laundering and anti-terrorist policies and procedures in accordance with internationally acceptable standards, such as the revised Forty Recommendations for combating money laundering and the Eight Special Recommendations against terrorist financing of the Financial Action Task Force.

The Central Bank may grant a licence with or without conditions, or refuse to grant a licence with the refusal being notified within six months of receipt of the application.

A prospective applicant bank must:

• be an institution enjoying a good reputation internationally and having an established track record of growth and profitable operation
• be domiciled in a country where, in the opinion of the Central Bank, stable economic and political conditions prevail
• have a widespread and transparent beneficial ownership and, preferably, be a public company listed on a stock exchange
• enjoy a high rating by an international rating agency
• have a strong capitalization
• demonstrate that it does not have a significant concentration in lending or deposits or significant related party business in general

A successful applicant bank is required to establish a physical presence in Cyprus by operating one or more fully staffed branches, not merely a 'brass plate' operation or accounting/booking centre.

Apart from background information on the bank and information on its proposed operations in Cyprus, an applicant bank is required to submit:

• a Letter of Authorization which enables the Central Bank to approach and exchange information with the applicant bank's home banking supervisory authorities. The policy of the Central Bank is to obtain directly from such authorities a written consent, an undertaking that they will exercise consolidated supervision over the global activities of the bank, including its operations in Cyprus, and assurances of their capability of exercising such supervision, the availability of lender of last resort facilities, the exercise or not of 'ring fencing' if the bank is wound up and the deposit insurance arrangements in the home country
• Letters of Comfort from its head office and/or ultimate controlling and beneficial shareholders as appropriate. Depending on the individual circumstances, Letters of Guarantee instead of Letters of Comfort may be required
• extracts from the minutes of the relevant directors' meeting, resolving the establishment of the branch in Cyprus and the issue of a Letter of Comfort

Annual accounts for the branch, as if it were a separate legal entity, must be prepared and submitted, after audit, to the Central Bank within four months of the end of each financial year. The auditors' report must include matters such as:

• the branch's compliance with the conditions, if any, attached to its licence
• the adequacy of the branch's internal control systems
• the adequacy and accuracy of information which passes from the branch to its head office
• the adequacy of the branch's provisions against bad and doubtful debts

The local chief executives and managers of the branch must satisfy the Central Bank that they are fit and proper persons to be involved in the provision of banking services, determined by means of detailed questionnaires completed by the persons concerned. At least two people permanently resident in Cyprus must be responsible at all times for the management and/or monitoring of the operations of the branch.

Once in operation, the branch will be subject to the supervision of the Central Bank through regular on-site examinations and off-site monitoring. The minimum annual fee payable to the Central Bank for supervision and inspection is US$ 15,000.

The Central Bank may require a branch to maintain a minimum reserve with it.

Branches are required to become members of the Cyprus Deposit Protection Scheme unless covered by a guarantee scheme in their home countries which is deemed to be equivalent to the Cyprus Scheme.

If management and control of the branch are exercised outside Cyprus, no Cypriot corporation tax will be payable, but if management and control are exercised in Cyprus, tax is payable at 10 per cent.

Foreign bank branches may have the following advantages, arising mainly from the geographical position of Cyprus:

• Attracting international business connected with neighbouring countries
• Servicing the transit trade which uses the Cypriot ports en route to the Middle East and Africa
• Specializing in shipping and aviation finance
• Attracting business from the international and expatriate communities in Cyprus as well as from international companies which maintain their international or regional headquarters in Cyprus
• Providing finance and related services such as leasing to neighbouring countries with whom Cyprus has double taxation treaties
• Playing a part in the reconstruction of neighbouring war-torn countries