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Newsletter | Articles Understanding the Cyprus changes Following the signing of the EU Accession treaty in Athens on 16 April 2003, Cyprus is due to join the European Union on 1 May 2004. along with nine other countries. Cyprus will be one of the smallest EU countries but probably the one with the strongest economy of the ten new entrants. Cyprus has also received favourable evaluations from the European Commission, the International Monetary Fund and a number of other international organisations. As part of the preparations for EU accession, Cyprus has enacted new tax legislation and has made some amendments to its company law in order to conform to certain EU standards in these areas. Cyprus Tax Legislation. A new Income Tax Law No. N118 (I) 2002 came into effect on 1 January 2003. The main aim of the tax reform was to eliminate differences in the treatment between local and international companies and between Cypriots and foreign individuals resident in Cyprus whilst maintaining its competitiveness from an international tax perspective. The highlights of the legislation are as follows: Unified corporate rate of 10% for both international and local business enterprises. Adoption of the residency basis rather than source basis and the criteria of taxation. Exemption of profits from the disposal of securities. Dividend income is exempt in most cases. No withholding tax on payments of dividend, interest and royalties to non-residents. Capital gains realised on immovable property held outside Cyprus are outside the scope of capital gains tax. New definitions A Resident Company is defined as one that is managed and controlled from Cyprus and will pay tax at 10% of its chargeable income from 1 January 2005. There are some transitional arrangements for 2003 and 2004 which include a higher rate tax of 15% for profits over CYP 1,000,000. Resident Companies can make full use of the country’s extensive network of Double Tax Treaties. A Non-Resident Company is defined as one that is managed and controlled outside of Cyprus and has no source of income in Cyprus. Non-Resident Companies pay no tax in Cyprus. As an obvious consequence of its non-resident status for tax purposes a Non-Resident Company cannot make use of the Double Tax Treaty network nor can it obtain a tax residency certificate in Cyprus. The term “management and control” in Cyprus is defined through the location of the majority of directors. Thus, if the majority is resident in Cyprus, the company is also resident. Defence Tax This is an additional tax also known as the Special Contribution for the Defence of The Republic Law. It is applied to certain kinds of income but there are exemptions. Defence Tax on Dividends Dividends received by resident companies are not liable to Defence Tax if: they are from another Cyprus resident company; the resident company holds at least 1% of the share capital of the overseas company paying the dividend; or the activities of the overseas company paying the dividend lead to less than 50% investment income and the foreign tax burden on the overseas company is substantially lower than the Cypriot tax burden. Defence Tax on Interest Resident companies that receive or are credited with interest are liable to Defence Tax at the rate of 10%. This includes a notional 9% interest on non-interest-bearing loans provided to related parties but does not include interest from ordinary trading activities. Withholding Taxes There are no withholding taxes on dividends, interest and royalties, regardless of the recipient country. Exempt Income Income from trading in stocks and shares and the income of companies owning vessels registered under the Cyprus flag are completely exempt from corporate tax. To form a Cyprus company or to find out more about Cyprus contact David Ashton.