Cyprus

It should be noted from the outset that these companies are empowered to carry on any type of activities except those licensed including the provision of banking, insurance and reinsurance services and recently added financial services.
Over 135,000 companies are registered with the Register of Cyprus. The most widespread type of international business companies’ activities is trade. On the Island the companies may stock or repack its transit shipments, establish there trade exhibitions of its goods as well as to organize various trainings and seminars for its agents and clients. The second position is occupied by the companies providing professional services – accounting, promotional, technical support as well as the ones in the sphere of marketing, business consulting and software engineering. A sufficient part is played by companies-news agencies, periodicals publications editing houses and publishing houses (their registration requires special permit pursuant to the Press Law the obtaining whereof is not very difficult subject all requirements are met). The rest is shared between holding, administrative, mediator, shipping and other companies.
Some of our overcautious businessmen are confused by the obligatory submission of Cyprus companies’ accounts which are not required in some negligent “tax havens”. What if they spy? However this practice is primarily supported by the reason that these companies shall pay taxes though of a low level for the local authorities to be firmly sure that the income sources are exclusively of a foreign nature. Cyprus authorities are well effective to deal with inveterate wheeler-dealers by themselves, and they by no means are used to informing foreign tax authorities regarding the offshore companies’ owners and their profits. Otherwise who would incorporate his company in the jurisdiction?
An International Business Company as well as previously an offshore one is registered via submitting proper forms for approval to the Central Bank of Cyprus (hereinafter referred to as “CB”) and the Registrar of Companies. It should be noted that it is impossible to incorporate and especially to purchase a ready-made company without using the services of a Cyprian lawyer or a firm (including a Russian one) involved in partnership relations with a Cyprian legal organization working in this sphere.
According to the exchange control Law CB is responsible for granting permit to non-residents that purchase shares of legal entities registered in Cyprus. The exchange control Law does not differentiate between the citizens of Cyprus and foreigners yet it does differentiate between residents and non-residents.
The Registrar of Companies in Cyprus is empowered to disapprove of the name of the company if it is alike that of an already existing company, implies misleading, sounds too general or bombastic, points at the royal, national or international attribute or includes the words – “Co-operative”, “Insurance”, “Bank”, “Financial Services” which do not correspond to the aims of the company.
Notwithstanding that the family names of the true owners of International Business Companies must be filed with CB, their personalities are protected by secrecy regulations. The Law prohibits a bank to be a source of information about natural persons or legal entities. The names of only registered owners are stated in minutes of the court filed with the Department of Registrar of Companies and Official Receiver. The list of companies is a confidential document. From time to time CB makes public only consolidated figures for the Government and community to evaluate the offshore sector development.
For the purpose to confirm the financial reliability of true owners of International Business Companies, their solvency, respectability and that they are honored in the country of residence, CB requires bank or other letters of credence to be submitted (special forms for such letters have recently been adopted). In some cases CB is empowered to apply to the Ministry of Internal Affairs of the country of residence of the true owners of companies willing to operate on the basis of fully-operational office and thus use foreign members of stuff employed in Cyprus. Recommendations are not necessary to well-known international corporations the shares whereof are traded on famous stock exchanges.
Usually it takes several days to obtain incorporation permit. The following basic documents are necessary to incorporate a company:
 printed Memorandum and Articles of Association signed by the subscribers and certified by the lawyer;
 declaration by a practicing advocate that all the requirements of the Companies Act are satisfied;
 Certificate of Directors and Secretary and Certificate of the Registered Office of the company.
Should the Registrar of Companies deem the submitted documents be drawn up correctly he will issue the Certificate of Incorporation pursuant to which the offshore company becomes a legally existing corporative body.
By the issue of the permit the Central Bank determines certain provisions regarding actual ownership, activities, financial transactions and the order of accounts that must always be observed.
At the end of a financial year each company is obliged to forward to the CB the balance and income and expenditure assessment. For the preparation thereof chartered accountants and auditors practicing in the Republic of Cyprus and duly authorized by the Minister of Finance are retained. The auditor is to confirm that the company did not make any transactions with residents but for professional services payments and for the administrative purposes.
Pursuant to the Companies Act the first annual general meeting is to be held by the company during 18 months since the date of incorporation. Afterwards the interval between two meetings shall not exceed 15 months. Table A of the Companies Act contains regulations regarding proceedings at meetings including voting, quorum, voting by proxy etc. These regulations may partially or in full be observed by the company. The usual proceedings at meetings include declaring dividends, matters regarding the balance of the company, calculation of income and expenditure as well as Directors’ and auditors’ reports; furthermore – election of Directors to substitute those retiring, the appointment and fee of the auditor.
Directors manage the company during the periods between general meetings. Each Director is authorized to conclude contracts (subject to some established internal restrictions). As a result Director bears the responsibility for the losses caused to the company through the abuse of the powers of a Director. In accordance with the Companies Act the court may bind directors to reimburse the debts of the company if they carried on its activities being aware of the company’s insolvency. A Director shall be prosecuted or liable to civil proceedings if he transacts business with the purpose of misleading creditors or any other person. The Act also provides for the responsibility of a Director for dishonest preference i.e. assistance to one creditor at the expense of another one during or previously to the winding of the company.
In addition to the annual returns it is obligatory to make the “Director” Report that shall be attached to the balance of the company and served to the shareholders thereof. This report shall contain the information determined by the regulations of the Articles of Association. Directors are also responsible for keeping registers and records.
Each company in Cyprus pursuant to the Law is obliged to maintain duly organized records of its economic activities. All correctly completed books and records should be kept either in the Registered Office of the company or in any other office as the Directors may determine. Should the documentation be kept outside the island, it must in equal intervals of time be forwarded to the Office of the Company in Cyprus. Every company at its annual general meetings shall appoint auditors for annual auditing. The Law provides that the auditors shall be the members of either the Institute of Approved Chartered Accountants of Cyprus or associates of British Association of Accountants and Auditors or they must be approved by the Council of Ministers to be persons of efficient qualification, skills and experience.
The audited financial accounts are necessary to present at an annual general meeting of the company as well as to submit to the Registrar of Companies together with the annual return that contains data of the company capital structure, pledges and mortgages besides the names and the addresses of the members, Directors and the secretary of the company. The exempt private companies are not obliged to submit the audited financial accounts together with the annual return.
On the 1st of May, 2004 Cyprus joined the European Union. It was 1987 when Cyprus and EC concluded the Customs Union agreement proposing a gradual abolition of duties on most Western-European manufactured goods and produce (which (the agreement) however did not apply to so-called “service” economic sectors to which the offshore sector relates as well). The government of Cyprus has also adopted some substantial changes in the system of companies and natural person’s taxation. The new Law came into force on the 1st of January, 2003, however there are certain regulations which were introduced as early as 2002. The main aim of the new enforced Law – the coordination of own legislation with the European Union legislation and EU Code of conduct as well as the fulfillment of the obligation before the Organization for Economic Cooperation and Development (OECD) to eliminate the dangerous tax practices.
The following are some of the principal regulations of the tax reform relating to offshore companies and that from our point of view are of the main interest to be examined by those who regard Cyprus as the prospective sphere of the offshore activities:

• The definition of a company-resident of Cyprus is adopted. A company is a resident of Cyprus if it is controlled and managed from the territory of Cyprus, if most members of the Board of Directors of the company are residents of Cyprus.
•  The differences between general companies in Cyprus and offshore companies are abolished. The taxable income of all companies in Cyprus is liable to taxation at the rate of 10%. The companies that were operating and in Goodstanding before the 31st of December, 2001 reserve the tax rate of 4.25% till the end of 2005.
•  Those of companies in Cyprus owned by the citizens of European Union members are empowered to gain profits both in the territory of Cyprus and outside it. If the owners of a company in Cyprus are not citizens of European Union members – such company has to obtain a license to have the right to carry out activities in the territory of Cyprus (actually it is not difficult but all formalities must be observed).
•  Dividends income derived from outside Cyprus is not levied with the corporate tax in Cyprus.
•  No tax is levied on profit received by the companies-residents of Cyprus from securities transactions. “Securities” are defined as shares, bonds, debentures and other securities of companies or other legal entities incorporated in accordance with the legislation of Cyprus or beyond it.
• The interdiction prohibiting during the period of five years to shift “the losses” to another article while preparing the financial accounts of the company is abolished. There is no time limitation any more.
•  For the purpose of compliance with the EU legislation the new tax legislation adopted the corresponding EU directives permitting rearrangement, takeover, purchase and merger of companies without changes in tax terms.
•  No withholding and royalty payment tax.
•  VAT in Cyprus is raised from 10% to 13%.
•  Real estate tax applies to the real estate in Cyprus and the rates are modified as follows:

Asset value (CYPs)	RATE (%)
Less than 100,000	0
100,001 – 250,000	2.5
250,001 – 500,000	3.5
500,001 and more	4

 
Thus and so the favorite tax rate of 4.25% flows into past and actually there are no offshore companies (in terms of both name and nature). However it does not cause panic in Cyprus as the perspectives of using companies in Cyprus as European holding structures are brought to the forefront whereof the Cyprian lawyers expect the main rise in the number of incorporation cases and amount of the corresponding services rendered. The companies in Cyprus obtained the image of a European company and at will and sometimes under the necessity VAT number may be obtained for preferential trading with EU countries.
In the history of the European Union – the “Cyprus case” is practically unprecedented for it is not an English colony like Jersey or Gibraltar that is in question the status whereof, England being joined to the EU, was regulated by the special protocols but a sovereign state. And what is more important Cyprus entered into EU without abolishing the low Tax regime quite deliberately. Now when Russia is far from entering into the European Union the offshore companies incorporated in Cyprus and owned by our fellow countrymen may provide them with a real “window to Europe”.

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