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Cyprus
Cyprus is an independent democratic republic, and a member of the British Commonwealth. Its 788,500 population enjoy a prosperous GDP of US$23,000 per head. The economy is dominated by services, with tourism particularly important. Unemployment is low. The Cyprus Government worked hard to create a favourable offshore tax regime while at the same time maintaining a normal-looking domestic economy, albeit with rates of taxation that are low by international standards. The success of this programme is attested by the nearly 50,000 offshore companies registered in Cyprus since 1975. However, the island's entry to the EU in 2004 meant a restructuring of the tax regime, which took place on 1st January 2003. Domestic and offshore companies alike now pay 10% tax. Cyprus has double-tax treaties with 33 other countries, including most major Western 'high-tax' countries, and most Central and Eastern European states. This is unusual for an international offshore financial centre and the effect is that Cyprus is a very effective location for holding and investment companies aimed at emerging markets. Cyprus has a good, European-standard business infrastructure, and English is widely spoken. However, it is a relatively expensive jurisdiction for offshore operations, and many documents need to be filed in Greek. The legal system is predominantly based on English law, and provides for various types of trust. Cyprus is part of the EU, but the northern Turkish speaking part is not included in what we know as Cyprus. Reunification, it if takes place, may form part of Turkey's negotiation to join the EU. Cyprus Companies Law is largely based on the UK 1948 Companies Act and the main points of a Cyprus private corporation are:
Money Laundering In June, 2000, the FATF listed Cyprus as one of 15 offshore jurisdictions said to have inadequate defences against money-laundering. This hastened the introduction of better banking supervision and information exchange. In late 2003 the government also announced plans to weaken previously tight banking confidentiality. Tax Haven Cyprus was among 35 jurisdictions identified by the OECD in June 2000 as meeting the technical criteria for being a tax haven. After the EU agreed its Tax Directive in June, 2003, Cyprus implemented the 'information sharing' provision of the Directive on entry to the Union in 2004. This means that information about bank account information of nationals of other EU countries received in Cyprus by are now being passed to the tax authorities in the individuals' home countries. Cyprus is longer included in the OECD’s list of uncooperative tax havens.
Holding & Investment Companies Many international investors choose Cyprus as the location for financial holding and investment companies, due to the island's combination of tax treaties and low-tax regime. Investment into Central and Eastern European countries and a number of Middle Eastern countries, as well as India, China and South Africa, benefits from low treaty withholding tax rates. Often it would be best for the investment to have a high debt component, since the interest is normally a charge against profit in the destination country, and there is a low or zero withholding tax on interest payments. There is no case in which the withholding rate on dividends is less than the rate on interest payments, and it is sometimes more. The old Russian treaty had zero withholding on both counts, but the new treaty has 5% withholding on dividends. Whatever the mix of interest and dividends, the income once in Cyprus will in the worst case be taxed after deduction of expenses and attached tax credits at 10%. Since 2003 dividend income from abroad is untaxed in most cases. While a few Western countries have lower withholding rates than Cyprus in their treaties with Central and Eastern European states, none competes on profits tax rates. Profits can then be retained or distributed without further taxation. Distributions to some countries will benefit from tax-sparing credits; US investors will be able to mix low-tax Cyprus income with high-tax income, avoiding wastage of tax credits; and even for countries like the UK which have rules on the attribution of profits from Controlled Foreign Corporations there are benefits to be got from careful planning of international financing structures. Intellectual Property Due to its network of double-tax treaties and favourable taxation regime, Cyprus is a suitable place in which to locate an intermediary company to handle payments streams which might otherwise be highly-taxed in the receiving country. Such payments would normally be deductible expenses in the originating country, and under the tax treaties will be subject to low or zero withholding tax (Central and Eastern Europe, China, India, South Africa and a number of Middle Eastern countries). Relevance for Diamond Companies Cyprus does not stand out as a particularly useful jurisdiction for diamond companies, neither for holding companies nor for trading companies. Because of its geographical proximity to Israel and sophisticated business environment, it is sometimes used as a staging post for trade between Israel and the Arab and Muslim countries, especially Dubai.
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