Offshore companies

• Registration of Offshore Legal Entities
• Offshore Limited Companies
• Requirements for setting up an Offshore Limited Companies
• Administrative Offices in Cyprus
• Accounting and Auditing Requirements
• Tax Incentives offered to Offshore Entities and their Expatriate Employees
• Cyprus Double Taxation Treaties
• Agreement between the republic of Cyprus and the Russian federation for the avoidance of double taxation
• The Cyprus Stock Exchange
• Acquiring Immovable Property in Cyprus
• Question and Answers relating to Offshore Companies
• Other Offshore Entities available within the jurisdiction

Registration of Offshore Legal Entities

   Offshore entities may be registered in Cyprus in the following legal forms:

• Limited Company.
• Partnership.
• Branch.

   The Cyprus Laws, governing the aforementioned legal forms are identical to the Laws of the United Kingdom. Limited Companies make up the vast majority of offshore entities registered in Cyprus. Branches and Partnerships constitute only a small percentage, mainly because their legal status and financial liabilities are ultimately the same as those of their beneficial owners.

   Under the Exchange Control Laws, the establishment of any offshore entity in Cyprus requires the prior permission of the Central Bank.

   The Government of Cyprus, through the Central Bank, exercises a supervisory function in order to ensure that permission to set up an offshore company is given only to desirable and reputable persons or concerns. To this end, the Central Bank requires bank or other references as to the trustworthiness of the proposed shareholders. There are different requirements which must be met and additional references to be provided by offshore enterprises intending to engage in publishing or rendering insurance, banking or financial services to the public at large.

   However, for non-extraordinary cases the permission of the Central Bank, which is usually readily obtained, stipulates the following conditions:

• The business must be confined to activities outside Cyprus.
• The ownership must at all times be held beneficially by non-residents.
• No finance must be obtained from local organisations other than from an Offshore Bank Unit (OBU).
• All local expenses must be covered from funds to be imported from external sources.
• Annual audited accounts and other required information must be submitted to the Central Bank regularly .
• Foreign funds imported and converted to local currency must be reported to the Central Bank regularly.

   Permits for the establishment of Offshore Financial Services Companies, known as “OFCS”, incorporate a number of special conditions additional to those listed above. There are usually references connected to the status and experience of the applicant company or person including reliable letters of comfort from a business associate involved in the same business.

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Offshore Limited Companies

   The liability of a private company’s members is limited either by shares or by guarantee. If a company is limited by shares, the liability of its members is limited to the nominal value of the shares subscribed to by them and if the shares are fully paid up, then the shareholders are not liable to contributing further. On the other hand, if a company is limited by guarantee, the liability of its members is limited to the amount to which they have agreed to subscribe in the case of liquidation. Companies limited by guarantee are usually formed by non-profit-making organisations. Offshore entities are always registered as private companies because this legal form enjoys comparatively inexpensive formation procedures, consensus of a few shareholders, control over the membership and uncomplicated reporting requirements.

A Private Limited Company is a company which by its Articles of Association:

• Restricts the right to transfer its shares and prohibits the issue of bearer shares.
• Prohibits any invitation to the public to subscribe for its shares or debentures.
• Limits the number of its members to a maximum of fifty with a minimum of two.

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Requirements for setting up an Offshore Limited Companies

   1. Name of the Company

   The name of the company has to be approved by the Registrar of Companies. This procedure usually takes 2-4 days. It is advisable to give a choice of three names in order of preference as each application has to be carefully checked against previously registered names before approval is granted. The following are considered by the Registrar of Companies:

    1.1 Name Restrictions

    A name that is similar to or identical to an existing company. A name that is known to exist elsewhere. A name that implies illegal activities. A name that implies Royal or Government Patronage. Generally, any word that the Registrar considers undesirable.

   1.2 Language of Name

   Names may be expressed in any language using the Latin alphabet provided that the Registrar is provided with a Greek or English translation and the name is not considered undesirable.

   1.3 Names Requiring Consent or a Licence

   “Bank”, “Trust”, “Building Society”, “Insurance”, “Assurance”, “Re-Insurance”, their foreign language equivalents or any name that the Registrar considers it may be related to the aforementioned. Recently, the Central Bank of Cyprus, listed the following names as ones requiring special licence.

    1.4 Suffixes to Denote Limited Liability

            Limited or Ltd.

  2.  Memorandum and Articles of Association

    All Limited Liability Companies must prepare a Memorandum and Articles of Association.

    The Memorandum specifies the activities in which the Company may engage. More specifically, the first three main object clauses must include the main proposed activities of the Company.

    The Articles of Association specifies the rules governing the internal management of the Company.

  3.  Authorised and Issued Share Capital

   The Share Capital must be expressed in Cyprus Pounds. There is no legal requirement as to the minimum or maximum Share Capital of the Company. However, the Central Bank of Cyprus recommends that the minimum authorised, issued and paid up Share Capital of a Cyprus Offshore Company not be less than CYP 1.000,00. For Companies wishing to establish a physical presence in Cyprus the minimum is CYP 10.000,00. Such Companies may also enjoy and take advantage of Duty Free Concessions. (further information about duty-free concessions is given on page 16)

    The minimum number of Shareholders is two (2). There are no legal shareholding requirements. However, the participation of non-residents must be first approved by the Central Bank of Cyprus. If anonymity is required, the shares may be held by one of the trustee companies provided by Cyworld  Business Centre. Each beneficial shareholder must provide the Central Bank of Cyprus with bank references from a foreign bank. Experience has shown that an appropriate telex or facsimile sent directly to the Central Bank or to our offices by the bankers of the intended beneficial owners of the shares in the Cyprus Company will in most cases suffice. An adequate sample of a bank reference is given in Appendix III.

    Specifically, the following information is needed for each shareholder:

• Full name.
• Residential address, telephone and facsimile numbers.
• Nationality.
• Occupation.
• Number of shares to be held.
• Copies of passport or identity card.

   The minimum number of Directors is one. They may be natural persons or corporate bodies, of any nationality and need not be resident in Cyprus. The powers of the directors are determined by the provisions of the Articles of Association. It is usual to make provision for general and wide powers to conduct the business affairs of the Company, with perhaps some limitation on borrowing powers.

   It may be important, from a tax point of view, that the management and control are exercised from Cyprus. Local Directors can be appointed from our office to carry out their functions based on instructions received from the beneficial shareholders. This arrangement, facilitates the smooth and timely execution of the operations of the Company.

  The information required for each director is:

• Full Name.
• Residential address, telephone and facsimile numbers.
• Nationality.
• Occupation.

     5.1 Appointment and Removal of Directors

      Appointment of Directors is determined by the Company’s Articles of Association and is a power usually vested in the general meeting or, in some cases, in certain classes of shares. Directors may be dismissed by ordinary resolution of the shareholders. The Articles may lso provide for dismissal in certain circumstances and determine the procedure for dismissal.

       There are no mandatory rules as to the location or frequency of such meetings. Board meetings can be held at such places and at such times as the Board may determine.

      The information relating to directors disclosed to the Registrar of Companies is comprises the name, address, nationality and occupation.

6. Company Secretary

   Under the Companies Law, Cap.113, a Company Secretary is required who must be a natural person, but need not be resident in Cyprus. In this respect, a company secretary from Cyworld can be provided.

   All Companies must maintain a registered office in Cyprus. Companies are welcome to use our address as their registered office.

   It usually takes about one (1) week, subject to name approval. However, “off-the-shelf” companies are always available. If it is considered necessary, the name of the Company can be changed at a later date. In such cases, the time scale to incorporate a Company will not be more than three (3) days.

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Administrative Offices in Cyprus

     An offshore company registered in Cyprus is allowed to maintain its administrative office in Cyprus.

     If the company maintains an office and has at least one non-resident director then it is entitled to a duty free certificate, which enables the company and the director to buy duty free goods.

     Non-resident directors and employees of offshore companies which maintain administrative office in Cyprus are permitted to live in Cyprus. Permission is granted by the Central Bank of Cyprus. Families accompanying the directors and employees can also obtain permission to reside in Cyprus.

         VISAS

     All travellers to Cyprus must hold a valid passport. Visas are required except for citizens of European Union and Commonwealth member countries, and for citizens of the following countries: Antigua and Barbuda, Australia, Bahamas, Bahrain, Barbados, Belize, Bermuda, Botswana, Canada, Dominica, Fiji, Gambia, Ghana, Grenada, Hungary, Iceland, India, Jamaica, Japan, Kenya, Kiribati, Kuwait, Lesotho, Liechtenstein, Malawi, Malaysia, Malta, Mauritius, Nauru, New Zealand, Nigeria, Norway, Oman, Papua New Guinea, Qatar, Romania, Samoa, San Marion, Saudi Arabia, Seychelles, Sierra Leone, Singapore, Solomon Islands, Sri Lanka, St Christopher and Nevis, St Vincent and the Grenadines, Swaziland, Sweden, Switzerland, Tanzania, Tonga, Trinidad and Tobago, Tuvalu, Vanuatu, Uganda, United Arab Emirates, the United States, Yugoslavia, Zambia and Zimbabwe.

    Transit visas are not required for travellers staying for less than five days, provided they hold entry visas for their final destination.

         WORK PERMITS

    Any person wishing to work in Cyprus must apply to the Immigration Department of the Ministry of the Interior in Nicosia for a temporary residence (employment) permit prior to arriving in Cyprus. Applications may be made on behalf of the person by the prospective employer in Cyprus or our offices. Approval of such applications depends largely on the contribution the person can make to the economy and the extent to which the job can be filled by qualified local staff. Permits take about one month to process and can be valid for up to four years.

Note: For further information on the above mentioned points, please do not hesitate to contact Cyworld  Business Centre.

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Accounting and Auditing Requirements

   The accounting profession in Cyprus, which is of high standard, is represented by the Institute of Certified Public Accountants of Cyprus. Its members are either Chartered or Certified Accountants of the respective United Kingdom Institutes (the Institute of Chartered Accountants and the Chartered Association of Certified Accountants). The majority of the big international accounting firms are well represented on the island with members or correspondent firms.

   Offshore enterprises are subject to the same reporting requirements as all other Cypriot business entities.

   The directors of every company have the obligation under the Law to prepare audited financial statements, not later than eighteen months after the incorporation of the company and subsequently once a year, to lay before the company in a general meeting a set of financial statements consisting of the directors’ report, the auditors’ report, a profit and loss account and a balance sheet. These financial statements must be also submitted to the Tax Authorities and the Central Bank, not later than 12 months after the year end.

    Offshore enterprises are subject to the same reporting requirements as all other local business entities.

• Filing of provisional income tax declaration for current year of assessment. The year of assessment corresponds to the calendar year. The provisional income tax liability is payable in three installments.
• The provisional income tax declaration may be revised by 31 December of the current year. The revised taxable income may only be reduced to an amount for which provisional income tax was already paid (i.e. the revision can not result in a refund). Alternatively the provisional taxable income may be revised upwardly without any limitations.
• Payment of first installment of provisional income tax.
• Filing of self-assessment declaration of final income tax liability for the previous year of assessment as determined by the audited financial statements.
• Payment of final income tax liability for the previous year of assessment.

• Payment of second instalment of the provisional income tax liability

• Deadline for submission of audited financial statements together with the tax return for previous year of assessment.
• Deadline for revision of the provisional income tax declaration.
• Payment of third installment of provisional income tax liability.

  1.1 Interest and Penalties

• Interest on overdue tax is payable at 5% p.a. if the tax is settled within six months from the due date or 9% p.a. if settled any later.
• 5% penalty is imposed on tax due if:

             a)   the provisional income tax declaration was not submitted in time and the                     Commissioner of Income Tax has to issue an assessment himself. In practice the                      Commissioner issues provisional income tax assessments around October.

             b)   The audited financial statements are not submitted by 31 December of the                      following year.

• 10% penalty is imposed on the final net tax payable if the provisional taxable income is less than 75% of the final assessed.
• Tax overpaid is refunded with interest at 9% per annum.

  2. Registrar of Companies

     An Annual General Meeting (AGM) of the company’s shareholders is held 23 days after the date of issue of the financial statements. Audited financial statements for the year are submitted with the Company’s Annual Return to the Registrar of Companies. The Company’s Annual Return, dated 14 days after the AGM, must be filed within 28 days of that date.

     Notice for the following, must be given to the Registrar of Companies within one month after the passing of the relevant resolution:

• Redemption of preference shares.
• Increase in authorised share capital.
• Issue of new shares.

     Notice for the following changes, must be given to the Registrar of Companies within 14 days of the relevant change:

• Board of Directors.
• Secretary.
• Registered address.
• Shareholders.

  3.  Central Bank of Cyprus

    Within six months from the end of the financial year, financial statements must be filed with the Central Bank of Cyprus, together with a confirmation from the auditors stating that the company has not carried out any transactions with residents other than local payments for administrative purposes.

   Requirements to keep books of account

    Under the Companies Law, Cap.113, every company should keep proper books of account with respect to all amounts of money received and expended by the company, and the matters in respect of which the receipt or expenditure takes place, all sales and purchases of goods by the company, and all assets and liabilities of the company.

    Partnerships, although not required by law to prepare audited accounts, are required by the relevant legislation to keep proper books of account which are open to inspection by the partners.

    Requirements to keep other records

    Certain other statutory, non-accounting records, set out below, are also required to be kept by companies:

• Articles of Incorporation.
• Minutes of Meetings of both Directors and Shareholders.
• Register of Members.
• Register of Debenture Holders.
• Register of Charges.
• Register of Directors and Secretaries.
• Register of Directors’ shareholdings.

    The requirement for audit applies to all kinds of enterprises. There are special provisions in the Companies Law, Cap.113, which deal with the appointment, removal and resignation of the company’s auditor and also with disqualification regarding their appointment. Qualified persons for auditing purposes according to the law are either members of a body of accountants established in the United Kingdom and recognised by the Ministry of Finance (i.e. one of the U.K.’s Institute of Chartered Accountants or the Chartered Association of Certified Accountants) or persons authorised by the Ministry of Finance to be appointed as auditors either as having similar qualifications obtained outside the United Kingdom, or as having obtained adequate knowledge and experience. A non- qualified person may, however, be appointed by an exempt¹   private company.

    The law specifically disqualifies the following persons from acting as auditors:

• An officer or servant of the company.
• A partner or employee of an officer or servant of the company (except for exempt private companies).
• A corporate body.

    The appointed auditors are required to report to the members on the financial statements examined by them and their report must include statements regarding the true and fair view of the financial statements, whether they have obtained all the information and explanations necessary for the purpose of their audit, whether proper books of account have been kept and whether the financial statements comply with the relevant legislation. The audit is carried out in accordance with the Approved International Auditing Guidelines and the U.K. Auditing Standards and Guidelines.

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Tax Incentives offered to Offshore Entities and their Expatriate Employees

    A.   Reduced Income Tax Rates for Offshore Companies

       1. The net profits of offshore companies are subject to taxation at the rate of 4.25%.
       2. The profits of offshore partnerships are fully exempt.
       3. The profits of offshore branches whose management and control are outside Cyprus              are fully exempt. Where management and control are in Cyprus the tax rate is 10%.

     Expatriate employees enjoy a favourable tax regime, which makes Cyprus an attractive        place to work in.

     The main provisions are the following:

• Expatriate employees of offshore activities working in Cyprus are subject to taxation at half the normal rates, as shown in the table below:

• Expatriate employees of offshore entities working outside Cyprus are not subject to taxation even if paid through Cyprus. If they are not paid through Cyprus, tax is levied at one tenth of the normal rates.
   
• Expatriate employees working partly in Cyprus and partly abroad, pay taxes at the rates of the above table based on the income they have for the time they spent in Cyprus. For the time they were outside Cyprus they do not pay any tax on their relevant income.

   C.  Import and Excise Duty Exemption for Offshore Companies and their Expatriate             Personnel.

       Imported and locally purchased goods, new or second hand, other than furniture and air           conditioning equipment, for the use of offshore entities and their foreign employees,          are  free of import and excise duties.

  D. Exemption from Social Insurance Contributions for Expatriate Employees of Offshore            Companies

     Full exemption is granted from local social insurance schemes in respect of foreign               employees of offshore entities.

   E.  Refundable Tax on Dividends

     Any withholding tax paid on dividends by resident companies to companies abroad is       refundable on application to the Ministry of Finance. Individuals have the option not to        be assessed on dividends, in which case the tax withheld is final tax on dividends.

  F.  Dividends out of Profits of Offshore Companies

     Dividends out of profits of offshore companies bear no tax in the hands of the recipient       in Cyprus.

  Duty Free Concessions.

   Under the Customs and Excise Law, offshore enterprises and their expatriate employees may acquire the following, free of tax:

     (1)  Office equipment, including supplies of a durable nature such as photocopying              machines, computers, facsimile machines, etc, but excluding goods of a consumable              nature as well as air-conditioners.

     (2) Household effects including all durable goods used in a household such as carpets,             curtains, television sets, video sets, washing machines, refrigerators, etc,
          but excluding air-conditioners.

    Furniture including items such as chairs, tables, desks, bookcases, filing cabinets and wardrobes, does not qualify for exemption from duty.

   (3)  Motor vehicles, including sports cars, station wagons, saloon cars, Jeep, and                    Land Rover type as well as mini-buses with a seating capacity of up to nine                    persons.

   Those eligible for relief from duty are:

    (1)  Offshore enterprises operating continuously from their fully fledged and fully staffed              offices which are open during normal working hours and are separate from private              residences.

   (2)  Full-time expatriate employees of the above enterprises who live and work in Cyprus              during most of the year and whose remuneration exceeds CYP 12.000,00 (approx. US
            $ 24,000.00) per annum.

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Cyprus Double Taxation Treaties

    Cyprus has an impressive network of double taxation agreements. There are currently 26 treaties in force while 4 negotiations are in process and another 3 are awaiting ratification. The treaties signed and ratified by the Republic of Cyprus are based on the OECD (Organisation for Economic Co-operation and Development) model. Cyprus is one of the offshore centres in the world offering the advantage of so many double taxation agreements.

   The purpose of double taxation treaties is the protection of income derived in one country and remitted to another, from being subjected to taxation in both jurisdictions. The treaties usually provide for a tax credit to the recipient of the income for the amount of tax which has already been paid in the country where the income has originated. The maximum income tax suffered is normally that of the higher of the two rates applicable in the two countries.

   The typical forms of income which fall within the scope of the treaties are dividends, interest and royalties. Tax is normally deducted from the gross income by the remitting party in the form of “withholding tax” so that a net amount is transferred to the recipient. The latter will then claim a tax credit for the amount of withholding tax paid in the originating country.

   The treaty with Russia applies to individuals and companies who are resident for taxation purposes in either of the two countries, by reason of residence, domicile or place of management. Income is taxed only in one of the two states and never in both states. The treaty with Russia states that there is no withholding tax on dividends, royalties or interest paid between the two countries. For example, income derived from dividends, interest or royalties earned in Russia and remitted to Cyprus, bears no tax in Russia and is only taxed at 10% in Cyprus.

    Cyprus has ratified Tax Treaties with the following countries:

  The tax treaties with the following countries are:

       Awaiting Ratification: Belgium, Finland, Singapore.

       Under Negotiation: Ukraine, Thailand, Armenia, South Africa.

   In the Cyprus treaties, except those with Canada and the U.S.A., Cyprus offshore companies are allowed, under the provisions of the treaties, to benefit with respect to business profits. Investors in these treaty countries may extract business profits from an eastern European country free of tax, through the use of a Cyprus offshore entity, provided that a permanent establishment does not exist in the eastern European country

DOUBLE TAX TREATIES

Paid from countries shown                                                              Paid from Cyprus to residents
below to residents of Cyprus                                                          of the countries shown below

  Explanatory Notes

(1)  10% if recipient is a company with at least 25% direct share interest; 15% in all  other cases.

(2)  10% if recipient is a company with at least 10% direct share interest; 15% in all  other cases

(3)  10% if recipient is a company with at least 25% direct share interest; 27% if recipient is a  company with more than 25% direct or indirect share interest as long as the German             corporate tax on distributed profits is lower than that on undistributed profits and the         difference between the two rates is 15% or more; 15% in all other cases.

(4)  5% if recipient is a company with at least 25% direct share interest; 15% in all other cases.

(5)  Nil if recipient is a company which controls, directly or indirectly, at least 50% of the voting  power.

(6)  A resident of Cyprus, other than a company which either alone or together with one or   more associated companies controls directly or indirectly at least 10% of the voting power, is entitled to a tax credit in respect of the dividend. Where a resident of Cyprus is entitled to a tax credit, tax may also be charged on the aggregate of the cash dividend and the tax credit   at a rate not exceeding 15%. In this case any excess tax credit is repayable. Where he  recipient is not entitled to a tax credit, the cash dividend is exempt from any tax.

(7)  Subject to certain exemptions.

(8)  Nil if royalties are on literary, artistic or scientific work including cinematographic films and films or tapes for television or radio broadcasting

(9) 5% on cinematographic films not including television films.

(10) 5% on cinematographic films including television films.

(11) 5% on cinematographic films.
 

(12) Nil if royalties are copyright and other literary, dramatic, musical or artistic work not including film or videotape royalties.

(13) 5% if recipient is a company with at least 10% direct share interest; 15% in all other cases.

(14) There is withholding tax of 20% on dividends and 25% on interest. The final tax liability is determined as follows:

1. Companies: in respect of dividends, refundable on application. For interest, on application in accordance with corporate tax rates.
2. Individuals: on objection, in accordance with personal tax rates. In both cases any excess tax withheld is refundable.

  N.B. The agents or recipients of interest or dividends are liable for the payment of the due amount of tax on such income.

(15) At the rate applicable in accordance with domestic law.

(16) Nil if shareholder is a company that holds directly at least 25% of the capital of the company paying the dividends; 15% in all other cases.

(17) 15% for any patent, trade mark, design or model, plan, secret formula or process or any industrial, commercial, or scientific equipment or for information concerning industrial, commerc