Is Cyprus a Tax Haven in 2023?

In recent years, legislative and tax policies in Cyprus have been amended quite some times, both within its jurisdiction and as a member of the European Union. As of now, it no longer holds the same level of appeal as a tax haven compared to its earlier status. Let’s find out whether Cyprus is still an offshore tax haven in 2023.

In the past, Cyprus was really attractive for people who wanted to do business offshore. Many prominent individuals and businessmen were interested in it. However, due to its commitment to meeting the European Union’s standards and requirements, Cyprus effectively lost its offshore tax haven status by 2023 and isn’t as good of a place to avoid taxes anymore. This shift was particularly prompted by the jurisdiction’s urgent needs during the 2008 financial crisis. The local government embraced European financial and tax regulations, relinquishing its ambition to be a premier tax haven.

Even though there were challenges and changes to its tax rules, Cyprus is still a place favored by foreign investors. This is partly because they only have to pay a reasonable corporate tax rate of 12.5%. Also, if such investors meet certain conditions, they can become European citizens and again pay less tax.

Is Cyprus an offshore tax haven for international companies?

When someone mentions offshore companies, we often think about businesses that operate in tax-free environments and offer privacy for their founders. However, this association can have negative implications, especially with the increasing use of sanctions and information disclosure. This has led to the illegal use of offshore setups for global tax avoidance. Nevertheless, if we try to interpret the concept of an offshore haven correctly, we will discover its positive side.

An offshore company is one that’s set up outside the country where its owner resides and pays taxes. For many foreign investors, this approach is the most appropriate when they aim to expand their business reach, manage taxes within legal boundaries, and diversify assets while also safeguarding their capital.

Not too long ago, Cyprus used to be a highly attractive destination for corporations seeking tax advantages. However, its status as an offshore zone changed when it became a part of the European Union. Presently, companies formed under Cyprus regulations automatically become tax residents of the jurisdiction, but they can still optimize their tax burdens. The opportunity is provided for under multiple Double Taxation Agreements as well as local tax incentives.

FYI: Companies that are managed from outside Cyprus, are recognized as non-residents in the jurisdiction. They are exempt from income taxes in Cyprus.

Why isn’t Cyprus a tax haven any longer?

A typical offshore company is one that’s registered in a place with low taxes or no taxes at all, where it’s not considered a taxpayer. Some examples of these places are the Cook Islands, the Bahamas, Bermuda, Belize, the British Virgin Islands, Panama, the Seychelles, Nevis, and a few other states.

Companies like these, which are often called offshore companies, can’t do business where they’re registered, and they aren’t seen as taxpayers there. Instead, all the money they make comes from outside sources. It is namely in these overseas jurisdictions that they pay taxes.

But what’s wrong with Cyprus and why is it not really a corporate offshore tax haven anymore? Let’s look at all the things that happened:

1. Although Cyprus applied to join the European Union in 1990, it only actually became a member in 2004. One of the main things the EU asked Cyprus to do was change its tax system. Before, offshore companies in Cyprus had to pay a tax rate of 4.5%.
2. Then, Cyprus amended its laws for them to be in line with the international standards. It introduced a transparent taxation system that followed the rules of the EU, OECD, FATF, and FSF.
3. In 2003, the corporate tax rate in Cyprus was set at 10%. Later on, it was increased to 12.5%.
4. Cyprus also put in place a residence-based tax system. They started using IFRS, which stands for International Financial Reporting Standards, and made sure to follow all the rules in place to prevent money laundering and terrorism financing.
5. As of 2023, it is no longer correct to use the terms Cyprus offshore company and Cyprus IBC as these companies have no legal existence any more. No matter where the shareholder of a Cypriot company resides, the company is considered a tax resident if its operations are directly managed in Cyprus.
6. The tax regulations currently in force in Cyprus no longer differentiate between domestic and international companies, even those with full foreign ownership. All entities in the country are subject to the same corporate tax rate, applicable to their global earnings.
7. Since 2023, all companies previously labeled as non-resident in Cyprus (those not managed in their incorporation jurisdiction and not subject to taxes in any jurisdiction globally) are required to pay taxes in Cyprus on their global earnings from all sources.

In short, as of 2023, non-resident companies in Cyprus are only the ones that are not managed or controlled in Cyprus and at the same time pay taxes in any other jurisdiction. Companies that don’t have to pay taxes in any other country globally now have to pay taxes in Cyprus, even if they don’t run their business from there.

Why relocate your business to Cyprus in 2023: advantages of the local tax system

The registration and relocation of businesses to Cyprus hold a strong appeal for foreign entrepreneurs, with conditions that are on par with those found in low-tax havens. Established companies have highlighted the following advantageous aspects of Cyprus’ tax policy:

• A modest 12.5% income tax rate in the European Union.
• Non-residents of Cyprus are solely taxed on income from inside the country.
• Tax incentives for investors, including tax breaks and exemption from personal income tax for certain periods.
• Opportunity to benefit from Double Taxation Agreements (Cyprus has entered into 67 such agreements), enabling effective tax management with minimum taxes possible, akin to offshore havens.
• With the available tax residency schemes, companies can optimize their tax payments and access additional privileges.
• Compared to other European countries, relatively low property taxes in Cyprus are especially beneficial for investors willing to diversify their capital by investing in real estate abroad.

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Is Cyprus a corporate tax haven? Tax benefits for businesses

While Cyprus’ tax system of today may not rank as the most lenient compared to offshore havens out there, it comes with certain merits and a range of benefits. A significant advantage is the corporate tax rate in Cyprus, set at a modest 12.5% for resident entities. This stands out as one of the lowest rates across Europe, an aspect that hasn’t gone unnoticed by numerous international investors.

Delving deeper into a comparison between Cyprus and other low-tax nations reveals that matters are not always as straightforward as they may initially seem:

• Although Hungary maintains a mere 9% tax rate, it is slated to increase to 15% for larger companies in 2024.
• Lithuania has a corporate tax rate of 15%.
• The average corporate income tax rate across the EU hovers around 21.7%.

Cyprus-based companies classified as tax residents are liable to pay taxes on their global income from all sources. Conversely, non-residents are solely required to pay Corporate Income Tax (CIT) on their earnings from sources within Cyprus. For a deeper understanding of Cyprus’ tax system in 2023, please refer to Cyprus Tax: A Guide to Income and Corporate Tax Rates in Cyprus.

Is Cyprus a low-tax haven? Tax incentives in 2023

In Cyprus, there are several tax incentives and advantages for businesses, designed to help entrepreneurs effectively manage their taxes. These provisions make it possible to either avoid certain payments or pay taxes at reduced rates:

• Income tax in Cyprus is set at 12.5%, but it can be decreased by utilizing Double Taxation Agreements (DTAs). For this purpose, you’ll have to pay taxes in another country.
• Dividend tax is not levied on subsidiary companies that are controlled from the EU or countries with which Cyprus has DTAs. For other companies, the dividend tax rate is 17%.
• Personal Income Tax (PIT) is imposed on incomes exceeding EUR 19,500 per year. Residents of Cyprus with non-domiciled status are exempt from taxes on their income from foreign sources.
• Property tax can be reduced for those purchasing new buildings, renovating old housing, and in certain other cases.
• In Cyprus, the value added tax (VAT) rate is 19%, although reduced rates of 0.7% or 5% apply to certain goods and services.
• Unique tax benefits are offered in Cyprus to companies that engage in intellectual property. Under the IP-Box program, up to 80% of profits from qualified assets are tax-exempt.
• The Cyprus government does not levy inheritance and gift taxes. Besides, it offers tax breaks and favorable conditions for non-domiciled residents.

Retirees in Cyprus pay a 5% tax on their retirement benefits, if the latter exceed EUR 3,420 per month. Pensions below the above threshold are not taxed.

Cyprus’ offshore zone: from past to future

Often referred to as a tax haven, Cyprus is a compelling option for both Europeans and people from other nations. While Cyprus may no longer be classified as a low-tax haven, there are still avenues to optimize your tax liabilities there. Even better, Cyprus stands out as one of the cheapest European countries, which is particularly advantageous for potential immigrants and retirees.

The nation offers much more than just a conducive environment for setting up businesses. It is a welcoming destination for permanent relocation. Families with children can benefit from a range of educational opportunities in both private and public schools. Parents have the flexibility to explore various employment sectors or embark on entrepreneurial ventures in Cyprus, with the option to start their journey as self-employed individuals.

Notably, Cyprus boasts low crime rates. With Cyprus Permanent Residency (CPR) programs in place in the country, you’ll experience no issues with securing residency in any EU country. Investment initiatives designed for permanent residency and relocation to Cyprus and other countries extend to third-country nationals. For more information on the subject, you are welcome to study other Q Wealth featured articles.