date | theme

22. May 2019 | License barrier § 4j EStG: Requirements/ Legal consequences/ IP-Box/ BEPS

21. October 2019 | EU-wide corporate tax adjustments (CCCTB)?

07. August 2020 | Tax haven check: Which country offers which tax advantages?

18. January 2021 | Saving taxes abroad: Is there a perfect tax haven?

06. April 2021 | Taxation in the Channel Islands (Jersey/Guernsey/Alderney)

Date | Taxes in Cyprus: Is the country a tax haven? (this contribution)

Often comes the question of how high taxes are in Cyprus. More often, the concept of a tax haven is used, which often arises due to significantly lower corporate tax rates in connection with the EU country. We analyse which taxes are subject to special benefits and which taxes are more likely to be avoided. DTAs with other countries also play an important role, but it is important to examine tax obligations in individual cases.

Beginning with the entry of Cyprus into the European Union (EU) in 2004, a lot has changed in the small Mediterranean state. However, work has already been done on reforms to prepare the tax system for EU membership, among other things.

First of all, it can be said that Cyprus was by no means as interesting before joining the EU as after receiving membership. For Member States, intra-European legal traffic is much simpler than for third countries. On the one hand, this is due to the hurdles to other tax systems, the current national borders, which mean significant customs and export duties outside the EU, as well as possible complications in foreign exchange transactions. It should be noted that Cyprus has also had the euro as its official currency since 2008.

Now it is hardly a secret anymore that taxes in Cyprus are significantly lower than in most other European countries. First of all, we are talking about corporate taxes. But why is that even so?

When joining the EU, an interesting factor can be observed again and again, with higher tax rates applying more often during the accession negotiations than immediately after admission to the EU. We will take a closer look at the tax saving models in the further course.

Before that, it is necessary to briefly consider the recent advance of the G7 countries. Because of the existing tax loopholes, at the same time in other countries of the world, the displeasure that important tax revenues are simply siphoned off their business locations. So that these supposed revenues do not flow into tax havens all over the world in the future, the G7 countries want to introduce a global minimum taxation. As powerful as the project sounds, the implementation is much more complicated than is still conceivable today. Around the world, many different tax systems are based and related interests are deeply rooted in the structures of the countries. For example, in the case of so-called tax havens, there are hardly any other factors than taxes, as a result of which these countries have a chance compared to industrial nations or even states with a high population density.

The plan behind the reform provides for a turnover principle instead of the currently prevailing local principle in order to tax turnover where it is generated. In particular, the focus is on international corporations such as Google, Amazon and Facebook, which use their digital services to shift revenue across various holding structures and subsidiaries to low-tax countries.

Since the corporation tax rate in Cyprus is 12.5%, the risk it poses in Cyprus is considered rather low. Because a minimum tax should be set at a percentage of about 15 % worldwide. That would not make the difference very serious.

There are some countries in the EU that have the lowest corporate tax rates. Among these, Cyprus is one of the top places with 12.5% corporation tax. In addition, a special feature here is that no higher tax rate can be set retrospectively and taxpayers thus enjoy early legal certainty and planning security.

Since in Germany, for example, additional taxes are incurred, such as trade tax, the total corporate taxes are significantly higher here than in Cyprus. In Germany, the total burden of corporation tax, trade tax and solidarity surcharge is 29.83%. Other industrial nations of the EU usually have similarly high corporate tax rates as Germany.

Important for the tax system in Cyprus are taxes such as corporation tax, income tax, private dividend tax and capital gains tax.

In addition to the low corporate taxes, there are other special features of the withholding tax in Cyprus. Because this does not exist on the small island state. As a result, funds from dividends, securities and royalties are classified as completely tax-free. In addition, foreign persons residing in Cyprus have an exemption for interest income, regardless of whether they have arisen at home or abroad. The peculiarity of this scheme is a condition which must be fulfilled, according to which the taxable person must be able to demonstrate a non-dom status. This is distributed exclusively to tax residents, provided they are in Cyprus for at least 60 days a year. Once this exists, the status is valid for 17 years. Frequently, the establishment of a corporation is envisaged, whereby the managing director becomes subject to social insurance on site.

This is due to the favoring of acquired IP at the license barrier by so-called IP boxes are supported. This advantage is reflected in the fact that only 20% of all revenues from IP are taxed, and this at a tax rate of only 12.5%, which results in a total taxation of 2.5%, which is not tantamount to taxation. However, since 2016 this has been limited to patents and copyrighted software. Consequently, rights contributing to the marketing of products and services have been excluded from this regulation.

But now let’s look at the other tax benefits that taxpayers in the Mediterranean can expect. The taxation at company level, which has already been mentioned, is only 12.5% in Cyprus. In addition, income from the marketing of patents and software licenses plays a special role in the international gaming sector. Because this fact has made Cyprus an important location in the international gaming industry.

Particularly important when using Cyprus as a tax haven is its membership in the euro zone. This greatly facilitates the intra-European approach by eliminating conversion fees and made the country even more attractive. Finally, there are a few final aspects to consider, because Cyprus is not yet listed as a low-tax country in the EU. This is due to the fact that up to 35% of taxes can actually be incurred in Cyprus and that it is only through tax exemptions and special tax-free types of taxes that the high tax levies can be avoided. In addition, it does not transmit tax data or account data to other countries, at least so far.

In the video Christoph Heuermann, Michael Wohlfart and Kanzlei Meyers & Partner AG explain which are the most attractive countries from a tax point of view.

There is currently a tendency for Germany to grant tax sovereignty to one of the participating countries through DTA, i.e. either the residence state or the other contracting state. Because this corresponds to the approach that taxpayers always pay taxes at the place where they are resident or carry out economic activities in the form of a permanent establishment or similar. However, the goal of taxpayers, who generally have a limited tax liability in Germany, is often to locate their income in a cheaper foreign country instead of in a tax-expensive Germany. It is logical to observe the DBA requirements with the participating states. These are usually based on the OECD Model Agreement, but there are almost always country-specific adjustments.

Now, in this context, it should be emphasized that in 2011, during the reworking of the DTA between Germany and Cyprus, the change was made from the exemption method to the credit method. This will take the same path for the DTA Cyprus as the Federal Republic of Germany has already done for many countries before. In principle, however, the exemption method is considered preferred.