Private Company Limited by Shares

The relevant legislation is Cyprus Companies Law, Cap. 113, which is virtually a copy of the English 1948 Companies Act. 

A private company is one which by its articles:

Restricts the right to transfer its shares

Limits the number of its members to 50

Prohibits any public subscription to shares or debentures

When 100% foreign-owned, a private company is referred to as an offshore company, although recently the expression International Business Company has come into favour. However, as from 1st January, 2003, an offshore company (IBC) no longer has a separate taxation status, and will be taxed according to the same principles as a regular company. In future, IBCs will be allowed to trade inside Cyprus. 

However, an existing IBC which makes an irrevocable commitment not to trade inside Cyprus until 2006 will be able to claim the existing low tax rate for the three years 2003, 2004 and 2005.

In order to form a foreign-owned company, a bank reference and copy of the owner's passport is required for the registration. The bank reference must be issued by a bank included on the Central Bank of Cyprus's list of qualifying banks.

The following information will be required for the formation of a standard Cyprus offshore company:

Name of the company with two alternatives;
Objects of the company (description of principal activities of a Cypriot off-shore company);
Capital: a minimum of CYP 1000 for a company with no offices in Cyprus, or CYP 10 000 for a company with offices in Cyprus. Payment of the capital can be extended in time.
Full personal details of shareholders (minimum two) will be necessary.
Full personal details of directors (minimum two) will be necessary

Registration of a standard Cyprus offshore company takes three weeks typically.

In Cyprus, a company's formation documents and its annual return must be filed in Greek; the same applies to accounts when these need to be filed.

A private company limited by shares is exempt if:

No body corporate other than another exempt company holds any of its shares or debentures

The number of debenture holders is not more than 50

no body corporate is a director of the company.

The main advantages of an exempt private company are:

It need not file accounts with its Annual Return

It is not subject to the statutory restrictions on loans to directors

Any company registered under the Act whose Articles do not contain the restrictions applicable to private companies is a public company. 

A public company may obtain a listing on the Cyprus Stock Exchange.

Partnerships fall under the Partnerships and Business Names Law Cap 116, basically similar to the equivalent English legislation. 

They must be registered with the Registrar of Partnerships within one month of formation, giving name, purposes, place of business, full particulars of the partners etc. Foreigners may belong, but need exchange control consent.

A general partnership may have between 2 and 20 individual members (up to 10 only, if it intends to conduct banking business).

Partnerships do not need to file accounts or to be audited.

A Sole Proprietorship falls under the Partnership and Business Names Law Cap 116, being essentially similar to the English sole partnership. It is subject to broadly the same rules as a General Partnership.

A sole proprietor has unlimited liability for his debts, and any business name (other than his own) must be registered with the Registrar of Partnerships.

A 'local trust' is governed by the Cyprus Trustees Law Cap 193, which closely follows the English Trustee Act 1925. 

The settlor and beneficiaries are normally residents of Cyprus, and the trust and its property are subject to exchange controls.-

The International Trusts Law of 1992 brought Cyprus trust law into line with that of other major international trust jurisdictions. Both settlor and beneficiaries must be non-resident, although one Trustee must be Cypriot. International trusts may have many tax and legal advantages.

In 1975 the Cyprus Government began to create a welcoming regime for offshore companies, and more than 54,000 offshore enterprises have been registered. Currently about 14,000 IBCs are in business, including 1,200 with fully-staffed offices; the remainder are administered by local professional firms. Due to Cyprus's particularly favourable tax treaties with Russia, the CIS and the countries of eastern Europe, the island is chosen by a high proportion of firms needing to set up an offshore base as a holding or investment company, or trading subsidiary, for those regions. Among emerging markets there are also favourable tax treaties with China, India, South Africa and a number of Middle Eastern countries.

In July, 2002, as part of the Income Tax Act No. 118(I) of 2002, Parliament approved a uniform 10% corporate tax rate, to apply to both onshore and offshore companies, plus a 2% levy on wage bills (meant to subsidise pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, the rules are complex.

The 10% corporate tax gives Cyprus the lowest rate in the EU, after Ireland (12.5%), with the (very new) exception of the Isle of Man, which has just announced a nil rate - but the IOM isn't really in the EU anyway for most purposes.

The new regime introduces a 'residence'-based system of taxation, and is in operation from 1st January 2003.

The remainder of this section describes the most important types of offshore business activity carried out from the island. As far as the taxation of offshore companies is concerned, it is now of mainly historical interest; but in other respects the sectors described are ongoing.

An Offshore Banking Unit is a Cypriot limited liability company, or a branch of a foreign bank, which has obtained a banking license from the Central Bank. It has all the advantages of any other offshore entity.

In Cyprus, non-Cypriot banks are offered the status of Offshore Banking Units (OBUs) which are restricted to banking operations with non-residents in foreign currencies, and with Cyprus-registered offshore companies and their expatriate staff. The Central Bank issues OBU licenses and normally requires fully-staffed operation.

OBUs are taxed as offshore enterprises, normally at 4.5% of profits (now 10%), although certain types of profit resulting from domestic operations (if permitted) may attract higher rates. If the OBU is controlled from abroad, there will be no profits tax.

Branches of foreign banks

The Central Bank favours this arrangement; there are no liquidity or risk ratio requirements, and there is no reserve requirement. 

The annual supervision fee is $15,000.

Subsidiaries of foreign banks

These are supervised more closely, and liquidity and risk ratios may be imposed. 

The annual supervision fee is $15,000.

Representative Offices
Representative Offices may be formed under the Companies Law, but may not conduct banking business except with clients of their parent bank; the annual supervisory fee is $5,000.

Administrative Banking Units (ABUs)
These units carry out their banking business through local Cyprus banks but are otherwise similar to branches or subsidiaries. 

The annual supervisory fee is $10,000.

In addition to the Central Bank, the Cypriot banking system consists of 9 local commercial banks, 30 IBUs, 2 administered banking units, 3 specialised financial institutions and a number of leasing companies. Commercial banking arrangements and practices follow the British model.

An Offshore Financial Services Company (OFC) is an offshore company which engages in any of the following:

dealing, buying, selling, subscribing to or underwriting investments

managing investments belonging to other persons

giving investment advice to actual or potential investors

establishing collective investment schemes

The usual Central Bank vetting process for offshore companies also ensures that prospective OFCs are linked to existing investment or financial services companies in well-regulated (meaning in practice, high-tax) countries, although exceptions are made for the internal financial services of respectable companies. The Central Bank imposes additional conditions on OFCs, and usually requires a 'Letter of Comfort' from the foreign parent or associate.

In 2001, as part of preparations to join the EU, Cyprus began to construct a modernised regime for mutual fund operation. The Cyprus Mutual Fund Law came into force in March, 2003, allowing both native and foreign firms to offer mutual funds to Cypriot residents.

Cypriot Securities and Exchange Commission (SEC) chairman Marios Clerides said that the law would be further amended in August, 2003, to bring it into line with EU harmonisation rules which come into force in February, 2004.

However, as a result of the slump in the banking sector internationally as well as in Cyprus, the SEC expects few applications from native banking and financial institutions. A minimum start-up capital of CYP 1 million will further hold back Cypriot applications.

Most of the applications are expected to come from foreign-based firms offering mutual funds to Cypriot residents. The new rules require a company to deposit its prospectus with the SEC which will then investigate whether the fund is regulated by an approved body. This process is significantly accelerated if the fund is regulated by a body within the EU.

The new law, the International Collective Investment Schemes Law No. 47, offers many benefits to international mutual funds.

It has been decided by the SEC that prospectuses can be written in English, though rules will require that a potential purchaser of the fund has a sufficient enough grasp of the language to understand the implications of buying into the fund.

The major objective of the new law is to provide transparency in the market place. All funds will have to publicise their bid/offer rates and make clear commissions and costs in their promotional literature.

Limited Liability Company

Branch

General or Limited Partnershuip

Offshore Banking Unit

Offshore Financial Services Company

Offshore Captive Insurance Company

Shipping Company (Ship)

The entity must be entirely foreign-owned

The objects of the business and sources of income must be outside Cyprus

No local borrowing is permitted

Audited annual accounts must be filed with the Central Bank

Local payments must be recorded and reported

Anonymity may be achieved by using nominee shareholders; the beneficial owners must be made known to the Central Bank, which is then statute-bound to non-disclosure. NB There is no provision under the law for migration or re-domiciliation.

The expression 'International Business Company' (IBC) simply refers to a duly authorised offshore Limited Liability Company. There are no formal requirements in addition to those in standard Cyprus company law, but the Central Bank recommends a minimum authorised share capital of CY£10,000. This does not have to be paid up, unless the company concerned wants to make use of the import duty concessions.-

All offshore companies are taxed at 4.25% of profits; offshore branches of foreign companies with management and control in Cyprus are also taxed at 4.25%; branches with management and control outside Cyprus are exempt from tax on profits derived from sources outside Cyprus.

Offshore partnerships are not taxed on profits originating outside Cyprus.

There is no withholding tax on dividends paid by offshore companies; but no tax credit either on any tax paid.

Interest or royalties paid by an offshore company to another person or company outside Cyprus are not subject to withholding tax.

Estate duty is not charged on inheritance of shares in offshore companies, and the sale of or transfer of their assets (other than Cyprus real estate) is exempt from capital gains and other taxes.

Offshore entities (and their expatriate staff) may import various goods duty-free:

Motor vehicles (not buses, motor-bicycles, coaches or caravans)

Office equipment (not air conditioners and consumables)

Household effects (not furniture and air conditioners)

Offshore entities may not carry out any trading activities in Cyprus with Cypriot residents. The only permissible activities within Cyprus are those compatible with the exercise of management and control.

Certain borderline activities may be carried on with express Central Bank permission, such as:

Transit trade through Cyprus

Repackaging for re-export, within a tariff classification

Printing of foreign-language magazines or books for distribution abroad

Storage, repair or maintenance of goods to be used or sold outside Cyprus

Establishment of a private bonded warehouse for the display of foreign-made goods intended for re-export.

Sales activities, provided these do not result in sales in Cyprus or to Cypriot companies.