Cyprus

Generally

The Island of Cyprus is located at the east end of the Mediterranean Sea, about 30 miles south of Turkey, and 50 miles east of Syria. It is a little over 2,250 square miles in size, and has a population of approximately 700,000. Cyprus is a "divided island" insofar as the Turkish invasion of 1974 resulted in the "Republic of Cyprus" on the northern half which has not yet been recognized by the United Nations. Our commentary here will concern only the southern half of the island, Cyprus proper, which became in independent republic in 1960 and which has its capital in Nicosia.

Cyprus was historically a part of ancient Greece, but it has always had close cultural and commercial ties to Turkey and in this century to Great Britain. This is reflected in the spoken languages, which officially include Greek and Turkish, but English is widely used in commercial practice.

The independent Republic of Cyprus is a democracy, with a President elected for terms of five years. Ministers appointed by the President exercise executive authority within the country. The House of Representatives is comprised of members elected for terms of four years. The Judiciary is independent of the other branches, and the legal system is based on the English Common Law model. Cyprus is a party to the Hague Convention on the authentication of foreign documents.

Cyprus has an association agreement with the EU. The official currency is the Cyprus Pound (C£). Although Cyprus has currency exchange controls, these do not apply to offshore entities, which may hold and manage assets in any foreign currency anywhere, including of course the Cypriot banks.

Cyprus is an excellent offshore jurisdiction — the only major problem is the potential political stability because the Greco-Turk dispute. Thus, even if a corporation or trust is formed in Cyprus, all assets should actually be held elsewhere. Cyprus is, therefore, really only good for the formation of holding entities, which intrinsically have no "valuable" assets to be maintained in Cyprus, but it is very good for this purpose.

Cyprus Taxation

For residents, taxation is harsh: Up to 42.5% for resident companies and 60% for individuals. Even for offshore companies, Cyprus is not a tax-free. Offshore companies pay a 4.25% tax rate. However, this rate may be advantageous to the extent that the numerous double-tax treaties which Cyprus has negotiated may be utilized. Interest and royalties which are paid by a Cyprus Offshore Company to another foreign Company are not taxable in Cyprus, insofar as Cyprus considers such interest and dividends to be earned outside of Cyprus. Offshore companies are not liable for capital gains taxes. Further, offshore companies, as well as their officers and directors, are entitled to a variety of customs duty exemptions.

Cyprus has double-taxation treaties with more than 25 countries, including Canada, France, Germany, Greece, Ireland, Norway, Sweden, the United Kingdom, the United States, and the USSR.

Cyprus Secrecy & Confidentiality

Cyprus Law strictly regulates the disclosure of information. Every person associated with a Cyprus bank is required by the Central Bank to give an oath of secrecy, violation of which is a criminal offense.

Having said that, Cyprus has information sharing agreements with many nations, including the United States, for investigations relating to tax evasion.

Cyprus Financial Infrastructure

The Cyprus banking system follows the English model, with control being exercised by the Central Bank.

A notable characteristic of the Cyprus banking system is the Offshore Banking Units, or OBUs, the formation of which are encouraged by the Cyprus government. OBUs are essentially private banks which are established on an exclusively offshore basis, that is, they can only deal with non-residents and in foreign currency. There are also Administered Banking Units, or ABUs, which are OBUs which are administered by a local bank.

OBUs must obtain a license from the Central Bank before they can begin banking operations. Preference is given to banks which exist elsewhere which are attempting to open a subsidiary or branch on Cyprus. There is an annual license of US$15,000 payable to the Central Bank, and OBUs must pay tax on 4.25% of their net taxable income, unless it is merely a branch of a foreign bank and is managed abroad -- then it has no tax liability.

OBUs are not subject to foreign exchange controls, and may keep any necessary reserves outside of Cyprus in foreign currency. Both OBUs and ABUs may open and operate anonymous numbered accounts. However, in forming and operating an OBU the beneficial ownership of the bank must be made known.

Cyprus Insurance Company

Insurance, including the licensing of insurance and reinsurance companies, is governed by the Insurance Companies Law. Even if an insurance company is carrying on the business of insurance outside of Cyprus and does no insurance business within Cyprus, it is still treated as if it is carrying on the business of insurance in Cyprus. All insurance companies are required to be licensed by the Superintendent of Insurance. However a captive insurance company may obtain exemption from the Council of Ministers.

Typically, the Council of Ministers will grant an exemption when:

• The minimum paid up share capital exceeds C£10,000;

• Adequate cover for claims exists;

• The captive will not be financed from Cyprus sources;

• The captive will be funded from outside of Cyprus, and will not be financed from Cyprus sources; and

• The captive is otherwise in compliance with applicable Cyprus insurance regulations.

Cyprus Trusts

The International Trusts Law of 1992 governs Cyprus trusts. Generally, Cyprus trust law is derived from the English common law model, and to a large degree adopts the opinions of the English courts as precedence.

Cyprus Trusts need not be registered, unless they hold the stock of a Cyprus company. Further, trusts which control own or control real property on the Island must be registered with the Lands Office to be effective.

The maximum allowable number of trustees is four, except for charitable or religious trusts. At least one trustee should be a permanent resident of Cyprus, but no settlor or beneficiary should be a permanent resident of Cyprus. An offshore company or partnership may be a beneficiary.

Cyprus has a two-year statute of limitations against claims of fraudulent transfers to the trust, and has extended the Rule Against Perpetuities to 100 years instead of 21 years, and for an indefinite period in the case of charitable or purpose trusts.

Purpose trusts are prohibited, unless it is for charity. However, the creation of an international non-charitable purpose trust is specifically allowed under § 7(3) of the Trust Law, so long as the trust is not for an indefinite period of time and the means and manner of termination of the trust and disposition of the property is specifically set out in the trust document.

Income to an international trust formed in Cyprus will not be subject to taxes on, among other things, (1) interest earned in local banks; (2) trust distributions where the settlor has retired to Cyprus; or (3) capital gains.

A foreign (from outside Cyprus) company or partnership may register with the Central Bank for the limited purpose of acting as a private trustee.

Cyprus Partnerships

Cyprus has both general partnerships and limited liability partnerships, deriving generally from the Partnerships Law, Cap. 116, which is derived from the English Partnerships Act of 1890 model. Whether the partnership is general or limited, the number of partners cannot exceed 20. The Partnerships requires every partnership to be registered. Bank references for the partners must be provided to the Central Bank of Cyprus. Partnership profits are exempt from local taxes.

Cyprus Corporations

Generally

The Cyprus Companies Law of 1951 which governs Cypriot corporations was modeled on the English Companies Act of 1948. The Companies Law creates public companies and private companies. Companies which are not private companies are deemed to be private companies. There is also the Overseas Company, which is a Company which is registered abroad.

Private Companies

A company is a private company if essentially three conditions are met: (1) share transfers are restricted; (2) shareholders are limited in number to 50; and (3) the public is not solicited to purchases shares. Bearer shares are not allowed, although shares may be issued in registered form.

Public Companies

Public companies must be listed in the Cyprus Securities and Stock Exchange. There are two types of public companies: (1) Companies Limited by Shares, and (2) Companies Limited by Guarantee. An interesting feature of Companies Limited by Guarantee is that they do not require share capital. This creates potentially interesting scenarios viz. U.S. tax laws which are based upon percentage ownership of share capital.

Offshore Companies

Offshore Companies are not separately defined from other types of companies, but are in practice. Offshore Companies have no resident shareholders or beneficial owners, and the actual business of the company is conducted outside of Cyprus.

Name

Offshore companies can be named anything, but the name cannot use the words Commonweath, Worldwide, Global, Co-operating, National or Imperial. The name can use the words Bank or Insurance if and only if the company has a license to engage in those businesses. All offshore companies denote that they are of limited liability, i.e., use the suffix "Ltd.".

Company Formation

All Cypriot companies, offshore or not, private or public, must be formed by a practicing local attorney (Advocate). Formation of a company requires the following information:

• Company name, which must be approved by the Registrar of Companies

• Amount of share capital

• Purposes for which the Company is formed

• The name, address and nationality of at least two shareholders, and the amount of stock they own (of seven shareholders in the event of public companies)

• The name, occupation, address and nationality of the company’s directors, any or all of whom may be non-residents

• Typically photocopies of the passports of shareholders are retained by the Advocate who forms the corporation.

Central Bank of Cyprus Authorization

Before shares of an offshore company can be issued to non-resident shareholders, the Central Bank of Cyprus must give its permission. Typically, the following is required:

• Each shareholder must submit bank references and prove solvency and financial integrity, etc.

• Issued and paid-up capital must be at least C£1,000 so long as the company does not maintain an office in Cyprus, but at least C£10,000 if the company does maintain an office in Cyprus.

• The beneficial owners of the shares can only be non-residents, although the shares can be registered in the name of a local Cypriot nominee or trustee.

• All business transactions must be conducted outside of Cyprus, and the Memorandum of Association must contain a limitation to this effect.

• Any moneys spent by the Company in Cyprus must come into Cyprus from abroad, and all currency exchanges must be made through a Cypriot bank.

• All financing must be obtained from abroad.

• Each year the offshore company must submit audited Balance Sheets, Profit and Loss Accounts and an auditors’ report to the Central Bank and also to the Commissioner of Income Tax.

Memorandum of Association

A Cypriot corporation must has a Memorandum of Association, which document must contain at least the following six clauses: (1) a name clause; (2) a registered office clause; (3) an objects/purposes clause; (4) a limited liability clause; (5) a capital clause stating the number of shares and their value, and how the shares are paid up; and (6) an association clause.

The Memorandum of Association must also state the number of outstanding shares, and the names, addresses and signatures of each share subscriber, including a description of the particular shares they hold. Each subscriber’s signature must be witnessed, and the advocate (attorney) who prepared the document must sign a declaration stating that he or she had prepared it.

Articles of Association

The Memorandum of Association must be accompanied by the corporation’s Articles of Association (bylaws). These Articles regulate the internal management of the corporation and describe how business shall be conducted. The Memorandum of Association controls and is interpreted with priority over the Articles of Association. The names, addresses and signatures of all share subscribers are also contained in the Articles of Association, and, as with the Memorandum or Association, all signatures must be witnessed or notarized, and the Articles must also have the declaration by the preparing advocate.

Registration

For the initial incorporation, three documents must be filed with the Registrar of Companies: (1) the Memorandum of Association; (2) the Articles of Association; and (3) a Declaration by the preparing advocate. At this time, the registration fees are also paid to the Registrar, and upon receipt of these documents and fees, the Registrar will issue a Certificate of Incorporation for the company. It is noted that, typically, at the same time as these documents are filed, a return is also filed listing, among other things, the names of the directors and corporate secretary, and a statement of the address of the registered office of the company (this return has to be filed at some time, anyway).

Meetings

Cypriot companies denote meetings of shareholders as "General Meeting", and there are two types: First, Annual General Meetings are held to allow shareholders to receive reports on the company, decide whether to distribute a dividend (upon the recommendation of the directors), and to elect directors; and, Second, Extraordinary General Meetings are unscheduled meetings of shareholders where the shareholders propose and vote on resolutions. These meetings can be held anywhere in the world.

Directors, Officers and Management

Directors are elected by shareholders in the typical English company fashion. The company must have at least one director, but is not required by law to have more, and the director does not have to be a natural person (i.e., another corporation may be a director, or the director).

Typically, a Board of Directors is appointed which is empowered to convene the Annual General Meetings, elect officers, and recommend the payment of dividends. The directors may appoint committees of directors, managing directors and the like to either actively manage or oversee the management of the company. Meetings of the Board of Directors may be held anywhere in the world, and may be convened by any director, or upon request of the company secretary.

Each company is required to have a company secretary, appointed by the directors, which may be either a natural person or another corporation or entity. The secretary must be resident in Cyprus, however. The company secretary has the power to convene the Board of Directors.

The Board of Directors are also required by law to keep records of the company’s directors, secretaries, members, charges, etc., but the directors will often delegate this duty to the company secretary. These records are kept at the Registry and are made available to the general public.

Shares and Shareholders

A Cyprus corporation must have at a minimum two shareholders. There is a maximum limit of 50 shareholders for a private limited company.

While shares can be held by a nominee, the Central Bank of Cyprus requires that the identity of the ultimate beneficial owners be disclosed to it (although this information is not to be made publicly known). Notably, non-residents must have the permission of the Central Bank to subscribe to shares in the corporation, which is an odd and unique requirement for an offshore jurisdiction.

All share capital must be stated in Cyprus pounds, and where the shares are owned by a non-resident the source of the funds must be from a source external to Cyprus. There is no minimum share capital requirement, either issued or authorized, although it is customary to capitalize the corporation for at least C£10,000 with at least C£1,000 of this issued and paid-up. It is also customary to issue shares with a par value of one Cyprus pound (C£1), although there is no legal minimum par value amount required. However, if the corporation will actually have an office and do business in Cyprus, a minimum paid-in capital of C£10,000 is required.

It is permissible to issue different classes of share, with each class having different dividend and voting rights, and redeemable preference shares may also be issued.

Meetings of shareholders need not be held in Cyprus, but may be held anywhere in the world. The use of written unanimous consent resolutions in lieu of physical meetings is permitted (and this is probably customary).

Registered Office

All Cyprus corporations must maintain a registered office in Cyprus.

Taxation

Cyprus corporations which have income derived from outside of Cyprus are taxed on that income at the low rate of four-and-one-quarter percent (4.25%) on net profits, irrespective of where the management and operation of the corporation really takes place. Thus, Cyprus corporations are required to keep proper books of accounts and submit balance sheets, profit and loss statements, etc. These books and records must be audited by approved Cypriot auditors, who must issue a report and express an opinion therein on the accuracy of the books and records, and these books and records are made available to the Central Bank of Cyprus for inspection.

There is no "double taxation" — once shareholders receive dividends they are not taxed (at least in Cyprus) on those dividends. Cyprus does not have any withholding tax on the payment of dividends.

Shelf Companies

Shelf Companies (pre-existing companies whose shares are available for immediate purchase) are not available because of exchange controls.

TAX WARNING FOR U.S. CITIZENS

U.S. citizens are taxed on their taxable income from wherever it is derived, anywhere in the world. U.S. citizens are also taxed on investments indirectly made through foreign trusts and foreign corporations, including offshore trusts and IBCs. Thus, the fact that an offshore jurisdiction may have low or no taxes does not mean that if a U.S. citizen does business there that he or she will enjoy only low or no taxes on the personal income made. There are simply NO personal income tax advantages, at all, for U.S. citizens to use offshore structures, and anyone who tells you differently is probably telling you a falsehood. Any discussion we make of an offshore jurisdiction's tax laws should be construed only according to the foregoing warning.

BEWARE OF OFFSHORE SERVICE PROVIDERS: There are some offshore service providers who will make wild claims about saving you personal income taxes, so as to convince you to set up an offshore structure. Most of these people don't know the first thing about U.S. tax law, and their representations to you will not help you, at all, if you are caught with an unreported trust, corporation, or bank account. All they really want is your money, and even if you commit tax evasion they are not subject to U.S. law, and so couldn't care less. See Hiding Money Offshore