One of the main reasons why Cyprus has became a very popular jurisdiction for establishing a base for International business is the availability of a large number of double tax treaties. Many of the well known offshore tax jurisdictions impose low or nil income tax on the company profits. However the problem with those jurisdictions is that they do not have double tax treaties. Cyprus offers a basket of incentives including the low tax on the net profits and the double tax treaties.

Most of the tax treaties follow the OECD model. The treaties aim to avoid double taxation of income earned in these countries. This is achieved usually by either exempting the income from tax, by providing a tax credit for the amount of tax paid in the other contracting country or by a reduced withholding tax.

WITHHOLDING TAX

One of the most important tools in the area of international tax planning is the use of the withholding tax rates specified in each of the double tax agreements. 

• (1)   10% if received by a company holding directly 25% or more of the capital.
  
• (2)   10% if received by a company holding directly 10% or more of the capital.
  
• (3)   10% if received by a company holding at least 25% of the capital of the paying
              company.  However, if German corporation tax on distributed profits is lower
              that on undistributed profits and the difference between the two rates is 15%
              or more, the withholding tax is increased from 10% to 27%. In all other cases
              the withholding tax is 15 %.
  
• (4)   5% if received by a company holding directly 25% or more of the capital.
  
• (5)   Nil if received by a company controlling 50% or more of the voting power.
  
• (6)   If received by a company controlling less than 10% of the voting power, thus
              entitled to refund of excess Advanced Corporation Tax deducted in the U.K..
              If company controls more than 10% of the voting power, it is not entitled to
              the refund.
  
• (7)   5% if received by a company controlling 10% or more of the voting power.
  
• (8)   Nil on literary, dramatic, musical or artistic work
  
• (9)   Nil for literary, artistic or scientific work, film, and TV royalties.
  
• (10)  5% on film and TV royalties.
  
• (11)  Nil if paid to a Government or for export guarantee.
  
• (12)  Nil if paid to the Government of the other State.
  
• (13)  Nil if paid to the Government of the other State, in respect of bank loans, in
              connection with the sale on credit of any industrial commercial or scientific
              equipment or any merchandise.
  
• (14)  Nil if paid to a Government, banks or financial instructions.
  
• (15)  Nil if royalties are on literary, artistic or scientific work including films, TV films
              or radio broadcasting.
  
• (16)  According to the personal tax rates 0-40%. First C 2,000 taxed at nil. If recipient
              of Dividends is a foreign corporation, any tax withheld under the provisions of
              the treaties refunded on application by a foreign corporation to be made within
              six years from receiving the dividend.
  
• (17)  At the rate applicable in accordance with domestic law.
  
• (18)  Zero if received by a company holding at least 25% of the capital of the paying
              company.
  
• (19)  10% on copyright of literary, artistic or scientific work including cinematography
              films, and films or tapes for TV or radio broadcasting.

INTERNATIONAL TRANSPORT

A Cyprus company can extract free of tax from all treaty countries, any profits from International Transport i.e. shipping and air transport. In most cases the exception includes international road transport.

PROFESSIONAL SERVICES AND SALARIES

The Cyprus treaties provide that individuals of one country (say Cyprus) that provide services in another country (say Russia) will not be subject to the tax in the other country (Russia).

Provided – he stays in the other country (Russia) less than 183 days.

• the employer is based in Cyprus (or anywhere else) but not based in Russia.

In addition, wages paid to Cyprus employees by the companies that are exempted because they provide construction, assembly or international transport services in the other country are also exempt.

All the above exemptions also apply, the same way, to employees of the contracting state that work in Cyprus

TAX CREDITS AND TAX SPARING CREDITS

A tax credit allowed by the foreign country for the tax paid in Cyprus will not exceed the tax actually paid in Cyprus.

However some treaties provide that any tax "spared" (tax reduction) in Cyprus is still credited against his tax liability in his country.

Tax sparing credits are allowed in the following treaties: Canada, Czech Republic, Slovakia, Denmark, Germany, Greece, Ireland, Italy, Romania, Sweden, United Kingdom and Yugoslavia.

INTERNATIONAL BUSINESS COMPANIES AND THE USE OF DOUBLE TAX TREATIES

All the tax treaties apply to Cyprus offshore companies with the exception of some restrictions by some treaties. The treaty with United Kingdom does not apply on dividend, interest and royalty income, the treaty with France does not apply to dividend, interest, royalty and shipping profits, the treaty with Germany does not apply to shipping profits if there is more than 25% non Cypriot participation, and finally the treaties with Canada and USA do not apply to offshore entities.

However irrespective of the above exemptions there is no withholding tax deducted by the Cyprus international business companies on dividends, interest and royalty payments to anywhere in the world.