GENERAL OVERVIEW

Contents

Having as from 1 January 2003 amended its tax legislation in anticipation for EU accession, Cyprus has set-up a tax system which is ideally suited both to inbound and outbound EU investors.It resulted in aligning Cyprus with EU directives, abolished all distinctions between international business (formerly “offshore”) and local companies as from 1 January 2003 whilst maintaining a favourable tax regime for the international investor that includes the following features corporate profits are taxed at 10% investment income from dividends is tax free (0%) profit on sale of shares and securities is tax free (0%) repatriation of profits from Cyprus companies (dividends, royalties, interest) to non-residents is tax free (0%) no time restriction on carrying forward tax losses group relief provisions no CFC rules apply

The island’s 34 double tax treaties remain in force and continue to offer ample opportunities for international tax planning whilst also reducing legally overall taxes for businesses and individuals.Cyprus has double tax treaties in force with the following countries Austria, Belarus, Belgium, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, France, Germany, Greece, Hungary, India, Ireland, Italy, Kuwait, Lebanon, Malta, Mauritius, Norway, Poland, Romania, Russia, Singapore, Slovakia, South Africa, Sweden, Syria, Thailand, United Kingdom, United States, USSR and Yugoslavia.

Tax costs play a significant role in investment decisions. Investors aim in maximising after-tax return on investment. Therefore, investment structures which have the least tax leakage are preferred by investors and are recommended by professional advisers. As such, a Cyprus investment vehicle can collect income which is a charge against high tax income. Withholding tax is eliminated or reduced under double tax treaties or under EU directives. The rate of tax in Cyprus is low compared to other EU countries. The income can then be repatriated in any form the investor wishes without withholding tax.

 A Gateway to Investors

A Cyprus entity is suitable both for EU inbound and outbound investments. There are no investment activities which are inappropriate for the Cyprus tax environment. However, there are investment activities which are indeed ideally suited to the Cyprus tax environment such as holding companies investment funds and companies finance  companies royalty companies south Europe, Middle East, Russia and central and eastern Europe headquarter business activities European enlargement and the accession of Cyprus opens up a new gate to investors who wish to invest in the EU or who wish to invest from the EU.ures of Cyprus private companies

 Cyprus Legal Framework

 Incorporation and capacity to contract

A company comes into existence as a legal entity as soon as it is incorporated by the Registrar of Companies. This is evidenced by the Registrar issuing a Certificate of Incorporation that is conclusive evidence that the company has ratisfied all legal requirements in respect of incorporation and that the company is duly registered under the Companies Law. A company cannot contract or enter into any other obligation under the law until it has been incorporated. It cannot become liable on, or entitled under contracts purporting to be made on its behalf prior to incorporation. It cannot ratify contracts that were made prior to its existence. In practice, companies should enter new contracts to give force to agreements that were made prior to incorporation.

 Articles of Association

The Articles of Association set out the administrative regulations and procedures for running the company. They stipulate and define how meetings of shareholders and directors are held, the powers bestowed on directors, the method of appointing and removing directors, determine the minimum number of persons that must be

present for a quorum, set out the procedures for issuing new shares, transferring shares, borrowing powers and so on. Although the Articles of Association can often be in standard form, they are also drafted to take into account the specific needs and requirements of the shareholders.

 Shareholders and directors

The powers in a company are distributed between the board of directors and the shareholders as stipulated in the Articles of Association. The power of the directors can therefore be as wide or narrow as the Articles provide except that the exercise of certain powers are specifically reserved for the shareholders. For example, the shareholders always have the right to remove directors. The Memorandum of Association and Articles of Association are filed with the Registrar and are therefore public documents available for inspection by everybody.

As previously stated, an action outside the objects of the company is void and therefore unenforceable. The remedy commonly available to the other contracting party is to recover money or property paid or transferred under the void transaction to the extent that it is possible to trace it. However, the situation regarding an action that is within the objects of the company but made by directors acting outside their powers as stated in the Articles of Association may be very different. The “indoor management rule” as it is often called, accepts that persons dealing with directors are entitled to assume that the directors have the authority which they claim to have. Under common law principles, the company is bound by the actions of a director where that director acted within the usual, apparent or ostensible scope of the "director’s authority".

 Other related issues

All companies are required to hold in each calendar year, an Annual General Meeting (AGM). Not more than 15 months must elapse between one AGM and the next. The first AGM must be held within 18 months of incorporation. Failure to comply makes the company and each director liable to a fine not exceeding Cν250. The Articles of Association normally provide that the directors may call an Extraordinary General Meeting at any time. Notwithstanding the provisions of the Articles, the law states that the holders of 10 per cent of the paid up capital of the company have the right to require the directors to call an Extraordinary General Meeting. The notice period for an AGM or the meeting for the passing of a special resolution is 21 days. The notice period is 14 days for every other case. These notice periods may be shortened if 95 per cent of the members entitled to attend and vote agree to so do, except in the case of AGM where all the shareholders must agree to the shorter notice period. The Cyprus law contemplates 3 types of resolutions: ordinary, special and extraordinary. The minimum notice period and majority required in each care, are summarised .f resolution Minimum notice period Majority required

Ordinary 14 days  50% plus 1 share

Special 21 days 75% plus 1 share

Extraordinary 14 days* 75% plus 1 share

*21 days if the resolution is to be passed at an AGM

 The Cyprus law details the nature of resolutions for each type of decision required

Amendment to Articles ofAssociation

 Special Amendment to Memorandum of Association Special with Court approval Issue of shares at discount Ordinary with Court approval Purchase of own shares Special Reduction of share capital Special with Court approval Change of name Special Change of auditor Ordinary with special notice (28 days) Removal of director Ordinary with special notice (28 days) Member’s voluntary liquidation Special

The directors are obliged to ensure that the company maintains accounting records that enable the preparation and audit of financial statements. They must show a true and fair view of the company’s financial position and performance in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS)  The accounting records must be held either at the registered office or at another place in Cyprus and must always be available for inspection by the directors. Where the bookkeeping function is maintained outside Cyprus then arrangements must be made for those accounting records to be sent to Cyprus in regular intervals not exceeding 6 months. Every company that has subsidiaries is obliged to prepare consolidated financial statements in accordance with IFRS and ISA and to present these financial statements to the members in general meeting. Additionally, those financial statements must disclose the following remuneration of auditors amounts paid to directors as compensation for loss of office the total amount paid to directors in fees and emoluments directors’ holdings in shares and debentures loans granted to directors Failure to comply with this requirement leaves the directors open to prosecution with the possibility of a fine up to Cν1.000 and imprisonment up to 12 months.

It is important to understand that one company is considered to be a subsidiary of another only if that other company controls the constitution of its board or holds the majority of the voting rights either directly or through an appointed agent or trustee.  The financial statements must be accompanied by a report of the board of directors which includes

details of any changes in the nature or volume of operations any changes in the share capital any significant change in the constitution of the board of directors or the duties assigned to its members directors’ proposals regarding the distribution or not of the retained profits The financial statements must be audited by a registered auditor.

C. Costa & Associates partners will be happy to provide more details about our services.