Cyprus Authorities Claim Offshore Sector Will Thrive Without Special Tax Regime

Mandy Robinson, Tax-news.com, London

06 November 2000

As an established international business centre Cyprus will continue to ensure success for offshore companies regardless of the absence of favourable tax status. This is according to Central Bank Governor Afxentis Afxentiou and Finance Minister Takis Klerides at a seminar organised by the Cyprus International Financial Services Association (CIFSA) last week.

CIFSA held the seminar in order to address the controversial issue of Cyprus' ability to achieve European Union accession and satisfy its OECD obligations, without compromising its status as a major international financial and business centre. Last year, with around 2,500 Cypriots and 2,660 non-Cypriots working for offshore companies, Cyprus' international business sector generated CY£230m in foreign exchange - the equivalent of 4.7% of GDP.

Messrs Afxentiou and Klerides said that they foresaw no major difficulties in satisfying EU and OECD demands for a uniform tax on both local and foreign companies, as well as loosening bank secrecy regulations and allowing access to information to investigative tax authorities abroad. But they could not confidently state what the uniform tax rate would be. Mr Neocleous proposed 10 per cent but Inland Revenue director Polyvios Rialas said: 'We have brought in foreign tax experts to study the whole issue. We are not in a position to say what the rate will be because we are still calculating the repercussions on state revenue.'

The overall message was that Cyprus' standing as a successful international business centre was not just due to the current favourable tax rate of 4.25 percent. For example, Cyprus has entered into 31 bilateral double tax treaties, with 13 more in the pipeline, and a further 12 countries have expressed an interest.

Mr Afxentiou confirmed that the tax harmonisation so cherished by the EU would result in a number of changes. Whilst the favourable tax status that offshore companies currently enjoy will be gradually eroded, further changes would include exchange of information with tax authorities abroad; and the identities of beneficiaries of trusts would no longer be subject to bank secrecy. Mr Afxentiou explained: 'These requirements are not contrary to the best interests of international business enterprises ... Cyprus' advantages are not just in the arena of tax and duty free. Cyprus has many advantages that should more than compensate higher tax. The long term interests of the international sector will be safeguarded in the best possible way.'

However, Mr Neocleous, an expert on international tax laws and cross border investments, confirmed that as part of the EU, Cyprus will be obliged to increase VAT from 10 per cent to 15 per cent and must also abolish exchange controls. In addition Cyprus' international business regime would be replaced by a new one that is more in line with the EU's code of conduct on taxation. He also said it was likely certain tax allowances will be provided for services offered abroad by companies and individuals. He concluded: 'Our task is to ensure that Cyprus is one of the survivors as an international business centre. We must make the appropriate changes with energy, determination and methodically.'

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