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Cyprus Offshore Sector Tax Breaks To Go By 2005

Andrew Mair, Tax-news.com, Nicosia

22 May 2000

The Cyprus Government has caved-in to pressure from the EU and OECD and announced that it intends to abolish tax breaks for offshore companies by the end of 2005.
Despite previous assurances that Cyprus would negotiate with the EU to retain its offshore sector, Finance Minister Takis Klerides said that scrapping preferential tax treatment for offshore companies was a necessary part of the island's EU tax harmonisation process.

But what Klerides did not say, was that abandoning its commitment to the offshore sector will ensure that Cyprus is not included in the OECD's tax haven blacklist due to be published next year, thus avoiding OECD sanctions and a potential sticking point with the EU during accession negotiations.

Currently international business companies (IBCs) in Cyprus are taxed at 4.25% of their net profits and local companies at 20%, and the 1,000 IBCs operating on the island contribute nearly US$300 million to the local economy. Cyprus also has a large number of shelf companies and other offshore legal and financial entities whose impact on the local economy is not as significant as they are primarly "pass-through" vehicles.

Although 2005 has been set as the date for abolishing the current preferential tax regime, the details of how IBCs will be taxed after this have not been decided. Previously it has been suggested that in order to soften the fall there should be a transitional period during which taxes for IBCs are brought into line with taxes on local companies. However last week's announcement indicates that this option is no longer being considered and IBCs should prepare for the loss of all tax advantages, including VAT exemption from 1 January 2006. Another option which has been floated is to reduce the tax rate for local companies (which has been achieved by Ireland), but this would have serious revenue implications and would be dependent on Cyprus raising VAT to the minimum EU rate of 15% in time to bolster the treasury sufficiently.

Klerides acknowledged that the decision to scrap offshore tax advantages will impact the local ecomony but qualified this by stating that this should be offset by the Government's efforts to transform Cyprus into a regional business service centre.

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