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Offshore Companies Said To Accept New Cyprus Tax Regime

by Lorys Charalamabous, Tax-News.com, Cyprus

18 November 2003


Last month, Cyprus angrily refuted a Financial Times article that suggested it was maintaining 'harmful tax practices' in the run-up to full EU membership next May, and it now appears that most offshore companies are in fact happy to go along with a revised and approved tax regime which will apply a 10% tax rate to all companies, regardless of their status.

President of the Cyprus International Businesses Association (CIBA), Chris Koufaris, last Friday denied rumours that offshore companies that had previously enjoyed preferential tax conditions were now looking to bail out before EU accession and uniform taxation kicks in. “As far as I know, we have not experienced any members leaving Cyprus because of the tax reforms,” he said. “On the contrary, there is increasing movement from potential new companies checking up on the new tax situation here. These are more quality-type companies than we’ve experienced before, which operate in the areas of financial and consultancy services.”

Offshore companies established before December 2001 have the choice of paying 10% tax from now on and being allowed to trade in Cyprus (which they weren’t allowed to do under the old regime), or continuing to pay 4.25% (the old ‘offshore’ rate) for a transitional period up to January 1, 2006. “The majority of our members will remain in the current 4.25 per cent tax regime until 2006," said Koufaris, "the reason being that companies’ activities are exclusively outside Cyprus and so they don’t need to trade within the local market.”

However, one past source of offshore companies - Russia - may not be quite as happy to use Cyprus in future given that Russians will have to apply for visas to visit Cyprus once it is part of the EU (a notoriously difficult process). "Now it is not so attractive for me - the tax, the visa situation," said one anonymous businessman. "Plus, I think the Russian authorities know everything that is going on there."

Curiously, Cyprus figures high up on the list of foreign investors in Russia, as Russians who had taken their money out of Russia in the 1990s began to return it when the country's murky tax and legal rules were cleaned up by the Putin administration. This process went rapidly into reverse however in mid-2003 as investors began to worry about the attitude of Russian prosecutors as demonstrated by the Yukos affair - and inward investment dried up sharply when Mikhail Khodorkovsky was imprisoned in November.

Now the jury is out, and most investors are holding their breath - and their money - waiting to see which way the Russian authorities will jump. So it's too soon to write off Cyprus as a home for Russian money. If the Russian domestic climate remains challenging, Cyprus may yet re-emerge as the jurisdiction of choice for Russians to invest into the EU in a reasonably tax-efficient way.


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