Cyprus is more than a holiday destination: It’s also a sought-after jurisdiction for offshore trusts

by Tia

Over the last decade, the Mediterranean island of Cyprus has become a preferred jurisdiction for setting up offshore trusts and companies. In the first half of 2022, overall foreign direct investment (FDI) into Cyprus increased by 150% compared to the same period in 2019, while investments in software and IT grew by 600% over the same period. In the 10 years leading up to 2022, net inflows driven primarily by real estate, communications and headquartering reached €13.5 billion. In 2022, foreign investment into Cyprus’ tourism-related real estate and infrastructure sectors alone totalled over €4.2 billion1.

However, Coreen van der Merwe, Director at Sovereign Group, says that Cyprus doesn’t only offer opportunities for multibillion-Euro investors. “Cyprus’ liberal FDI policy, coupled with its favourable tax regime, as well as special schemes and incentives to facilitate headquartering in certain sectors, and a government action plan to incentivise non-EU companies to establish operations on the island, make it an attractive destination for anyone who wishes to establish a financial presence in Europe.”

More compelling initiatives include a recently-introduced business facilitation unit and a digital nomad visa that make it easy for non-residents to establish businesses by fast-tracking applications, permits and licences for companies, their employees, and their families, as well as a government-run agency that helps foreign investors to identify suitable business opportunities via a matchmaking platform called Project Bank1.

Favourable tax regime

Van der Merwe says that many people looking to incorporate a company or set up an offshore trust make the mistake of looking at the headline tax rate in isolation. “At 12.5%, Cyprus has one of the lowest corporate tax rates in the European Union. But not many know that it can be reduced to an effective rate as low as 2.5% in terms of the IP Box Regime, which provides an 80% exemption of qualifying profits from the use of intellectual property such as patents, software and tech-related initiatives.

Should intellectual property fall outside of this scope, the Notional Interest Deduction regime allows companies to deduct notional interest on new equity capital, thus providing a tax break on the deemed interest on new equity injected into companies, and lowering the tax rate to the same 2.5% as the IP Box Regime.”

Other benefits include a double taxation treaty with South Africa, in terms of which Cyprus does not tax dividends received at all, and also does not withhold any tax when distributing dividends up to a shareholder in the form of a trust or company.

Further, Cyprus does not levy capital gains tax on the sale of shares and immovable property outside its borders, and nor does it levy estate duty or inheritance tax making it advantageous for succession planning and asset protection via trusts. Trusts regulated by the laws of Cyprus are exempt from income tax, capital gains tax, and tax on the receipt of dividends, levied from within Cyprus.

Political, economic and fiscal stability

In the aftermath of the 2012-2013 financial crisis, Cyprus implemented sound fiscal policies and reforms that have worked to stabilise public finances, support economic recovery, and gain successive annual credit rating upgrades. Real GDP growth averaged 4.6% in 2018-2022 despite the pandemic, the war in Ukraine, and other socio-political factors. The country was ranked third worldwide in terms of its recovery in FDI after the pandemic. And, as a member of the European Union, United Nations and other international organisations, Cyprus is committed to global co-operation and adherence to international standards.

Robust legal framework

Cyprus offers comprehensive legislation that aligns with international best practice, providing a clear framework for the establishment, administration and regulation of trusts and companies. It also has robust, modern company laws that facilitate the establishment and operation of corporate entities, including trusts, limited liability companies, public companies, and partnerships. The legal framework offers clear guidance for corporate governance, shareholder rights and regulatory compliance, including compliance with international anti-money laundering regulations.

“The region’s fiscal stability and favourable tax regime are just a few reasons why Cyprus is one of the most sought-after jurisdictions for the establishment of offshore trusts and companies. However, as with all foreign jurisdictions, there are numerous factors specific to its legal and tax frameworks to consider, and anyone looking to Cyprus as an investment destination would do well to consult with professionals before making any moves,” says Van Der Merwe.

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