Following the tax reforms in July of this year the Central Bank has received many queries from professionals engaged in the registration of IBCs, all concerned with how the reforms will affect IBCs. Bellow the answers to the most commonly asked questions.

1. Question: What are the new rates of corporation tax for IBCs under the tax reforms?

The new tax law which was passed by the House of Representatives and which was published in the official Gazette on 15 July 2002, provides for a uniform rate of corporation tax (i.e. 10%) for all companies registered in Cyrus (IBCs and local). It also provides for a windfall tax of 5% for chargeable income in excess of CY£1 million, which will be collected for the years 2003 and 2004. The law thus implies the abandonment of ring fencing (i.e. the restriction that IBCs can only conduct commercial activities outside Cyprus). In other words, from 1 January 2003, the date from which the new rate of corporation tax comes into effect, there will no longer be a distinction between the tax status of IBCs and local companies. It should be stressed, however, that a) specific types of income, such as dividends from overseas as well as profits from companies deemed as permanent establishments abroad, will, under certain conditions, be exempt from taxation and b) payments made abroad either in the form of dividends, interest or royalties, will continue to be exempt from withholding tax.

2. Question: Which IBCs will continue to benefit from the existing tax regime (i.e. 4,25%) and for how long?

Those IBCs which were registered in Cyprus prior to 1 January, 2002 and which had and continue to have an income exclusively from outside Cyprus (the sources of the income are stipulated in the new tax law), can opt to maintain their existing tax status (i.e. 4,25%) until the end of 2005, irrespective of any changes to their beneficial ownership. If, on the other hand, they decide as of 1 January, 2003 to undertake commercial transactions in Cyprus, than a) they will be taxed at 10% (plus the 5% windfall tax, if applicable) and b) they will have to apply to the Central Bank for a change in their status from an IBC to a local company. New permits will be issued in line with the policy that currently applies to direct foreign investments in Cyprus.

3. Question: What about those IBCs which register between the period 1 January-31 December, 2002?

The taxation of these IBCs will be 4,25% for the year 2002 but 10% (plus the 5% windfall tax, if applicable) from 1 January, 2003. Since the passing of the new tax legislation by the House of Representatives in July, the Central Bank has been inserting a notification on new permits bringing these changes to the attention of IBCs.

4. Question: Will those IBCs registered prior to 1 January, 2002 be allowed to undertake commercial transactions in Cyprus as of 1 January, 2003?

Yes, on condition that IBCs apply to the Central Bank for a change in their status. Revised permits will be issued by the Central Bank under the framework for the current policy pertaining to direct
foreign investment in Cyprus.

5. Question: Will Cypriot residents be allowed to participate as shareholders in IBCs?

Until 31December, 2002 Cypriot residents will be strictly prohibited from participating as shareholders in IBCs. As of a January 2003, the distinction between IBCs and local companies will cease to exist hence Cypriots and foreigners wishing to participate as shareholders in a particular venture will be allowed to do so under the framework of the current policy applicable to direct foreign investment.

6. Question: Given that under the new tax legislation all companies will be liable for the same rate of corporation tax, what procedures will the Central Bank follow with regard to applications for the registration of companies with foreign participation?

Applications for the registration of IBCs will continue to be processed using the current procedures until 31December, 2002. As of 1 January 2003, those companies with foreign ownership wishing to be active in the Cypriot as well as foreign markets will be subject to the same procedures currently pertaining to direct foreign investment. For companies whose foreign owners are interested only in conducting their business activities outside Cypriots, they will be subject to self – regulation in the form of appropriate clauses in their memorandum and articles of association.

7. Question: Will a special permit be issued to companies with foreign participation wishing to undertake local commercial activities in Cyprus?

For IBCs registered prior to 1 January, 2003, the criteria used will be the same as those currently in use. If these companies wish to undertake local commercial activities during the course of 2002, the criteria used will be those applicable to direct foreign investment. In such cases, they will have to apply to the Central Bank for a change in their permit.

8. Question: Which internal organisational changes are being considered by the Central Bank which professional (such lawyers and accountants) responsible for registering IBCs and companies with foreign participation should be aware of?

The Direct Foreign Investments Section, which is responsible for considering applications for inward investment, will become part of the International Business Department (IBD).
As of 1 October 2002, the IBD will process all applications for IBCs and foreign investments in Cyprus. Until further notice, the application forms for both IBCs and inward investment will remain as they currently are.

GMG/aa

August 2002