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10.4. Specific Regimes

Ship Owning and/or Managing and Crew Employer Company

There are significant advantages associated with the registration and operation of a shipping company in Cyprus. Through the conclusion of double tax treaties and signing of numerous bilateral and international agreements, the island's own well-established maritime infrastructure and the government's dedicated efforts to the development of the shipping industry, Cyprus has experienced a phenomenal growth in this sector. Today with a fleet flying the Cyprus flag at over 25 million tons and with a large number of ship management companies established in the island, Cyprus is ranked amongst the largest maritime centers in the world.

Some of the most important tax and other incentive available to shipping companies are as follows:

  • Shipping companies registered in Cyprus which own or charter qualifying EU/EEA (European Economic Area) ships (and foreign ships under conditions) are completely exempt from income tax on the profits from any shipping activity.
  • No capital gains tax is payable on the sale or transfer of a ship or shares in a shipping company.
  • No estate duty is payable on the inheritance of shares in a shipping company.
  • No income tax is payable on the earnings of officers and crew of Cyprus ships operating in international waters.
  • No stamp duty is payable on bills of sale and mortgages on ships and related documents.
  • Exemption for ship management companies include (i) profits from technical/crew management, (ii) dividends paid out of these profits at all levels of distribution, and (iii) interest income relating to the working capital. Certain requirements apply in order to qualify as a ship manager.
  • Companies engaged in ship management activities. The fees for the registration of a ship are substantially lower than in other countries and the annual tonnage tax is very competitive when compared to other countries. Fees and taxes payable are based on the type of registration (i.e. provisional or permanent), gross tonnage and age of ships. The Cyprus legislation permits the practice of parallel (bareboat) registration.
  • The Cyprus legislation allows the provisional registration of a ship which affords time to the applicant to prepare to apply for permanent registration.

Yacht VAT Leasing Scheme

Under a scheme approved by the Cypriot VAT department it is possible to reduce the effective rate of VAT paid significantly, sometimes to as little as 3.4%. The rationale behind this scheme comes from the effective use and enjoyment of a provision within the Sixth VAT Directive. Given Cyprus' position on the southern / eastern flank of EU waters it is presumed that a portion of the ships operation will be in international waters in which VAT is not applicable. This does not affect the VAT payable on an outright sale but is applicable to the lease of a vessel. The scheme, therefore, changes the nature of the transaction from an outright sale into a lease with an option to buy in which VAT is applicable to only a portion of the amount paid by way of the lease. The proportion on which VAT is applicable is calculated based upon the length and type of the vessel in accordance with the published guidelines of the VAT office.

Cyprus International Trusts

The use of Cyprus International Trusts is increasingly becoming popular as a vehicle for international tax planning and business structuring. Income and gains of a Cyprus International Trust derived from sources outside Cyprus are exempt from any tax imposed in Cyprus. See Sec. 10.4. for further detail.

Cyprus International Trusts are governed by the International Trusts Law, 1992 which regulates the establishment and administration of International Trusts. Under this law, Cyprus International Trusts are defined as those where:

  • The settlor is not a permanent resident in the Republic of Cyprus;
  • At least one of the trustees during the whole duration of the trust is a permanent resident in the Republic of Cyprus;
  • No beneficiary other than a charitable institution is a permanent resident of the Republic of Cyprus; and
  • The trust property does not include any immovable property situated in the Republic of Cyprus

Tax Aspects

International Trusts are not taxed in Cyprus.

In fact, Cyprus International Trusts enjoy important tax advantages, providing significant tax planning possibilities. The following advantages are indicative of the possible options for tax minimisation.

  • all income whether trading or otherwise of an International Trust, (i.e. a Trust whose property is located and income is derived from outside Cyprus) is not taxable in Cyprus
  • dividends, interest or other income received by a Trust from a Cyprus company are also neither taxable nor subject to withholding tax
  • gains on the disposal of the assets of an International Trust are not subject to capital gains tax in Cyprus
  • an alien who creates an International Trust in Cyprus and retires in Cyprus is still exempt from tax if all the property settled and the income earned is abroad, even if he is a beneficiary
  • an International Trust created for estate duty planning purposes would not be subject to estate duty in Cyprus

Trusts are usually used by high net-worth individuals for the purpose of protecting their estate from inheritance or capital gains taxes in their home country. They can also be used by expatriates settling into a trust before repatriating assets acquired while working abroad, to protect such assets from the tax net of their home country.

Other Aspects

There are many situations other than saving in taxes where Cyprus Trusts can prove advantageous. These include the following.

Estate planning

  • an individual, through the use of a Cyprus Trust, can ensure that minors, mentality handicapped persons or persons that cannot be trusted with the management of the individual's estate are well provided for, even after the individual's death
  • an individual, through the use of a Cyprus Trust, can arrange to be inherited by persons, who due to the legislation of the individual's country, would otherwise be excluded from the inheritance
  • an individual who wishes to divest himself of personal assets for fiscal or other reasons can achieve that by transferring them to a Cypriot International Trust

Anonymity

  • an individual who wishes to keep the ownership of a company anonymous and confidential, can do this by setting up a Discretionary Cyprus Trust to own the shares in the company

Maintain funds overseas

  • an individual who has or may have income arising overseas which he does not wish to remit to his country of residence, can arrange for such income to be directed to the Trustees of a Cyprus Settlement to be held on a Discretionary Trust in accordance with his wishes
  • an individual with assets outside his country of residence, which country may in future extend its exchange control restrictions to include Remittance of overseas funds, may wish to retain the flexibility of overseas funds by transferring them to a Discretionary Trust.

Other advantages

In addition to the tax and other aspects set out above there are other favorable factors for creating a trust in Cyprus.

  • The favorable legal system relating to Trusts together with the advantageous geographic position of the island make Cyprus a particularly attractive Trust location.
  • Cyprus international Trusts are not subject to exchange control. Bank deposits with Cyprus banks, either local or international, or with any bank around the world, are also not subject to exchange control. The absence of exchange control restrictions and the availability of excellent telecommunications and international banking services, make Cyprus a convenient base for the remittance and transfer of funds.
  • The presence of a number of reputable international fund management companies on the island and the high standing of the legal and accounting professions ensure the availability of expert advice as well as the competent management services required for the proper operation of a Trust.
  • Currently, there are no registrations or reporting requirements for Trusts established in Cyprus nor are the names of the Trust or of the persons referred to in the Trust Deed disclosed.

Cyprus law is flexible in that it allows the removal of a Trust from its jurisdiction and vice versa. This could be important in cases where a change in circumstances may render such a transfer advantageous for fiscal or other reasons.

Examples of Advantageous Uses

Protection against high taxation

For settlers residing in high taxation jurisdictions it is possible to minimize their taxation on income or wealth by transferring property to a Cyprus International Trust, as under a proper tax structure they will be able to take advantage of the beneficial double taxation treaty network of Cyprus and the non-taxability of any income of the trust in the island.

Obtaining confidentiality

Confidentiality is absolutely achieved, as there is no requirement to register or publish the financial results of an international trust. The Deed of the Trust is private to the parties concerned whereas when a person dies his Will becomes open to the public inspection in many overseas jurisdictions. A corporate trustee does not die and the continuity of the trust is not affected by the death of a settler.

Organizing collective investment

Where several persons wish to make joint investments a trust can provide the basis of their co-operation and the sharing of the financial results of their joint venture.

Management vehicle

Investment Trust Funds, banks, etc may through a structure of a trust and an international business company that acts as a trustee, manage funds for their clients.

Holding property that cannot personally be held

A minor may not be able to hold property in his own name but a trustee can often hold it for his benefit.

Protection against spendthrifts

Trustees can protect family fortunes for future generations by safeguarding capital and avoid it being frittered away by spendthrift beneficiaries.

Promoting causes and charities

Through a Cyprus international Trust a person may provide for a charity, promote a religious or artistic cause, or establish a foundation to support a worthy project.

Protection of assets

Assets can be placed into a Cyprus international Trust to safeguard the interests of a beneficiary, e.g. sheltering the inheritance of a daughter from claims in case of divorce. Professional partnerships may also find that trust assists in providing custody for personal assets and safeguarding them from loss through litigation.

Managing profit sharing and pension schemes

Companies can provide pension schemes, benefit plans and profit sharing arrangements by using a trust with their employees forming the class of beneficiaries. The trust provides a most effective method for grouping and sharing benefits and it has the added advantage of being able to accommodate a rule book designed to suit each specific circumstance.

Power to transfer jurisdiction

Under the new legislation a Cyprus international trust may be transferred to another country’s jurisdiction and at the same time a trust established in another jurisdiction may be transferred to Cyprus. This facility will, without much expense or trouble, help settler wishing to relocate or benefit from the many advantages of Cyprus as a financial Centre.