On Friday 26 August 2011 the House of Representatives voted as a first step, amendments to various tax legislation, in order to raise revenues and decrease government spending to enable the Government to deal with the economic crisis which Cyprus faces. These changes relate to increasing various taxes, introducing a levy for all companies incorporated in Cyprus, as well as introducing/increasing contributions to pension schemes of employees of the government, local authorities and semi-governmental organizations, and introducing a special levy for two years on the salaries and pensions paid to employees of the government, local authorities and semi-governmental organizations. In the next few months, a second and possibly a third package of additional measures is expected to be voted by the House of Representatives, which hopefully should concentrate on further reductions in government expenditure. The increase in the VAT rate from 15% to 17% is expected to be approved with the second package of measures. The most significant changes in the tax and company legislation are set out below: The Income Tax Law Increase in the maximum personal income tax rate to 35%A new income tax rate of 35% is introduced for individuals on taxable income in excess of €60.000. Tax incentives for the employment in Cyprus of highly paid non-Cypriot resident individuals In order to encourage the establishment or expansion in Cyprus of new businesses, tax incentives are offered for the employment in Cyprus of persons who are not tax residents of Cyprus. In such a case, if the income from employment exceeds €100.000 per annum, a 50% deduction is allowed for such income for the first 5 years of employment. The incentive is granted both to Cypriots and non-Cypriots, on condition that prior to employment in Cyprus such a person was resident outside Cyprus and was not considered as a tax resident of Cyprus. Abolition of exemption from taxation of the President of the Republic and the Presiden of the House of RepresentativesThe exemption from taxation of the official emoluments and the pension of the President of the Republic and the pension of the Presidents of the House of Representatives is abolished. Entry into force The increase in the personal tax rate will come into effect as from 1 January 2011, whereas the incentive for new employees will come into force for employments starting as from 1 January 2012. The Special Contribution for the Defence of the Republic Law Increase in the rate of defence tax on interest from 10% to 15%The rate of special contribution for the Defence of the Republic (“defence tax”) on interest received or credited by Cypriot tax residents is increased from 10% to 15%. This applies to both individuals and corporations. In the case of corporations, if the interest results from the ordinary carrying on of any business, including any interest closely connected with the ordinary carrying on of the business, it is not subject to defence tax, but instead is subject to corporate income tax. Therefore, financing companies, including companies involved in intragroup financing activities, are not expected to be affected from the change in the rate. It should be noted that no defence tax is payable on interest payments to non-residents. It should also be noted that this provision applies to interest received by resident individuals or corporations, both from sources within Cyprus and outside of Cyprus. For provident funds defence tax on interest received remains at 3%, as well as in the case of an individual whose total income for the year does not exceed €12.000 (including interest income). The same rate applies to interest received by an individual from Government savings certificates and development stocks. Increase in the rate of defence tax on dividends from 15% to 17%The rate of defence tax on dividends received by a Cypriot tax resident is increased from 15% to 17%. This applies only to individuals since under the provisions of the legislation companies are generally exempt from the payment of defence tax on dividends. The increase in the rate also applies when the deemed distribution rules are applied in cases where a tax resident company does not distribute within two years at least 70% of its after-tax profits. It should be noted that no defence tax is levied on dividends paid to non-resident individuals or corporations. It is also noted that the deemed distribution rules are not applicable in the case where shareholders of a resident company are non-tax residents of Cyprus. However, the deemed distribution rules are applicable in the case of a Cypriot tax resident company owned by another Cypriot tax resident company, which in turn is owned by non-residents. It is expected that shortly such companies will be excluded from the provisions of the deemed distribution rules, therefore there would be a significant benefit for such companies in case of inability to distribute an actual dividend. Entry into force The above provisions will enter into force as soon as the new law is published in the official gazette of the Republic. The Immovable Property Tax Law The rates applicable for the payment of immovable property tax, which is paid by both individuals and companies on property owned in Cyprus are significantly increased, as well as the threshold as from which taxes are paid is lowered. It should be noted that tax remains levied on the assessed value of the property as at 1 January 1980. The rates are as follows: Up to €120.000 0%o From €120.000 to €170.000 4%o From €170.001 to €300.000 5%o From €300.001 to €500.000 6%o From €500.001 to €800.000 7%o Over €800.000 8%o The increase will be effective as from the year 2012. The Companies Law As from 2011, an annual levy of €350 is introduced for all companies incorporated in Cyprus payable to the Registrar of Companies. For groups of companies, the maximum levy is fixed at €20.000 The levy for 2011 must be paid by 31 December 2011, whereas the levy for 2012 onwards must be paid by 30 June of each year. Dormant companies, companies which do not own any assets, as well as companies owning property located in the non-Government-controlled areas of Cyprus are exempted from the payment of the levy. In the case where the levy is not paid within the prescribed period, if the levy is paid within two months from the due date, a penalty of 10% is payable which is increased to 30% if the levy is paid within five months from the due date. If the levy is not paid within five months, the Registrar of Companies will remove the company from the registry (something which is expected to restrict the company from filing documents or requesting certificates from the Registrar’s Office). The return of the company to the registry can be effected within two years with the payment of a levy of €500 per annum and thereafter with the payment of a levy of €750 per annum. The issue of the above penalties is still being discussed and may change. The Value Added Tax Law Under existing legislation, individuals who buy or construct a flat or house to be used as private main residence are entitled to apply for a refund amounting to about €17.000 from the Government. This provision is replaced with the introduction of a reduced VAT rate of 5% on the purchase or construction of a house or flat to be used as private main residence, provided the area of the property does not exceed 200 square meters (the reduced rate of 5% also applies on the first 200 square meters if the total area of the property does not exceed 300 square meters). More information on VAT

Article 33 (Arm’s length principle) of the Cyprus Income Tax Law gives power to the Commissioner of Income Tax to adjust a company’s taxable profit where it believes that the financial result of a certain transaction was influenced by the fact that the parties to the transaction were related or connected. Therefore, it is required that interest on loans provided to or by a Cypriot company is established on an arm’s length basis. Until recently, the practice of the Commissioner of Income Tax, and based on Article 33, was to impose deemed interest on the market interest rates on any financial transactions between related parties provided that the specific financial transactions did not satisfy the arms-length principle. On 14 July 2011, the Institute of Certified Public Accounts of Cyprus (ICPAC) has announced that the Commissioner of Income Tax has agreed to certain minimum profit margins that may be applicable to related-party financial arrangements. Under the Cyprus Tax Legislation, an exemption is given from the 10% special contribution for defense arising from interest received provided that this interest derives from or is closely connected to the ordinary course of business of the company. The Commissioner of Income Tax has set the minimum acceptable interest rate profit margins on the so-called “back-to-back” intra-group financing arrangement between 0,125% -0,35%, applicable as from the tax year 2008 and onwards (subject to conditions). The above-mentioned margins are applicable where a Cypriot company uses the borrowed funds to finance its related/connected party via loan(s) within a period of six months, with such funds being obtained: From another related/connected party or a bank (subject to guarantees from another group company); In the form of a loan(s) or other credit instruments (subject to conditions). The margins apply for each financing arrangement separately. The margins will not apply: Where the funds lent have been raised by a Cypriot company through the issue of share capital; From the date when liability in relation to the funds borrowed or lent by a Cypriot company is settled or written-off. The margins concerned should be calculated after the deduction of any expenses directly related and/or attributable to the financing arrangement entered by the company. Any foreign exchange differences (either realized or unrealized) should be treated as non-tax deductible in case of foreign exchange loss and non-taxable in case of foreign exchange profit. Want to learn more about taxation in Cyprus?

Synopsis – Cyprus has become a center through which many leading international companies conduct their business activities. Among the benefits which accrue in using Cyprus as a corporate vehicle is the lowest corporate tax rate in Europe, the extensive double tax treaty network, the secure environment, its reputation, infrastructure, and favorable tax provisions. Company Name The name of a company must be approved by the Registrar of Companies before applying to incorporate the company. No identical or is so similar to an existing company as to cause confusion is permitted. Likewise, any name considered of a “general meaning”, misleading, undesirable, offensive or implies “Royal”, “Queen”, “King”, “Imperial”, “Saint”, “Commonwealth”, “National”, “Corporation”, “Co-operative” etc. are not approved either. Main Objects/Activities of the company The main objects/purpose of the company must be stated in the proposed company’s Memorandum of Association, which it is advisable that they should be as wide as possible so as to enable the company to engage in any kind of business or activity, without this being considered “ultra vires” (beyond the powers of the company) and, therefore void. Share capital The Cyprus Companies Law provides for a minimum of one share and at least one registered shareholder. The minimum required share capital for a company is €100 which may conveniently be divided into 100 shares of €1 each – issued and fully paid upon incorporation. Shareholders The minimum number of “registered” and/or “beneficial” shareholders could be one and can either be an individual or a legal corporate entity. Trusts may also be shareholders in a Cyprus company.Trustee shareholders will frequently hold the shares allowing the beneficial owner to retain anonymity. Directors At least one director is necessary and may be a Cypriot resident individual, a corporate entity or a non-resident (foreign) individual. It is advisable to appoint local directors if one wishes to have effective management and control in Cyprus rendering the company resident in Cyprus for tax purposes. Secretary The company Secretary may be a physical person or corporate entity and is responsible to prepare and submit the Annual Returns of the company, to keep the Minute Book and Register of Members, etc. Registered Office Every company must have a registered office in the country of incorporation. It is the official address of the company where the statutory books, registers and the seal of the company are kept. Summons, writs, notices orders and other official documents are also served at the registered office address. Bank reference A recently issued reference from a reputable bank must be provided for the beneficial shareholder together with a clear copy of his/her passport, or a copy of the certificate of incorporation (if a corporate entity), along with a copy of a utility bill depicting the residential address. A specimen of such a letter can be provided upon request. Bearer shares are not permitted. Annual Reporting Companies need to comply with the following filings annually: (a) Submission of the company’s annual return to the Registrar of Companies. (b) Submission of audited financial statements to the Income Tax Authorities and to the Registrar of Companies. (c) Submission of provisional tax returns on 1 August in the tax year and final tax returns on 31 December of the year following the end of the tax year to the Income Tax Authorities. Confidentiality / Secrecy Although details of the shareholders and directors appear on the public file, with the use of trustee shareholders together with the appointment of nominee directors, one can ensure complete confidentiality and anonymity of the beneficial owners. Shelf companies A number of already registered companies could be available through our associates. Transfer of shares may be effected immediately. The list of the already incorporated companies (shelf companies) is available on request. Exchange Control / Bank accounts Companies are under no exchange control. Bank accounts may be kept anywhere in the world and in any currency. Bank accounts kept in Cyprus may be operated freely without prior approval of the Central Bank of Cyprus. Audit Companies need to have their accounts audited every year and file a tax return with the Commissioner of the Inland Revenue. The audit must be carried out by a Cypriot firm of auditors in accordance with International Standards on Auditing. The above is brief and general in nature. Kindly contact our professionals for in-depth analysis and advice. More information about our services Meet our team

A Cyprus Holding Company can be effectively utilized for international tax planning purposes and at the same time enjoy the status of being located at a reputable business center within the European Union. In summary, a Cyprus Holding Company offers the following advantages in relation to the major tax considerations: Dividend income received from subsidiary companies abroad is exempt from taxation, provided the subsidiary company does not engage in more than 50% of its activities in producing investment income and the foreign tax burden on its income is substantially lower than that in Cyprus. Double Tax Treaties with over 50 countries, enabling lower withholding tax rates on dividends or other income received from the subsidiaries abroad. Being an EU Member State, holding companies registered in Cyprus may also enjoy no withholding tax on dividends received from EU subsidiaries as a result of the utilization of the EU Parent-Subsidiary Directive. Profit arising from the disposal of shares is exempt from income tax Full capital gains tax exemption on capital gains, except on the sale of immovable property situated in Cyprus. No tax on capital gains or income on the liquidation of the Cyprus holding company. No withholding tax on distribution of profits. Outward dividends by the Cyprus holding company to its non-resident shareholders are exempt from any withholding taxes. Profits earned from a permanent establishment abroad are fully exempt from Cypriot tax, subject to certain conditions. A diversified group of Cyprus companies belonging to a Cyprus holding company can set off group relief for the utilization of tax losses. No minimum holding period. The above is brief and general in nature. Kindly contact our professionals for in-depth analysis and advice. Double tax treaties country list

The tax reform act of 2002 was inevitable in order to harmonize Cyprus’ laws and practices with the European Union laws and directives, the Code of Conduct and the Organization for Economic Cooperation and Development. The end result of this exercise was the abolition of the offshore regime, the introduction of uniform taxation and operational scheme applicable to all companies and the introduction of the lowest taxation rate in the EU. This new regime opened significant opportunities for tax planning. The purpose of this letter is to provide you with some basic ideas on the advantages that Cyprus has to offer. Cyprus is not considered as a “tax haven” country but a tax incentive country and at the same time has acquired the European “stamp of respectability”. Corporation tax at 12.5% on net profits arrived at after deducting all business expenditure incurred.  Annual capital allowances and all expenses incurred for earning of income are allowed as deductions for tax purposes. No exchange control restrictions for the companies and their foreign employees, therefore, free movement of profits derived from operations on non-resident investments. Profits may be transferred to any account worldwide. Trading companies engaged in global trading may be established with 0% taxation in all respects provided their management and control are exercised outside Cyprus. Easily obtained residence and work permits for expatriate personnel and their dependents. Full capital gains tax exemption on capital gains, except on the sale of immovable property situated in Cyprus. Maximum 2.5% tax on royalties An extensive network of double tax treaties offering tremendous possibilities for international tax planning. No withholding tax on dividends, royalties or interest paid to nonresidents. There is a wide network of air-routes connecting Cyprus with Europe, Africa, and Asia by sea and air via frequent daily connections. Highly qualified professionals and well educated, competent labor force. Free zone and bonded warehouse facilities. Low set up and running costs of a company. Complete anonymity of shareholders. Nominee/trustee services are available. Excellent modern telecommunication facilities – direct dialing to over 200 countries. Modern and efficient legal, accounting and banking services. Pleasant Mediterranean climate. About Cyprus >

New tax compliance obligations arise from Circular 2011/1 dated 15 February 2011 which has been issued by the Commissioner of Income Taxes. The circular states that as from 1 April 2011 annual income tax returns for all companies as well as for self-employed individuals with a turnover that exceeds €70,000 that are submitted to the Inland Revenue Department must be accompanied by a Tax Confirmation that is prepared and signed by an independent auditor or tax advisor. This requirement applies for all income tax returns submitted on or after 1 April 2011 regardless of the tax year to which the return relates and from this date, the Inland Revenue Department will not accept the submission of any income tax return if not accompanied by the relevant signed Tax Confirmation. The Tax Confirmation is a certification given by the taxpayer’s auditor or their tax advisor that the tax computation within an income tax return has been prepared in accordance with the Circulars issued by the Inland Revenue Department. Please note that a false certification by the auditor or tax advisor will lead to a fine of €17.086 and/or up-to 5 years imprisonment. In addition, from 1 July 2011, all income tax returns for all companies as well as for self-employed individuals with a turnover that exceeds €70,000 for the 2010 tax year and subsequent tax years may only be submitted to the Inland Revenue Department by way of electronic filing using the TAXISNET electronic system. The TAXISNET electronic system will not allow the electronic submission of any income tax return if the Tax Confirmation, which constitutes an integral part of the Income Tax Return, is not duly completed and signed. We will be contacting all clients closer to the time in order to obtain an authorization to register for the TAXISNET electronic system. Income tax returns for all tax years up to and including 2009 that are submitted on or after 1 April 2011 will continue to be submitted in paper format however the Inland Revenue Department will not accept an income tax return that is not accompanied by the Tax Confirmation. Once the electronic system of the Inland Revenue Department is upgraded to accept such returns electronically, it is expected that the compulsory electronic submission of such returns will also be required. Read all our News and Updates

On 1 January 2010, a number of important VAT rules will change following the implementation of various European Directives and Regulations (the “VAT Package’), mainly concerning the place of supply rules for services. These changes may have an impact on Cyprus companies if such companies receive or provide services. Such services, for example, include fees for consultancy, management, administration, professional, royalties, telecommunications, broadcasting, freight, transport, and catering. The most important changes that would affect Cyprus companies are the following: Place of supply of services rules: For services provided from one taxable person to another taxable person situated in another country either within EU or outside EU (Business to Business or B2B) the place of supply will be where the customer is situated. In other words, Β2Β services will be taxed where the customer is established, or where the establishment is based for which the services are provided. Almost all services will now be subject to the reverse charge provisions. For services provided from one taxable person to a non-taxable person (Business to Customer or B2C), the place of supply will be where the supplier is situated and thus VAT may have to be charged if the supplier is situated in Cyprus. Thus, Β2C services will be taxed where the service provider is established, or where the establishment is based on where the services are provided. Services provided to third countries are outside the scope of Cyprus or EU VAT. There are exemptions to the above rules that include property-related services, transportation of goods, passenger transportation, short-term hiring of means of transport, restaurant and catering services, scientific and educational services, sporting and cultural services. These services will be taxed at the place of consumption. Taxable persons In order to assess whether a supply of service is a B2B or a B2C supply, it must be considered whether the recipient of the services is a taxable person or not. In general, a “taxable person” is any person engaged in an economic activity (i.e. any person trading in goods, providing services, or is VAT registered in an EU Member State). Evidence required in order to treat a supply as a B2B supply include the following: If it is an EU person situated in another Member State you need to request for its VAT number. If it is a non-EU person, you need to request for its VAT number (if any), tax number or other relevant information obtained from the customer’s competent tax authorities. Under the new rules, a “taxable person” is obliged to register for VAT purposes when: It acquires services over €15.600 per year from other EU entities (B2B supplies) It acquires services over €15.600 per year from non-EU entities (B2B supplies) It provides services to other EU entities irrespectively of the volume or amount (B2B supplies) A Cyprus company engaged in a non-economic activity (e.g. a holding company) is not considered as a taxable person. However a Cyprus company engaged in a non-economic activity (e.g. a holding company) together with an economic activity (e.g. providing loans or services to other entities), is considered as a taxable person for all services it acquires from abroad.  Consequently, this holding company would be obliged to register for VAT and apply the reverse charge provisions (and account for VAT) if the services received from abroad exceed €15.600 per year. This company may need to pay over the Cyprus Authorities 15% VAT on the whole or part of the value for all services acquired irrespective of whether such services are related to its economic activity or not. Basis of allocation of Input VAT to business and non-business activities Input VAT relating to non-business activities cannot be recovered. Only Input VAT relating to business activities can be recovered. Input VAT on common expenses must be apportioned in a two-way process. VIES (VAT Information Exchange System) From 1 January 2010, businesses will be required to complete and submit a declaration for the intra­-community supply of services that are taxed under the reverse charge provisions in another Member State. This new declaration is VIES II. The services which must be included in this new declaration are solely the services that will be taxed for VAT purposes in the other Member State. Services that are supplied to persons established outside the EU must not be included. Services that are exempt from VAT in the country of the recipient must not be included in the new declaration for the intra-community supply of services. Consequently, these rules require businesses to have a full understanding of the VAT treatment of the services in the Member State of the recipient. The new declaration will be submitted on a monthly basis. In accordance with the provisions of the proposed legislation, the declaration will be submitted by the 15th day of the month which follows the month for which it relates. Consequently, the declaration for January 2010 will be submitted by 15 February 2010. From 1 January 2010, the VIES returns for the intra-community supply of goods must also be submitted on a monthly basis. These returns are currently submitted on a quarterly basis. The VIES declaration for intra-community supplies of goods will also need to be submitted electronically. If the VIES declaration form contains any errors, the corrections will have to be made in the Correction Statement until the end of the month following the month to which the statement contains the errors. The penalty for late submission of the form is €50 for each form and €15 for every corrective form. Time of Supply of Services The time of supply of services which are subject to VAT by the recipient under the reverse charge provisions will as from 1 January 2010 be the earlier of the: Date in which the supply of the service was completed, and Date of payment In the case of the supply of services continuously over a period of more than one year, for which no obligation for periodic payments exists, the VAT will be due at the end of the calendar year. The VAT that will be due will be the VAT which is attributable to the value of the service provided. Reclaim of VAT paid in another EU member state The existing procedure for refund of VAT paid in another Member State will be replaced with a new electronic procedure. The purpose is a faster refund of the VAT to the claimants. In addition in case of delay in the refund of the VAT by a Member State, interest will be paid to the business for the period of the delay. The deadline for the submission of the claim for the VAT refund is extended by 3 months from 30 June of the next year to 30 September. Examples Below are some examples which may help you get a better understanding of the new regulations: Example 1 A Cyprus holding company that also provides loans or services to other entities receives consultancy services from a BVI company. This company must register for VAT and apply the reverse charge provision and possibly account for VAT to the Cyprus Authorities if the services received exceed the amount of €15.600 per year.  If the services provided by the holding company are in any other EU Company it must be registered in VAT irrespectively of the amount and VIES form must be submitted. Example 2 A Cyprus holding company, with no other activities at all, receives consultancy services from a BVI company. This company will not need to register or account for any VAT in Cyprus unless the services received exceed the amount of €15.600 per year. The same applies if the consultancy services acquired come from an EU company. Example 3 A Cyprus Company provides services to another EU company registered for VAT in the EU. This Cyprus company needs to register for VAT and VIES and submit VIES declaration forms every month. Example 4 A Cyprus Company provides services to non-EU companies. This Cyprus Company does not need to register for VAT and VIES. Example 5 A Cyprus dormant Company receives services from a BVI or EU Company. This company will not need to register or account for any VAT as long as it remains dormant. Dormant companies are considered non-economic activity entities. This VAT circular is meant for information purposes only and cannot be regarded as a binding legal, financial, tax or any other advice. If you believe any of the above changes affect your business and you would like further information on the topics discussed above, please do not hesitate to contact us. More on VAT. > Cyprus Tax Department >