Why do IT companies establish businesses in Cyprus?

Tax advantages

Although Cyprus was previously associated with an “offshore” jurisdiction, significant legislative changes in line with EU directives and OECD recommendations have helped it avoid the status of a “tax haven” while maintaining some of the lowest tax rates within the EU. Key tax benefits of Cyprus include:

1. Dividends for Non-Residents: Dividends may be taxed at 0% under certain conditions, including:
   • (i) The company distributing the dividends does not earn passive income.
   • (ii) The corporate income in the country from which the dividends are paid is taxed at a corporate tax rate exceeding 6.5%.
2. Corporate Tax Rate: Cyprus’s corporate tax rate is 12.5%, one of the lowest in the EU.
3. IP Box Regime: This allows up to 80% of qualifying profits to be tax-exempt, reducing the corporate tax rate to 2.5%. This is a significant advantage for IT companies operating in Cyprus.

Details about the IP Box: You can achieve a reduction of up to 80%, but it could also be lower—such as 40%, 50%, or 70%. To better understand the specifics of the tax reduction, it is essential to distinguish between three key terms:

1. (і) Qualified Assets: These include patents, copyrights for software, utility models, and other similar intellectual property assets.
2. (іі) Qualified Income: This refers to income eligible for the preferential regime, including royalties, profits from the sale of qualified assets, and other types of licensing income.
3. (ііі) Qualified Expenses: These include research and development (R&D) costs associated with developing intellectual property assets and related activities.

The primary tax advantage of the IP Box lies in reducing the effective tax rate on income from qualified intellectual property assets that are maintained and developed by a team in Cyprus. To simplify, the calculation can be expressed with the formula:
“Qualified Profit” = “Qualified Income” × (“Qualified Expenses” / “Total Expenses”).

The country ranks among the top 10 nations actively investing in research and technology development. However, building an effective system requires a solid foundation, takes time, and must be tailored to each specific case, depending on the existing business structure and the product’s development stage. Therefore, it is crucial to consider the legal aspects of doing business in Cyprus.

Operational specifics

Despite its significant tax advantages, Cyprus has unique operational aspects that businesses must prepare for, including:

1. Substance Requirements: These must be maintained at an appropriate level and may include:
   • Having a local office and a company secretary.
   • Periodic visits to the island.
   • A resident director, among other obligations.
2. High Minimum Wage: The minimum salary ranges from €2,000 to €3,000, depending on the employee’s qualifications, and the island has a limited pool of skilled professionals.
3. Infrastructure and Logistics Challenges: Cyprus’s geographic location in the Mediterranean presents certain logistical and infrastructural limitations.
4. Historical and Political Context: Services involving Turkey may be restricted due to sanctions, which can impact operations.
5. Enhanced Financial Reporting Requirements: All companies, regardless of size, are subject to stringent financial reporting and audit obligations. This can result in additional administrative expenses for accounting services.
6. Inefficient Remote Management Systems and Bureaucracy: The underdeveloped systems for remote company management and high levels of bureaucracy can delay business operations and processes.

Conclusion

In practice, Cyprus is better suited for establishing a transparent corporate structure to reduce the tax base for a group of IT companies, considering its robust legal protection for intellectual property assets. With a holding structure, Cyprus can be an ideal solution for minimizing the tax burden on dividends, royalties, and other types of income received from subsidiary companies registered in different jurisdictions. Thus, living in Cyprus can benefit businesspeople from a business operations perspective.