AS CYPRUS rushes to carry out last-minute measures ahead of EU accession, with tax reforms that effectively end the ‘offshore’ status of overseas companies, it appears the bulk of the foreign business community has no intention of leaving the island.
Indeed, Cyprus is even expecting more international companies to come to town, attracted by the island’s attractive location, infrastructure and still competitive tax rates.
A representative of the offshore community, Chris Koufaris, yesterday denied rumours that offshore companies that had previously enjoyed preferential tax conditions were now looking to bail out before EU accession and uniform taxation kicks in.
“As far as I know, we have not experienced any members leaving Cyprus because of the tax reforms,” said the President of the Cyprus International Businesses Association (CIBA).
“On the contrary, there is increasing movement from potential new companies checking up on the new tax situation here. These are more quality-type companies than we’ve experienced before, which operate in the areas of financial and consultancy services,” he said.
Under the new tax regime, all companies – local or foreign – are taxed 10 per cent. However, offshore companies established here before December 2001 have the choice of paying 10 per cent tax from now and being allowed to trade in Cyprus (which they weren’t allowed to do under the old regime), or continue to pay 4.25 per cent (the old ‘offshore’ rate) for a transitional period up to January 1, 2006.
“The majority of our members will remain in the current 4.25 per cent tax regime until 2006. The reason being that companies’ activities are exclusively outside Cyprus and so they don’t need to trade within the local market,” said Koufaris.
By 2006, the ten per cent tax regime will apply uniformly throughout the business sector in Cyprus.
The CIBA president maintained that the tax package was not going to scare off the many offshore companies that settled on the island, but on the contrary, help to make Cyprus a well-respected international business centre, moving away from its older image of a tax-haven. As such, it would contribute further to the state’s revenue.
“There has been a positive response to the tax changes,” he said.
“But here I must distinguish between companies that look at Cyprus as a middle to long-term contract and those that see it as a one-off venture. I’m talking about companies looking for a respected international business centre, which doesn’t carry an offshore stigma, a country in line with the standards of the Organisation for Economic Development and Cooperation (OECD) and with an EU stamp of approval,” said Koufaris.
“From talking to banks, accountants and lawyers, the overall message I got was that good quality companies, transparent in their operations, accept the new affairs and have a positive point of view,” he said, adding quickly: “This view might not prevail with one-person offshore companies who came here for the climate and ease of doing things though.”
Koufaris believes EU accession will make Cyprus more attractive, despite the loss of its offshore status. “The idea now is to build up a reputable international business centre with an acceptable competitive tax system which will be the right place for European or American companies to use to access nearby areas.”
The CIBA president noted that after 2006, international businesses would only add to state coffers by falling into the 10 per cent bracket. “This will obviously be a positive input to tax revenue.”
There was an increase in profitability and increase in numbers of companies coming in from 2001 to 2002, which would translate into higher fiscal revenue for Cyprus, he added.
Just how much will offshore companies contribute? A rough indication can be found in the Commissioner for Public Aid’s report on the level of ‘public aid’ (in the form of tax advantages) given to offshore companies through tax exemptions in 2001 and 2002.
The study found that in the two years, the state gave public aid to offshore companies to the sum of £256 million through tax exemptions or reductions.
Public Aid Commissioner, Onoufrios Koullas, said he used the tax benchmark rate of 2001 for local companies which was between 20 and 25 per cent to calculate the level of public aid to offshore companies.
“It seems a lot but it’s not really a sign of what’s lost because if those companies were taxed at that level they probably wouldn’t be here,” said Koullas.
Moreover, this potential gain to public coffers needs to be tempered by the fact that overseas companies will only be paying 10 per cent from 2006, while corporate tax for local companies will come down from 20-25 to 10 per cent.
The Public Aid office was created to check aid given by the state to businesses, as part of the obligations to the EU to maintain healthy competition in the market.
“Now it’s 10 per cent for all local companies and by 2006 all offshore companies too,” added Koullas.
