Yes, you have heard it right. You can enjoy tax free dividends owing directly a Cyprus company in the following two cases:

 

1. Management and Control is exercised in a tax free jurisdiction

A main principal for the taxation of Cyprus companies is the management and control rule. This tax law stipulates that the place management and control is exercised, it defines the tax jurisdiction of the company and the place the company will be taxed.

Consequently all Cyprus companies must be managed and controlled by local directors only or by majority of local directors (in the event an overseas / investor / shareholders wants to participate in the composition of the board) to be taxed at the Cyprus Corporation Rate of 12.5%.

Therefore, a Cyprus company managed by an overseas individual (this person is a director on the company), effectively manages and control the Cyprus company at his / her place of tax residency. 

If the place of tax residency is a tax free zone or jurisdiction like Dubai or BVi then this Cyprus company even though established / created in Cyprus it will not be paying any taxes in Cyprus as its management and control is outside Cyprus.

 

2. Shareholders of Cyprus companies who are Cyprus Tax Residents but non domiciled or are tax residents overseas

Dividends paid by Cyprus companies to its shareholders are tax free at the company level and are taxed at the personal level by the Cyprus dividend tax (which is called special defence tax). 

This tax does not apply if the shareholders of the Cyprus company are Cyprus Tax Residents but are not domiciled in Cyprus (see related articles for the non dom tax status). In fact all their worldwide income will be tax free at the Cyprus level (some overseas jurisdictions may deduct dividend taxes at source; when dividends are paid). 

On the other hand, in the event the shareholders of Cyprus companies are overseas tax residents they will be subject to overseas tax at their place of tax residency only. The Cyprus company will pay them dividends free of tax and when reported in their personal tax returns maybe subject to local dividend taxes, again at personal level.

 

In Summary:

Shareholders of Cyprus Companies are taxed depending on their tax status as follows:

- Cyprus Tax Residents, Non Domiciled in Cyprus —-> Worldwide Tax Free Dividends

- Overseas Tax Residents                                           —-> Subject to dividend tax in their country of tax residency

- Cyprus Tax Residents, domiciled in Cyprus (i.e Cypriots) ---> Are taxed by the dividend tax (special defense tax) at the enforcable rate at the time of the dividend payout.

 

 

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