The new tax regime that came into force on the 1 January 2003 brings about fundamental changes to the current tax system.

The major fundamental changes in the tax legislation of Cyprus are:

There will be no differentiation between local and International Business Companies.

The taxation of companies will be based on tax residency. Under the new legislation companies will be considered resident in Cyprus and taxed in Cyprus if they are managed and controlled in Cyprus.

Participation exemption for dividends received from other companies and/or other countries.

No withholding tax on dividends, interest and royalties payable to non-residents (foreign companies and individuals).

All companies will be taxed at the rate of 10% but there are transitional provisions for I.B.Cs which at 31 December 2001 were generating income from sources outside Cyprus. These companies may elect to be taxed at 4,25% up to the end of the year 2005. Companies which elect to continue with this preferential rate till 31 December 2005 may not take advantage of the various exemptions and favourable provisions introduced by the new regime.

The term “resident” has been added to the vocabulary of relevant terms under the new taxation system. For corporate entities, as mentioned above, the criteria are management and control. As far as physical persons are concerned, an individual who stays in Cyprus for a period or periods exceeding in aggregate 183 days in the year of assessment is considered resident in Cyprus.