Definition: Offshore Entity
Offshore entities are companies, partnerships or branches which are incorporated or registered in Cyprus and which entire income is obtained from activities conducted outside of Cyprus.

There exist almost no restrictions with respect to the type of activities an offshore company is allowed to perform .

Forms of Organisations
The laws and regulations for setting up and administering such organisations are the same for foreign investors and offshore activities as they are for local organisations. Foreign investors however, are required to obtain the approval of the Central Bank of Cyprus.

All enterprises, except sole traders, are required to register with a government agency - the Registrar of Companies

Companies
A company is a distinct "legal person" created in order to separate legal responsibility for the affairs of a business (or any other activity) from the personal affairs of the individuals who own or operate the business.

The Companies Law of Cyprus, which closely resembles the United Kingdom’s Companies Act 1948, provides for private companies, exempt private companies and public companies.

Private companies need two or more founding members, are limited to fifty shareholders (except for employees or ex-employees), cannot offer shares for public subscription and impose restrictions on the transfer of shares.

Exempt private companies are subject to the same regulations as other private companies except that they are not required to file financial statements with the Registrar of Companies. Shares in exempt private companies may not be held by a foreign registered company or a corporate body. Only registered holders of shares can have any interest in the company’s securities.

Public companies need 7 or more founding members, can seek public subscription of shares and do not restrict share transfers.

In all cases, shares must be registered, may be ordinary or preferred with differing voting rights and can be paid in cash or other consideration.

Final responsibility for conduct of a company’s business rests with the board of directors, elected by the shareholders, though the actual conduct of the business generally is in the hands of executive directors/managers. A general meeting of shareholders must be held once a year (the annual general meeting), although special meetings of shareholders can be called.

Although there is no minimum legal requirement, the Central Bank requires that the minimum paid up share capital of offshore companies is C£1.000, or C£10.000 for companies which intend to establish an office in Cyprus, and C£100 for shipowning companies.

As stated above, the Companies Law stipulates a minimum of two shareholders. In case where one member desires to hold 100% of a company or where the company is to be a wholly owned subsidiary of another , a local or foreign nominee may be used as the second member, holding one share.

Nominees or trust companies may also be used when anonymity is required. However, full disclosure of the beneficial owners of the shares should be made to the Central Bank of Cyprus.

A private company must have at least one director, whereas a public company must have at least two directors. There are no requirements as to nationality or residency. To serve foreign tax planning considerations, it is often important to establish that the company is managed and controlled from Cyprus. This may be achieved by the majority of directors being residents of Cyprus. Such directors are appointed and may be removed by the shareholders according to the provisions in the Articles of Association of the company.

Branch operations
A company incorporated outside Cyprus may establish a branch in the Republic. Within a month of establishing a branch, the company must file with the Registrar of Companies various documents including its charter/memorandum and articles of association and particulars of its directors and of its representatives in Cyprus.

Partnerships
Partnerships can be either general or limited.

In a general partnership every partner is liable jointly and severally with the other partners for all debts and obligations of the firm.

In a limited partnership there is at least one general partner with unlimited liability and one or more limited partners who are not liable beyond the amount of capital they have agreed to contribute. The number of partners cannot exceed twenty. A company may be a general or limited partner in a partnership.

The relations of partners between themselves may be regulated by a partnership agreement, which need not be registered.

Offshore activities
Cyprus offshore entities are free to perform a wide range of activities, subject to the provisions of the Memorandum and the provision of their exchange control permit. The following activities are given by way of indication.

Head office-Regional Headquarters Operations
The geographical location, the excellent telecommunications and other services and the pleasant living conditions are particularly important for head office or regional headquarters operations, especially for multinational companies with interests in the East Mediterranean region, the Middle East and Northern Africa.

Holding and Investment Companies
A Cyprus offshore entity may be used as a holding company to own subsidiary companies registered abroad or registered in Cyprus as offshore entities. It may also be used for the management of investments in shares and real estate and the provision of finance and services to related companies. With management and control on the island, the investing group may take advantage of the expanding network of double tax treaties.

International Trusts
In 1992 Cyprus enacted the International Trusts Law which provides for the establishment and operation of international trusts in Cyprus. International trusts must comply with four requirements:

• the settlor must be non-resident for exchange control purposes
• all the beneficiaries with the exception of any charity in Cyprus must be non-residents
• at least one of the trustees must be a Cypriot, whether a legal person or individual
• the trust fund must not include any immovable property in Cyprus

The term "non-resident" when referring to the settlor or the beneficiaries includes also offshore companies or partnerships.

The advantages which are enjoyed by international trusts are:

• complete exemption from income or capital gains tax
• complete freedom from any exchange control restrictions
• they can last up to one hundred years
• the trust instrument may provide for the right of relocation of the trust
• there are no restrictions on the investment of the trust fund
• the anonymity of the settlor and beneficiaries is safeguarded by the law
• availability of accounting, legal and banking services of a very high standard.

The above advantages make Cyprus international trusts a useful vehicle for the avoidance or mitigation of tax liabilities and for maintaining the anonymity of the beneficial owners of the trust property.

International trading and factoring
Offshore entities are eminently suitable vehicles for international trading, invoice factoring and re-invoicing of goods, materials and services within international trading groups. Trading operations between the members of the group may also be on a commission basis.
Offshore trading companies are also used for transit trade activities through the use of private or general bonded warehouses located in Cyprus. Simple processing operations such as breaking bulk, sorting and repackaging may be performed on goods stored in such warehouses.

Patents and copyrights
Rights to copyrights and know-how may be assigned to a Cyprus offshore entity for a capital sum, allowing this entity to exploit the rights and therefore benefit from the nil or 5% withholding tax for royalties stipulated in most of the Cyprus double tax treaties.

Professional services
Professionals providing services in the region use Cyprus as a base for their activities and therefore benefit from the available facilities and tax concessions. Such services include architecture, engineering and professional training.

Employment companies
Offshore employment companies are used as a vehicle to provide expatriate staff, working outside both their home country and Cyprus, with almost tax free remuneration. By paying tax at the low Cyprus rates, higher rates may be avoided in the home countries.

Construction and engineering contractors
Contractors use Cyprus as a base for their operations and/or to yield a mark-up on their contracts.

Business in Eastern Europe
The movement towards market economies in Eastern Europe is creating unprecedented business opportunities for Western companies. Taken together, the countries of Eastern Europe represent a virtually untapped market of 400 million people with strong interest in Western type consumer goods and services.

Cyprus has double tax treaties with Bulgaria, Czechoslovakia, Hungary, Poland, Romania, USSR and Yugoslavia.

These treaties are unique in the sense that they are the only treaties of East European countries with a country like Cyprus, which offers significant tax and other incentives to foreign entities conducting their business activities from a base in Cyprus.

In comparing the withholding taxes provided in the double tax treaties between East European countries and Cyprus and on income remitted to Cyprus and the corresponding rates applicable in treaties of other countries with East European countries or applicable in the absence of a treaty, it is obvious that Cyprus offshore companies are ideal vehicles to extract income such as dividends, interest and royalties from East European countries with minimum tax costs.

Captive and general insurance business
Captives and companies providing insurance services in the open market benefit particularly from the low operational costs and the availability of skilled insurance personnel. A Captive is particularly attractive to major companies or groups with the substantial risks to cover. Both types of companies are subject to special legal provisions.

Offshore Banking Units (OBUs)
Cyprus OBUs provide banking services on a world-wide basis (except Cyprus) and therefore benefit from the liberal regulatory framework, the position of Cyprus within the time zones, the excellent telecommunications services and the generous tax concessions. OBUs are subject to special legislation and regulations.

Ship Management
Ship-management companies use Cyprus as a base for managing ships under the Cyprus or other flags. Their activities include chartering, ship brokering, recruitment and management of crew, technical and other services to the shipping industry.

Ship Owning
About 2.500 ships are registered in the name of Cyprus ship-owning companies, making Cyprus a major world ship registration centre.
Ship-owning companies benefit from competitive registration costs and low annual fees both for ship-owning company and the ship. No tax is payable on profits from the operation of a ship under the Cyprus flag or on the emoluments of foreign crewmen.