Cyprus: A Country Known for Its Tax-Friendly Policies?
In a significant shift, Cyprus has lost its status as a tax haven, transforming into a compliant and transparent jurisdiction. This transformation was primarily driven by increased international pressure for tax transparency and adherence to global tax standards.
By 2012, the country's banking system was reeling under the weight of Greece's sovereign debt crisis. The situation became so dire that by March 2013, a bailout was necessary. The bailout agreement, signed in the same year, marked a turning point for Cyprus.
The agreement included stringent measures to reform the country's banking practices. Cyprus agreed to change its practices to end its status as an offshore tax haven. This shift was evident as the country hiked its corporate tax rate to 12.5%, one of the lowest corporate rates for non-offshore entities worldwide.
To curb the use of Cyprus as a shell entity for tax avoidance, the country enhanced its banking sector’s regulatory environment to meet OECD standards. Companies are now required to demonstrate real economic substance to benefit from favourable tax regimes. Cyprus has also transposed the EU’s Public Country-by-Country (CbC) Reporting Directive into national law, requiring multinational companies to disclose detailed tax and economic activity reports from 2024 onwards.
Moreover, Cyprus has removed or tightened many opaque tax practices that previously enabled aggressive tax avoidance. For instance, the country applies a 0% tax rate on foreign dividends if certain criteria are met, and has an effective IP Box regime with a 2.5% rate, aligned with OECD guidelines to reduce harmful tax practices.
The participation of Cyprus in the Automatic Exchange of Financial Account Information program further marks the end of its status as a tax haven. Under this program, the country now automatically sends tax-related banking information of non-citizen account holders to tax authorities in their countries of citizenship.
These changes reflect Cyprus’s shift from a traditional tax haven towards a compliant, transparent jurisdiction integrated with international tax standards. The transformation is a testament to Cyprus's commitment to global tax transparency and compliance.
- The shift from Cyprus being a tax haven to a compliant jurisdiction, as a result of increased international pressure, has also impacted its finance and business sectors, as the country now adheres to global tax standards and requires companies to demonstrate real economic substance.
- In line with its commitment to global tax transparency and compliance, Cyprus has implemented various measures such as transposing the EU's Public Country-by-Country (CbC) Reporting Directive, tightening opaque tax practices, and participating in the Automatic Exchange of Financial Account Information program, signifying its transition away from a traditional tax haven towards a transparent jurisdiction.
