IV. FOREIGN DIRECT INVESTMENT
§ 11:10 In general
Cyprus has a declared policy of encouraging foreign investment which is reflected in various laws, regulations, international conven- tions and treaties concluded by the Republic. A number of substantial concessions and incentives coupled with Cyprus’s strategic geographi- cal location, excellent commercial infrastructure, political stability and high standard of living are among the factors which have contributed towards the development of Cyprus as a notable interna- tional business center.
The commercial infrastructure of Cyprus is well developed. It offers a good environment with respectable and pleasant working conditions combined with low operating costs and living expenses. Not only are there many well-qualied lawyers who are experienced in company law and tax planning but also all the major international accounting rms are represented in Cyprus, as well as many engineering, insur- ance and trust companies. Furthermore, there is an ample supply of university graduates who are available to work in all sectors of the economy.
§ 11:11 Regulations and restrictions
Prior to Cyprus’s accession to the EU on 1 May 2004, a number of restrictions existed concerning exchange controls and the level of foreign investment, with respect to participation in Cypriot businesses. Foreign investment in Cyprus has been fully liberalized since 1 October 2004, and there are no restrictions other than in regulated sectors such as banking and financial services, tertiary education, public utilities, media, and airlines.
§ 11:12 Taxation of foreign direct investment
As this is a large and complex field, a detailed analysis of taxation of foreign direct investment is not feasible in a publication of this nature, and potential investors are strongly advised to obtain detailed, specific advice before making any commitments. The following brief analysis of existing tax rules concerning Cypriot holding companies should provide a satisfactory initial understanding of the general principles of taxation relating to foreign direct investment in Cyprus.
The model of the Cypriot holding company is that of an ordinary company which, besides having shares in Cypriot or foreign companies, may also be engaged in other commercial activities such as trading, manufacturing or nancing.
The taxation regime which applies to these companies is three-fold. It consists of the Income Tax Law, the Special Contribution for the Defence of the Republic Law, and any applicable double taxation treaties.
The business profits of a Cypriot holding company are subject to a corporation tax of 12.5%. Dividends are exempt from income tax; instead, a 17% special defense contribution tax is payable on the divi- dend income of companies resident in Cyprus with a participation exemption being available for domestic and foreign dividends. These exemptions are subject to anti-abuse rules regarding hybrid instruments.
The international participation exemption is provided by domestic law and grants relief from international double taxation by exempting foreign dividends received by Cypriot companies from any taxation, with no minimum holding requirement. The legislation also exempts from taxation any dividends that the Cypriot holding company may pay to its parent company. It should be noted that tax law does not distinguish between company shareholdings in EU and non-EU countries.
Individuals are liable to special defense contribution only if they are both resident and domiciled in Cyprus. It should be noted that the above tax regime only applies to holding companies that can be dened as resident in Cyprus. Under the residence rules for companies, management and control is the key test and not the mere fact of incorporation in Cyprus.
Shareholders of Cypriot companies who are not residents of Cyprus are not subject to the special defense contribution tax and therefore dividends payable by a Cypriot-resident company to its foreign shareholders (whether a company or individual) will not be subject to withholding taxes in Cyprus. This is in marked contrast to other tax regimes in other EU countries in respect of dividends paid within the EU where withholding taxes are normally levied unless the EU parent/subsidiary directive requirements are fulfilled or a double tax treaty applies to dividends paid to a non-EU shareholder.
In relation to the issue of double taxation, the Income Tax Law provides relief from double taxation in relation to income tax and any tax of a similar character imposed by laws of a foreign country. The Law distinguishes between situations where there is a double tax treaty in place between Cyprus and another country and where no such treaty exists. All the double-taxation treaties which apply to Cyprus provide relief from double-taxation by applying the credit method regarding the taxation of dividends and interest. It should of course be noted that EU law prevails over the provisions of bilateral tax treaties which cannot be used to justify its violation. Where no treaty exists, relief against double taxation may be granted unilater- ally at the discretion of the Commissioner for Taxes.
V. CONTRACTS
§ 11:13 Formation of contracts, offer and acceptance
In order to form a contract, it is necessary to establish that there has been an agreement between the parties. It must be shown that an oer was made by one party and that the oer was accepted by an- other party and, therefore, that legal relations were intended.
An offer is an undertaking by the offeror that he will be bound in contract by the offer if there is a proper acceptance of it, provided that the offeree is aware of the offer. An oer may be made to a specific person or to any member of a group of persons or, in the case of a uni- lateral contract, to the world at large. However, a mere invitation to treat or a declaration of intent are not considered to be an offer.
An oer does not continue indenitely and may come to an end in one of the following ways:
1.by acceptance of the offer;
2.by revocation or withdrawal of the offer prior to acceptance;
3.by the expiration of a time limit set by the offeror for acceptance of the offer;
4.if the offeror dies prior to acceptance;
5.if a counter-offer is made; and
6.if there is a failure to meet the conditions of an offer.
The acceptance takes place while the offer is still open and must be unqualied and absolute. Acceptance completes the contract and the place where the acceptance is made is considered to be the place of the contract. Acceptance may be made orally or in writing or may be implied by conduct. The offeror may stipulate a method of acceptance and, if so, a contract will only arise if the prescribed method is followed. However, the offeror may waive his rights to have the accep tance communicated by him in the specified way and agree to an alternative method. The rule is that acceptance is only effective if communicated but there are a few exceptions, such as in the case of unilateral contracts or where the “postal rule” applies.
§ 11:14 Capacity to contract
To create a valid, binding and enforceable contract, the contracting parties must have capacity in law to contract. There exists a general presumption that everyone is capable of entering into contracts and that these contracts are enforceable against them. However, some groups of persons have certain disabilities in this regard.
According to Cypriot contract law, persons who have not reached the age of 18 years are considered to be minors with limited capacity to enter into contracts and therefore such contracts are deemed to be void in most cases. This disability exists to protect minors from the consequences of their actions. Consequently, the law will sometimes penalize those who enter into contracts with minors.
The law provides for two exceptions to the above rule, namely contracts for necessities and contracts for the minor’s benet. Necessi- ties may be dened as goods suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery. Food, clothing, lodging, educational books, medical attention and legal advice are some examples of necessities. Contracts for the minor’s benet include contracts of employment, of apprenticeship, of service and for education. However, if a contract’s terms are unduly onerous on the minor, despite being for the minor’s benefit, it may not be enforced.
Contracts made by persons of unsound mind are valid but if the other party is aware of the person’s disability then the contract is voidable at the option of the insane person. However, an insane person can make a valid contract during a period of lucidity even if the other party is aware of his disability.
§ 11:15 Formal requirements of a contract
The Contracts Law states that a commercial contract may be made orally or be partly written and partly oral or be entirely in writing or even be implied by the conduct of the contracting parties. As a matter of good commercial practice, most contracts tend to be in writing. In some instances, the Law requires that certain contracts must be in writing in order to be valid and enforceable. The following contracts are examples of the above requirement and must be in writing:
1.An agreement made without consideration on account of natural love and affection between parties standing in near relation to each other;
2.A contract for the sale of immovable property;
3.A contract relating to the lease of immovable property for a term exceeding one year;
4.A contract relating to obligations incurred in consideration to a promise of marriage;
5.A bond in customary form must be in writing and be signed by the promisor in the presence of two witnesses; and
6.Commercial agency agreements.
§11:16 Formal requirements of a contract— Acknowledgments
Generally speaking, most commercial contracts do not require any acknowledgments or witnessing in any form. However, contracting parties may provide for acknowledgments in the commercial agree- ment subject to prior agreement.
§ 11:17 Formal requirements of a contract—Notaries
There is no general requirement for commercial agreements to have a notary sign and/or seal them. However, in some cases the Law or good commercial practice requires that certain documents have a no- tary sign and seal them. Good examples of this are powers of attorney and certain documents that have to be deposited with any public authority.
§ 11:18 Performance of contracts
It may be stated that a contract may be discharged by performance when the contracting parties have fullled their obligations under the contract.
The mode or method of performance is a question of the proper construction of the contract. If the contract does not specify the means by which it may be performed, the appropriate means will depend on the implied intentions of the parties which will be concluded from the nature and all the surrounding circumstances of the contract.
As a general rule, it is the case that a party to a contract is not required to request or demand performance and the promisor must fulfill his obligations without being asked to do so. Such a request is required only where there is an express stipulation in the contract to such effect or the nature of the contract suggests an implied condition requiring a request.
As regards the issue of the date or time of performance, it is the case in common law that in the absence of a contrary term in the contract, performance of the contract is required at the exact date stipulated in the parties’ agreement. Failure to perform on a specified date gives the aggrieved party the right to claim for breach of contract. If no precise date is stipulated, the law implies an undertaking that the contract shall be performed within a reasonable time taking into account all the circumstances of the case.
§ 11:19 Remedies for failure to perform
A failure to perform a contract may constitute a breach of contract and may provide the aggrieved party with one or more of the follow- ing remedies:
1.A right of action for damages;
2.A right of action for a quantum meruit;
3.A right to sue for specific performance or an injunction;
4.A right to claim rescission of the contract; and/or
5.A refusal of further performance of the contract by the aggrieved party.
§11:20 Distinction between civil and commercial contracts
Cyprus law does not create distinctions between civil and com- mercial contracts.
§ 11:21 Special requirements of sales contracts
A contract for the sale of goods concerns the transfer of the owner- ship of the goods sold from the seller to the buyer and is governed by the Sale of Goods Law The formation of the contract of sale is like that of any other contract and adopts the same principles. The Sale of Goods Law is important in that it implies certain requirements in the form of implied conditions in the sales contract. Specically, the law implies the following conditions in a contract of sale:
1.The seller has the right to sell the goods in question;
2.If the contract is for the sale of goods by description, the goods conform with the description stated;
3.Where the seller is made aware by the buyer, expressly or impliedly, of the particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract shall be t for that purpose except under the circumstances that it is unreasonable for the buyer to rely on the seller’s skill and judgment;
4.The goods sold are of merchantable quality;
5.Where goods are sold by sample, that the bulk corresponds with the sample in quality, that the buyer will be able to compare the bulk with the sample, and that the goods are free of defects that would render them unmerchantable; and/or
6.The goods are free from any encumbrances in favor of any third party unknown to the buyer prior to the making of the contract.
The Sale of Goods Law provides certain remedies to an unpaid seller of goods. These remedies include the following:
1.A lien on the goods for their price while they are in the seller’s possession;
2.A right of stoppage of the goods while they are in transit in case of insolvency of the buyer;
3.A right to re-sell the goods to minimize his loss; and
4.A general right to sue for damages for non-acceptance of the goods.
In the event that the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may bring an action for damages for non-delivery or for delay in delivery.
The buyer may also seek a court order for specific performance.
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