Introduction
Following the amendments made in the UK S249 FA 1994 it is now possible to register UK companies which can, in the circumstances described below, trade or carry on business via Cyprus free of UK corporation tax.

The existence of S249 Finance Act 1994 combined with the Cyprus – UK Double Tax treaty and the low tax paid by offshore entities in Cyprus offers tremendous possibilities for tax planning through Cyprus.

Section 249 Finance Act 1994

Section 249 of the UK FA 1994 deals with a UK company which is “dual resident”, being resident in two places at once:

(i) In the UK under domestic law by virtue of incorporation under section 66 FA 1988.
(ii) In Cyprus due to local legislation and the UK – Cyprus double tax treaty.

Where this situation arises, then with retrospective effect from 30th November 1993 all UK companies that meet the circumstances described above will be regarded as resident in the country which the treaty rules specify as being the country of residence.

As a result, a UK company which has its place of effective management in Cyprus and which is not centrally managed and controlled in the UK will be non-resident for UK tax purposes.  The UK company will not be liable to pay UK tax unless it receives income in UK.

UK – Cyprus double tax treaty
The treaty contains a tie-breaker clause, which awards tax residence in favour of one of the treaty countries.  The tie-breaker for UK dual resident companies awards residence to the country in which the place of effective management of the company is situated.

Without the presence of a tie-breaker clause the rule in S249 cannot apply.  Cyprus was indicated by the UK Inland Revenue as having a suitable double tax treaty with the UK to enable a UK company to shed its UK tax residence.

A UK company which has its place of effective management in Cyprus is regarded for tax purposes as a Cyprus resident company.  Hence, the company will not have to pay tax in the UK unless it has UK source income.

The UK company will carry on its business through a Cyprus registered offshore branch managed and controlled in Cyprus which will pay tax at the rate of 10% only.

Residence in Cyprus can be achieved by appointing the majority of the directors locally and arranging for its board meetings to take place locally.

The benefits form the  above exercise are as follows:-

 (a) respectability and reliability of a UK company
 (b) reduced rate of tax at 10% on company net profits
 (c) no capital gains tax
 (d) large number of Cyprus double tax treaties