Cryptocurrency transactions, including the buying and selling of digital currencies, have increased in popularity across the globe. While some countries have added strict regulations, other countries like Cyprus have embraced the paradigm shift, opening their arms to innovation opportunities.
Cyprus is an island in the eastern Mediterranean with nearly one million in population. Their market is known for being diversified and prosperous, being primarily built on the services industry. The economy at one time suffered from the eurozone banking crisis, which the island has continued to recover from since 2014. The island is also known for its good investment climate and business-friendly taxation policies, making it a financial hub for investment and digital currencies.
Although there is currently no comprehensive legal framework for governing blockchain and cryptocurrencies, the Cyprus Securities and Exchange Commission (CySEC) has established an innovation hub to share its knowledge on digital currency. In the meantime, provisions regarding contracts for difference (CFDs), options and futures (derivatives on cryptocurrencies) are viewed as financial instruments under the region’s Investments Law and require authorization by CySEC.
For these reasons, investors and businesses should consider the guidelines written by government authorities to meet their taxation and other legal obligations. To do so, we provided a legal guide for those looking to buy bitcoin in Cyprus.
Tax implications as a “Dividend-Company”
From a personal investing standpoint, income tax can be up to 35% in the Republic of Cyprus, which, although it isn’t extremely high, also isn’t competitive.
For those hoping to protect themselves against potential and unforeseeable legal changes in Europe, qualified legal parties will often recommend Non-Dom status. With the Non-Dom status, investors can “transform” profits from buying and selling crypto into tax-free dividends. To be eligible for this status, investors are required to hold residency in Cyprus and set up a “Dividend-Company.” For investors, this means you should set up a company in Cyprus and trade crypto through a corporate e-wallet. Therefore, the Company will be liable to pay the corporate tax rate of 12.5% on all income. However, parties will not be required to pay taxes on the dividends since they technically earn these funds abroad.
After doing so, any profits earned from cryptocurrency transactions are in effect outsourced to a neutral company, making these events the exclusive business of the “Dividend-Company. Then, as long as the business owner registers the Company at an offshore location, any profits will not be taxed.
Additional tax considerations for businesses
Furthermore, Cryptocurrency asset service providers that offer services for exchanging or selling cryptocurrency or fiat assets require registration, according to CySEC. Although cryptocurrency is not prohibited, businesses may still face barriers from commercial banks in the area.
Currently, licensing for mining, trading and ICO’s is not provided, but the parties organizing these initiatives should comply with the existing applicable regulatory framework. At this time, the Central Bank of Cyprus and CySEC continue to issue warnings about the potential drawbacks of using digital currencies.
For example, in February 2014, the Central Bank of Cyprus produced an announcement about “the risks of cryptocurrencies.” This announcement highlights that crypto was not a “legal tender” and noted that activities relating to cryptocurrencies were not authorized. The announcement further emphasized that no specific measures are in place for any losses incurred from the use of cryptocurrencies.
That said, businesses can still participate in the innovation hub for support on any blockchain
initiatives.
The Cyprus innovation hub
The innovation hub, previously started by the Cyprus Securities and Exchange Commission, will select firms to join. If accepted, firms will gain access to specialized regulatory expertise, including academic and industry roundtables. Participants will also be able to voice any concerns on the CySEC to improve their understanding of the benefits and drawbacks of different blockchain-based innovations.
It is important to note that the hub is not Cyprus’ first attempt to support blockchain-based initiatives. Their local University, the University of Nicosia, was also one of the first higher education institutions to accept digital currencies for tuition payments and provide a Master of Science in blockchain and distributed ledger technology (DLT).
With the help of the innovation hub, Cyprus continues to improve the regulatory climate for businesses interested in the opportunities DLT represents. As a result, Cyprus will continue competing with other Southern European countries for the most promising innovators. These regulatory developments further signal that the region is open for business and can help propel growth across the industry.
