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Module 2.03 – Cyprus Option

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Module 2.03 – Cyprus Option THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION June 2018 MODULE 2.03 – CYPRUS OPTION SUGGESTED SOLUTIONS Module 2.03 – Cyprus option (June 2018) PART A Question 1 Part 1 Dr Giovanni did not spent more than 183 days in Cyprus during 2017 and so prima facie he is not a Cyprus tax resident for 2017. However he did not spend more than 183 days in any single country and assuming the 183 day rule application in Italy, he was also not tax-resident of Italy or any other country. As Dr Giovanni spent more than 60 days in Cyprus and as cumulatively he maintains a permanent home in Cyprus and also employed in Cyprus, then he could be treated as a tax resident of Cyprus for year 2017 and taxed on his worldwide income. Part 2 Pension income from Italy Per Art.18 OECD MC the residence State (Cyprus) has exclusive taxing rights. Dr Kit’s income taxed only in Cyprus with Dr Kit entitled to a tax refund from the Italian tax authorities. Foreign pension income taxed under special mode in Cyprus if taxpayer so elects. Such income is not aggregated with other income and taxed at rates of 0% and 5%. As Dr Kit’s income is substantial during 2017, he is advised to make the election. Rental income from Italy Subject to income tax. Not subject to SDC as Dr Giovanni is not Cyprus domiciled. Tax paid in Italy will be relieved against Cyprus tax liabilities on the ordinary credit method (Art.23(b) OECD MC). Salaried income from Cyprus Subject to income tax in Cyprus. Employer has to deduct PAYE. Gain on sale of medical practice in Italy (Goodwill). Gain treated as trading goodwill. Forms part of Dr Giovanni’s taxable income in Cyprus as it arose during 2017. However it arose from a PE overseas. Taxed in Italy and exempt from Cyprus tax per s.36. Bank deposit interest (Italy) Specifically exempt from income tax in Cyprus. Not Subject to SDC @ 30% in Cyprus as Dr Giovanni is a non-dom. Tax withheld in Italy may be possible to be refunded per Italian tax law. Bank deposit interest (Cyprus) Specifically exempt from income tax in Cyprus. Not Subject to SDC @ 30% in Cyprus as Dr Giovanni is a non-dom. Dividends from Italian companies Specifically exempt from income tax in Cyprus. Not subject to SDC @ 17% in Cyprus as Dr Giovanni is a non-dom. Page 2 of 11 Module 2.03 – Cyprus option (June 2018) Tax withheld in Italy may be possible to be refunded per Italian tax law. Income from Sicilian tourist apartments Characterised as business income. As business income arising from an overseas PE, it will be exempt from Cyprus income tax per s.36 Law 118/2002. As business income, outside SDC scope. Gain from trade in European listed shares and bonds Exempt from both income and capital gains tax as they are in the list of the ‘title’ definition Part 3 Dr Giovanni – Income Tax Computation € Taxed under special mode: Italian Pension 80,000 Income Tax (80.000-3400) at 5% Payable 3,830 Taxed under normal rates: Rental income 20,000 Less: 20% statutory deduction -4,000 16,000 Trading goodwill 150,000 BDI - Italy 15,000 Salary 6,000 BDI - Cyprus 2,000 Dividends 200,000 Gains on fin. Instruments trading 350,000 Income from Sicilian apartments 30,000 Total income 769,000 Less: Exemptions and Deductions Trading goodwill (s. 36) 150,000 BDI - Italy (s.8) 15,000 BDI - Cyprus (s.8) 2,000 Dividends (s.8) 200,000 Gains on fin. Instruments trading 350,000 Income from Sicilian apartments (s.36) 30,000 747,000 € Taxable income 22,000 Taxation liability 1-19,500 at 0% 0 19,501-22,000 at 20% 500 500 Total tax payable for year 2017 4,330 Page 3 of 11 Module 2.03 – Cyprus option (June 2018) Question 2 Part 1 Although BamaCo is incorporated in another jurisdiction, this tax-haven jurisdiction is unlikely to claim tax residency of the company due to its nature i.e. BamaCo seems to be managed and controlled in Cyprus and will be treated as a tax resident of Cyprus re: management and control test. Management and control is not defined in Cyprus tax law but it is taken as meaning, the satisfaction of all of the following criteria: Majority of directors resident in Cyprus Board meetings take place in Cyprus Strategic decisions are taken in Cyprus The third above criterion may not be satisfied if Chris’s country of residence claims tax residency (discussed in part (b) below). In the event that the country of incorporation claims the company’s residency, the tie-breaker rule in Art 4(3) OECD MC will be applied, according to which the ‘place of effective management’ of a company is the determining factor. As the country of incorporation cannot prove the above factor, the company will be treated as a tax resident of Cyprus. Failing the above tax residency analysis, ie the company is not determined as a tax resident of Cyprus, the fact that the company maintains a fully-fledged office in Cyprus, the latter will form a permanent establishment (PE), as it falls within the definition of both s.2 Law 118/2002 and Art 5(2) OECD MC. As such, profits attributable to this PE, will be taxed in Cyprus. Analysis of operations Terraland BamaCo Inc. has a factory in this country. This falls within the definition of Art 5(2)(d) OECD MC, BUT need to examine if this will be excepted from the PE definition by virtue of Art 5(4). Art 5(4) OECD MC, stipulates that if the use of facilities in Turkey are solely used: (a) For storage, display or delivery of goods (not the case here) (b) To maintain stock solely for the purpose of storage, display or delivery (not the case here) (c) To maintain stock solely for processing by another enterprise (not the case here) (d) To purchase goods or collect information for the enterprise (not the case here) (e) Any other activity of preparatory or auxilary character (f) Any combination of the above activities of a preparatory or auxillary character The issue to determine here therefore is as to whether the operation of the factory in Turkey is of a purely preparatory or auxillary purpose. From the facts of the case, it cannot be inferred that BamaCo’s use of a factory in Turkey is not of a preparatory or auxillary purpose and as such the company will be treated as having a physical PE in Turkey, irrespective of the fact that sales and receipts are managed and administered from the Cyprus office. As such profits attributed to the operation in Turkey will be taxed there. Qatar Need to examine if distributors deemed as dependent agents in which case, BamaCo will be treated as having an agency PE in this country per Art 5(5) OECD MC. Page 4 of 11 Module 2.03 – Cyprus option (June 2018) The decisive factor in this case, is as to whether these distributors have any authority to negotiate and conclude contracts on behalf of BamaCo Ltd. If such authority exists, then they will be treated as dependent agents and accordingly profits attributable to their activities will be taxed in Qatar. Malta The warehouse in this country falls within the definition of a physical PE per Art 5(2) OECD MC. However its activities seem to also fall within the exceptions stipulated by Art 5(4) OECD MC as discussed above. The warehouse cannot therefore form a PE in Malta and therefore Malta will have no taxing rights in respect of this activity. In relation to the JV agreement, this will have to be divided in its constituent parts. The part of the contract (65%) that will be physically carried out in Malta will be deemed as attaching to a physical PE there re: use of premises in Malta and these part of the profits will be taxed in Malta. The remaining part of the contract (35%) will be directly attributable to the Cyprus head office and its attributable profits therefore taxed in Cyprus. Ukraine Software programmers resident in this Country will not form a PE for the company in this Country, as their services are employed on a freelance basis. Accordingly, Ukraine has no taxing rights on the company. Any Profits attributable to foreign PEs in other Countries will be exempt from taxation in Cyprus (s.36 Law 118/2002) Part 2 Tax risks faced by Chris and BamaCo Ltd, depend on the tax residency provisions in the domestic legislation of Chris’s residence State. Chris could be treated as a shadow director of SeyCo ltd as the Company’s board is acting/accustomed to act per Chris’s instructions (Wood V Holden). Brief analysis of Wood V Holden. As such, Chris’ residence State may claim BamaCo’s tax residence, as the company is not incorporated in Cyprus and may deem its profits as distributed to Chris (if such CFC provisions apply). Page 5 of 11 Module 2.03 – Cyprus option (June 2018) PART B Question 3 Part 1 Dividend income from all companies (Cyprus and overseas) although taxable, is specifically exempt from taxation in Cyprus. Dividend income also exempt from SDC as Cyprus company holding of shares in overseas companies exceeds 1%. Cyprus does not impose WHT on outbound dividends paid overseas, nor SDC on dividends paid to non-residents i.e. dividend to Liechtenstein Foundation not subject to any WHT or SDC.
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