*

CYPRUS FOR INTERNATIONAL BUSINESS

by Savvas Shiatis, Director

*Aiming Higher

1 CYPRUS IS GOOD FOR BUSINESS

• Cyprus structures remain efficient and friendly to business

• It is not obligatory to use a credit institution (bank) in Cyprus, when setting up a Cyprus structure

• Cyprus is not a . It is an EU member state since 2004 and is compliant with EU laws and regulations

• Tax havens impose no or nominal or indulge in activities preventing an effective exchange of tax information and lack transparency in operations

• G-20 summits re-affirmed the willingness of leading nations to black-list tax havens which fail to sign tax information exchange agreements

2 OTHER FEATURES

• Recognition of Cyprus as a mature international business centre

• Cyprus has a business friendly tax environment and plenty tax privileges

• Licensing in Cyprus improves transparency and legitimacy

• Highly educated and qualified professionals to advise clients and provide expert support

• Suitable types of structures include: Holding, Financing, Royalty, Trading, IP, Shipping Entities and International Trusts

3

KEY ECONOMIC INDICATORS 2008 2009 2010 2011 2012 2013

Gross Domestic Product (at € mn 17.157,1 16.853,5 17.406,0 17.878,0 17.720,2 16.503,7 current prices)

Gross Domestic Product (real % change 3,6 -1,9 1,3 0,5 -2,4 -5,4 growth)

Gross Domestic Product Per € 21.800 20.900 21.000 21.000 20.500 19.000 Capita

Gross Domestic Product Per EU 27=100 99 100 96 94 91 -88 Capita

International Reserves € mn 721,0 888,6 858,0 931,9 903,7 664,3

Current Account Balance % of GDP -15,6 -10,7 -9,8 -3,4 -6,9 -1,9

Inflation Rate % change 6,67 0,33 2,43 3,29 2,39 -0,4

Registered Unemployed % of Econ. 2,9 4,3 5,5 6,7 8,5 11 Active Pop.

4

SUITABILITY OF CYPRIOT HOLDING COMPANIES

KEY CRITERIA FAVOURABLE (YES)/ COMMENT NOT FAVOURABLE (NO) Incoming dividends YES Extensive double tax treaties, unilateral tax reliefs and EU Directives Dividend income YES Generally not taxable Outgoing dividends YES No withholding tax to non-residents Capital gains YES Full of gains Reorganization and group relief YES Group relief is allowed and losses set off against future profits Controlled foreign company (CFC) YES No CFC legislation Thin capitalization YES No provisions for debt to equity ratio Redomiciliation YES Redomiciliation is permitted Listing in international stock exchanges YES Tax efficient and easy process Interest income Yes Interest taxed only at 12,5 percent Interest and royalties withholding YES No withholding taxes, only for royalties (10 percent) for their use in Cyprus VAT registration YES Holding activities are not obliged to register Liquidation Yes Distribution of assets without any tax Stamp YES Only for assets existing in Cyprus 5 COMPARISON OF EU RATES

35%

34% 29% 24% 12-25% 12,5%

10-19% 20-25%

30%

12,5%

Cyprus

Malta

Belgium

Hungary Hungary Ireland

Luxemburg

Netherlands Netherlands Switzerland

Spain United Kingdom United

6 COMPARISON OF EU EFFECTIVE IP TAX RATES

0-10%

6.8% 5.76% 24% 19-11% 2,5%

5% 5/25%

15-30%

2.5%

Cyprus

Malta

Belgium

Hungary Hungary Ireland

Luxemburg

Netherlands Netherlands Switzerland

Spain United Kingdom United

7 BENEFITS OF CYPRIOT COMPANIES AS INVESTMENT VEHICLES

• conversion from private to public company in Cyprus is a simple filing procedure • single EU Passport allows conduct a public offer in another EU member state or have the shares admitted to trading on EU Exchange Regulated Market • recognition as a mature financial services centre with developed infrastructure

• corporation of 12.5 percent, amongst the lowest in EU • no withholding taxes on dividends, interest, and in most cases on royalties paid to non-residents • no tax on gains from disposal of titled, including shares, bonds, debentures, founders and other titles of companies or legal persons and rights thereon • participation exemption system on dividends/profits from abroad • no exit costs • no holding period requirements for the participation exemption titles

8 TAX ADVANTAGES

12.5 percent corporation tax, amongst the lowest in EU • exemption from tax on dividend income, in most instances • no tax on profits from foreign (PE), in most instances • exemption from tax on profits from shares, securities, bonds and units • no withholding tax on the repatriation of income as dividends, interest and royalties

• extensive double tax treaties network • access to EU Directives • no thin capitalization rules • absence of Controlled Foreign Company (CFC) rules thus exempting foreign income received • flexible reorganization rules and group relief provisions

9 TAX ADVANTAGES (Cont’d)

Financing companies engaged in intra-group loans Generous tax deductibility of general administration expenses. No withholding tax on payments of interest to non-residents.

Intellectual Property (IP) companies The IP regime is the most attractive in EU, the effective tax rate is below 2.5 percent.

Other advantages • Strategic location at the crossroads of Europe, Middle East and Africa • Member state of the EU and a gateway for the movement of goods in and out of EU • High quality professional services • Excellent infrastructure providing easy access by air and sea • Low set up and operating costs 10 OTHER FEATURES

• Tax residency certificates can be obtained easily

• Tax rulings are available

• Arm’s length principle for related party transactions

• Unilateral and bilateral tax relief provisions

• Thin spread of income is generally acceptable

• Business-related expenses are tax deductible

• Group relief provisions for resident companies

• Tax losses can be carried forward up to 5 years

• No or estate duties

• Provisions for tax exempt company reorganizations 11

TAX SYSTEM • Corporation tax • Lowest corporate tax rate in Europe • 12.5% on trading profits applicable to all companies • Liberal approach to deduction of expenses, costs and allowances

Dividend income • Exemption on dividend income Condition for exemption: • The above exemption does not apply if the non- resident company paying the dividend engages directly or indirectly more than 50% in activities that lead to investment income and • The overseas tax burden on the income is significantly* lower than the Cyprus tax burden

*Significantly lower has been defined as lower than 6.25% by the Tax Authorities

12

PERMANENT ESTABLISHMENT (PE) The exemption does not apply if: • The PE engages directly or indirectly in activities that give rise to more than 50% of investment income and • Pays tax less than 50% of the Cyprus tax (ie 6.25%)

No withholding taxes • Dividends • Interest • Royalties

13 PROFIT EXEMPT FROM SALE OF TITLES • Gains on the disposal of “titles” is exempt from any tax in Cyprus. No minimum participation threshold required • The list of financial instruments that fall under the definition of “titles” includes: • Ordinary, preference, founder’s shares • Marketable securities, options on titles • Units in open-end and close-end schemes and funds • Debentures, bonds, swaps, depository receipts (ADR and GDR) • Repos, swaps, rights of claims on bonds and debentures • Short positions, futures/forwards on titles • Participations in Russian OOO and ZAO, US LLC, Romanian SA and SRL, Bulgarian AD and OOD Exemption from • Disposal of shares in a company owning immovable property situated in Cyprus • Disposal of immovable property situated in Cyprus is subject to capital gains tax only

14

TAXATION OF INTEREST AND ROYALTIES

Taxation of interest income • Special defence contribution on passive (investment) interest is 30%. Affects only “passive” interest income (usually bank deposit interest) • Interest subject to 30% SDC for tax resident individuals • Interest subject to tax at 12.5% CT for tax resident companies • Taxation would depend on the nature of interest income received (active vs. passive (investment income is taxed at 30%) Taxation of royalties • IP “Box” regime introduced in 2012 which provides an 80% exemption from tax for IP income and profit on disposal, offering to investors an effective tax rate of less than 2.5% Unilateral • Unilateral tax credit relief is available for taxes paid abroad if the respective income is subject to tax in Cyprus 15 CYPRUS INTERNATIONAL TRUSTS (CIT) • may exist in perpetuity • its income can be accumulated for the entire duration of the trust • the law applicable to it can be changed to a foreign law • asset protection. The law makes it difficult to invalidate the trust even in the event of a settlor’s bankruptcy

• confidentiality which ensures that the trustee may not disclose to any person

• the income and the profits of a CIT derives or deemed to be derived are completely exempt • no law, Cypriot or foreign, relating to inheritance or succession • significant tax privileges including: • income not taxable • dividends, interest and royalties being exempt from tax • gains on disposal of assets are tax free • all or any part of the trust funds may be invested anywhere

16

TAXATION OF UCITS & ICIS • Interest earned by UCITS subject to 12.5% CIT only • Interest exempt from SDC • Distributions from redemption of units exempt from 17% SDC • Foreign unit holders TOTALLY exempt for SDC • SDC minimised from 17% to 3% with respect to 70% of undistributed profits (CY tax residents) • SDC minimised from 17% to 3% upon dissolution (CY tax residents)

17 WHY SET UP AIF/AIFM FUND IN CYPRUS

• Cyprus based AIFMs and AIFs will benefit from low tax levied on Cyprus corporations • non –Cypriot investors in Cyprus AIFs will, at the time of a redemption from, or AIF, benefit from an extensive double-taxation treaty network that is in place in Cyprus • the tax regime applicable to corporate funds in Cyprus is one of the most favourable in the EU • at the investor level, receipts from redemptions in an AIF would be considered a disposal of securities would be completely exempted from taxation in Cyprus • dividends received by the AIF from a non-Cyprus tax resident subsidiary exempt from corporate in Cyprus

18 CESSATION OF ACTIVITIES • A Cypriot holding company held by non-resident shareholders can cease operations in Cyprus and distribute assets to its shareholders in any form (dividends, proceeds on liquidation, etc) without any tax cost to the shareholders

• If the Cypriot holding company owns immovable property in Cyprus, then its disposal at the time of ceasing operations may be subject to capital gains tax

REDOMICILIATION

• Relocation of corporate seat into Cyprus is possible. The first company is not dissolved, it simply “migrates” to Cyprus retaining its past corporate history and continues its business.

• Ability to redomicile opens new planning dimensions for investors and traders. Foreign companies may now more easily gain the well-known tax benefits of the Cypriot regime, no need to restructure and thus taxes are spared and significant savings in administration, tax and other costs are achieved. 19 SIGNIFICANCE OF EU DIRECTIVES • EU directives are useful tax planning tools and eliminate withholding taxes between member states. Cyprus, being a member can be used to benefit from the favourable provisions of the EU directives

• All EU directives fully adopted in the cyprus tax legislation

• The Parent/Subsidiary Directive eliminates withholding taxes on dividends under certain conditions for minimum participation of 10% and period the investment is held

• The Interest and Royalty Directive eliminates withholding taxes on interest and royalties between related parties, assuming minimum participation of 10%

20 IMPORTANCE OF DOUBLE TAX TREATIES • Main considerations for the development and success of an IBC is the existence of a wide network of double tax treaties

• Objectives : • avoid taxing the same income or gain in two jurisdictions • avoid either by exempting income, capital or gains • a tax credit is given for the tax paid in the other country

• New treaties with EU countries: Finland, Estonia, Portugal, Spain came into effect on 1.1.2014. Revised treaty with non-EU countries: Ukraine as from 1.1.2014

• New treaties signed soon with Lithuania, Guernsey, Norway, Switzerland

• New treaties to be signed soon Monaco, Bahrain, Georgia

• Negotiations are under way with Israel, Holland, Luxemburg, Jersey, Jordan, Oman and Libya

21

DOUBLE TAX TREATIES

Recipient Dividends % Interest % Royalties %

Armenia nil -/5 -/5 Austria 10 nil nil Azerbaijan nil nil nil Belarus 5/10/15 5 5 Belgium 10/15 10 nil Bulgaria 5/10 -/7 10 Canada 15 -/15 -/10 China 10 10 10 Czech Republic nil nil 10 Denmark -/15 nil nil Egypt 15 15 10 Estonia nil nil nil Finland 5/15 nil nil France 10/15 -/10 -/5 Germany 5 nil nil Greece 25 10 -/5 Hungary 5/15 -/10 nil India 10/15 -/10 10/15 Ireland nil nil -/5 Italy 15 10 nil Kuwait 10 -/10 -/5 Kyrgyzstan nil nil nil

22 DOUBLE TAX TREATIES(Cont’d)

Recipient Dividends % Interest % Royalties %

Lebanon -/5 -/5 nil Malta nil -/10 10 Mauritius nil nil nil Moldova 5 5 5 Montenegro 10 10 10 Norway -/5 nil nil Poland Nil -/5 5 Portugal 10 10 10 Qatar nil nil -/5 Romania 10 -/10 -/5 Russia 5/10 nil nil San Marino nil nil nil Serbia 10 10 10 Seychelles nil nil -/5 Singapore nil 7/10 10 Slovakia 10 -/10 -/5 Slovenia 5 5 5 Spain 5/15 2 5 South Africa nil nil nil Sweden 5/15 -/10 Nil Syria -/15 -/10 10 Tajikistan Nil nil nil

23 DOUBLE TAX TREATIES(Cont’d)

Recipient Dividends % Interest % Royalties %

Thailand 10 10/15 5/10/15 Ukraine 5/15 2 5/10 United Arab Emirates nil nil nil United Kingdom 15 10 -/5 United States of America 5/15 -/10 nil Uzbekistan nil nil nil

Withholding taxes – Paid From Cyprus

• no withholding taxes exist for dividend payments made to non-tax residents of Cyprus • no withholding taxes exist for interest payments made to non-tax residents of Cyprus • no withholding taxes exist for royalty payments if the right is used outside Cyprus

24 KEY TREATIES OF CYPRUS

Withholding taxes • Russia: dividends (5/10%), interest (0%), royalties (0%) gains from sale of shares holding real estate (exemption until 1.1.2017) • Ukraine: dividends (5/15%), interest (2%), royalties (5/10%), gains from sale of shares (exemption) • India : dividends (10/15%), interest (0/10%), royalties (10/15%), gains from sale of shares (exemtpion) • Ex USSR incl. Armenia, Kyrgystan, Tadzhikistan: dividends (0%), interest (0%), royalties (0%) • Mauritius: dividends (0%), interest (0%), royalties (0%) • South Africa: dividends (0%), interest (0%), royalties (0%) • Seychelles: dividends (0%), interest (0%), royalties (0%) • Italy: dividends (15%), interest (10%), royalties (0%)

25

DOUBLE WITH RUSSIA • Protocol with Russia comes into effect from 1.1.2014, removing Cyprus from Russia’s “black list”

• No changes on zero withholding taxes on interest and royalty income

• Dividends: tax rates of 5% and 10% remain unchanged. However, the minimum threshold for a beneficial owner’s investment in the capital of the company paying dividend has been charged to €100.000 from the previous USD100.000

• Furthermore, with effect from 2014, gains derived by a resident of a contracting state from the alienation of share in a company deriving more than 50% of their value from immovable property based in the other contracting state may be taxed in that other state at prevailing rates there (currently 20%)

• This provision is included in all new double tax treaties of russia (luxemburg, malta, etc) with the exception of cyprus one, which grants a grandfather period until 1.1.2017

26 DOUBLE TAX TREATY WITH UKRAINE

• New treaty provides for the following withholding taxes: Dividends 5/15% * Interest 2% Royalties 5/10%

• * The withholding tax rate will be limited to 5 percent if the beneficial owner holds at least 20 percent of the capital of the dividend paying company, or has invested in the shares or other rights of the company equivalent of at least €100,000. In case conditions are not met, withholding tax will be at 15 percent

• Taxation of capital gains from the sale of shares in property companies remains unchanged

27

COMPARISON OF EU MAJOR HOLDING TAX REGIMES (as of January2013) Belgium Cyprus Ireland Luxembourg Malta Netherlands Switzerland UK EU member Yes Yes Yes Yes Yes Yes No Yes Corporation tax rate 33.99% 12.5% (as of 12.5% 28.8% 35% 20-25% 12-25% 24% 1.1.2013) Income tax Up to 50% Up to 35% Up to 41% 40.56% Up to 35% Up to 52% Up to 42% Up to 50% VAT rate 21% 17% 23% 15% 18% 21% 8% 20% Dividend exemption Yes Yes No-but credit Yes Yes Yes Yes Yes

CFC rules No No No No No No No Yes Other incentives Notional Profit from - Tax rulings can Effective tax - Effective tax rate of - interest trading in ‘titles’ be negotiated to rate of 0-10% 7-12% for holding deduction is exempt optimize can be obtained companies effective tax (subject to rate exemptions)

Transfer pricing Yes Yes Limited Limited No Yes Yes Yes rules

Capital/ No Yes-only on Yes-only on No-however Yes-only on No Yes-on initial share Yes-only on on shares initial issuance transfer of 0.5% annual net transfer of issuance (1%) and transfer of of shares (0.6%) shares (1%) on shares (2%) an annual capital shares non-qualifying unless > 90% of tax on equity value (0.5%) assets business is (0.001%-0.01%) derived from outside Malta Double tax 90+ 46+ 65+ 60+ 55+ 110+ 100+ 120+ 28 treaties COMPARISON OF EU MAJOR IP TAX REGIMES (as of January 2013)

Belgium Cyprus Ireland Luxembourg Malta Netherlands Switzerland UK

IP tax rate 6.8% (effective) 12.5% 12.5% (2.5% 5.76% 0-10% 5% / 25% 9-11% 24% (2% effective) effective) (effective) (effective)

IP regime yes – applies to yes – applies to yes – applies to yes – applies to yes – applies to yes – applies to yes – applies to yes – applies to patents owned most most most registered registered IP of a technical all intangibles all post 2002 and developed intangibles intangibles intangibles patents (0%), nature (5%) and intangibles by company active IP (5%), to goodwill and passive IP trademarks income (10%) (25%)

Capital gains on capital gains 80% exemption capital gain on 80% exemption capital gain on capital gain on capital gain on capital gain on IP taxed at normal on capital gain disposal taxed on capital gain disposal taxed disposal of IP disposal disposal taxed rate on disposal at 30% but can on disposal at 5% qualifying taxed at 9-25% at 24% but can be deferred assets be deferred effectively taxed at 5% IP amortization Yes Yes Yes Yes Yes Yes Yes Yes deduction

WHT on 25% 0% 0/20% 15% 0% 15% 35% 0% dividends 0% for cooperatives WHT on 25% 0% 0/20% 0% 0% 0% 0% 20% interest

WHT on 25% 5-10% 0/20% 0% 0% 0% 0% 20% 29 royalties RISKS TO CONSIDER

• Tax Residency

• Permanent Establishment (PE)

• VAT

30 TAX RESIDENCY Considerations

• Management and control exercised in Cyprus

• Tax residency certificate

• Double tax treaties (tie-breaker clause)

• International tax case law

• Commentary OECD Model Tax Convention

• Beneficial ownership of income and gains

Common problems encountered

• Local directors not having sufficient professional skills

• Directors not applying their mind but follow instructions (pay attention to management agreements and e-mail correspondence)

• Solely non-Cypriot directors appointed and all or most board meetings are held abroad

• Broad power of attorney issued to non-Cyprus based persons 31

PERMANENT ESTABLISHMENT (PE)

Article 5 OECD Model tax Convention/5(2) (1) ITL

A permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on and includes specifically a place of management or an office

Where a person – other than an agent of an independent status – is acting on behalf of an enterprise and has and habitually exercises authority to conclude contracts in the name of an enterprise, that enterprise shall be deemed to have a permanent establishment

Common problems encountered

• Persons in reality exercise more powers than according to service agreements/powers of attorney

• Expansion of preparatory/auxiliary activities

• Agents in reality economically dependent on principal

32 VAT

• VAT is chargeable on any supply of goods or services made within Cyprus

• In addition, VAT is imposed on reverse charge services received by a taxable person in Cyprus

• A holding company with other activities such as providing loans and/or services may become subject to Cypriot VAT (under the reverse charge mechanism) on services provided to the company with no/limited right to reclaim the input VAT

ECJ Ruling – TRR (November 2008C-291-07) question: should, for the EU place of supply regulations, a person who carries out both an economic activity and a non-economic activity, and who acquires consultancy services from a person liable to tax in another member state, be regarded a taxable person for these acquired services, even where these services are used solely for the purpose of the non-economic activity? ECJ decision: Yes Result: VAT on services received may be an actual cost 33

OUR SERVICES

• Corporate and Trust • Tax and Legal • Financial Advisory • Global Compliance

• Business Advisory • Family Office

75 Prodromou Avenue Oneworld Parkview House PO Box 25207 Nicosia 1307, Cyprus T+ 357 22496000 F + 357 22493000 Savvas Shiatis, Director: [email protected] George Hadjipavlou, Director: [email protected] Constantinos Christoforou, Director: [email protected] www.oneworldweb.net 34 CYPRUS TAX PLANNING IDEAS

A CYPRUS HOLDING COMPANY PLAN -1

Investor Investor(offshore) (offshore) • No tax on income or gains HoldCo Dividends 100% • dividend income is exempt Holding co • gain on sale of investments exempt (Cyprus) • no withholding tax on dividends to investor • no tax on gain on sale of HoldCo shares 100% Dividends Russian Investments (Russia) operating co • 5% withholding tax on dividends to HoldCo (Russia) (Cyprus/Russia double tax treaty) • no tax in Russia on gain on sale of investments

B CYPRUS FINANCING COMPANY PLAN – 2

Investor (offshore) Investor interest loan (offshore) • No tax on imcome or gains FinCo • 12.5% tax on interest margin FinCo Holding co • no thin cap rules (Cyprus) (Cyprus) • no withholding tax on interest and dividends to investor • Minimum margin interest 0.125-0.35% Foreign operating accepted interest loan company (Ukraine) Investments (Ukraine) • 2% withholding tax on interest to FinCo (Cyprus/Ukraine Double tax treaty) • interest payment tax deductible C FOREIGN FINANCING BRANCH PLAN – 3

Investor Investor (offshore) (UAE) • No tax on income and gains FinCo 100% Equity • No or limited tax on income • No requirements Hold & FinCo (Cyprus) Hold & FinCo loan 100% • income and gains of PE exempt

FinBranch Investments (Russia) (Ireland) Investments (Russia) • no withholding tax on interest to interest FinBranch of Hold & FinCo (Cyprus/Russia tax treaty) • interest payments tax deductible

D TRADING IN SHARES PLAN – 4

Investor Investor (Sweden) (Sweden) • Dividends and gains from sale of tradeco shares exempt from tax TradeCo TradeCo • no tax on gains from sale securities (Cyprus) • no withholding tax on dividends to investor • no tax on gain from sale of TradeCo shares

Buy/Sell Source State Securities and Shares • no tax on gain from disposal securities Securities anywhere

E ROYALTY COMPANY PLAN – 5

Investor (EU parent) • no tax on income and gains Investor (EU parent) RoyalCo • 12.5% tax on net royalty income royalties licensing • Gains on the sale of IP are 80% exempt RoyalCo royalties royalties • Royalty income is 80% exempt • no withholding tax on royalty payments Licensee Licensee Licencees (Russia, Bulgaria) (Bulgaria) (Russia) • Royalty payments deductible • Royalty payments made with

zero withholding taxes F

INVESTING IN EU PLAN – 6

Non-EU shareholder (EG Singapore) Investor (EG Singapore) dividends • dividend received with no withholding tax

CyCo CyCo • dividend paid with no dividends withholding tax EU manufacturing company (EG UK) Manufacturing company (EG UK) • dividend paid with zero withholding tax G

HOLDING PROPERTY PLAN – 7

Investor (Germany) Investor dividend (Germany) • dividend received with no withholding tax

CYCO CyCo • dividend paid with no withholding tax dividend Property CO (Romania) Property holding (Romania) • income from rental is taxed in Romania • dividend paid with no withholding tax H