* CYPRUS FOR INTERNATIONAL BUSINESS by Savvas Shiatis, Director *Aiming Higher 1 CYPRUS IS GOOD FOR BUSINESS • Cyprus structures remain tax 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 tax haven. It is an EU member state since 2004 and is compliant with EU laws and regulations • Tax havens impose no or nominal taxes 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 tax exemption 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 duty YES Only for assets existing in Cyprus 5 COMPARISON OF EU CORPORATE TAX 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 tax rate 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 Permanent Establishment (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 inheritance tax 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 capital gains tax • 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 tax credit • 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