Cyprus Company: A Jurisdiction Conducive to Profit

Introduction: Why consider operating companies in Cyprus?

International investors nowadays have a broad choice when it comes to the selection of jurisdictions for the establishment of their special purpose vehicles (SPVs).  Cyprus companies are nowadays more frequently than ever appearing on the shortlists of these investors.

This has to do with a significant number of advantages that Cyprus companies have when compared against companies in competing jurisdictions - be it either offshore or onshore jurisdictions. These advantages can be divided into two categories: a) Fiscal advantages and b) non-fiscal advantages of Cyprus companies.

In this article we will highlight a number of these advantages, some of which are often ignored.

 

Fiscal advantages of a Cyprus company

General corporate income tax rate

The first fiscal advantage of companies based in Cyprus is that, if such companies carry  out trading-, servicing-, group financing-, licensing- or other activities, these profits will be subject to Cyprus corporate tax on income of 12,5% only. The 12,5% rate is a flat out rate without any conditions to be met in terms of level of turnover, number of employees etc.

However, given the broad permanent establishment concept followed by the Cyprus income tax laws and the tax exemption system for such profits applicable under these laws; profits derived by Cyprus companies from activities in overseas places of business will even easily qualify for full tax exemption.  So in many cases, Cyprus companies are equally in a tax advantageous position as offshore companies, offering a zero% tax option.

Participation exemption

Furthermore, Cyprus companies enjoy the benefit of a tax exemption system for holding company income, which can easily be described as the broadest in the entire EU.

After all, gains upon the sale of shares derived by Cyprus companies from other companies are always exempt from income tax, without any condition to be met by the a Cyprus companies in terms of;

-          capital ownership percentage (the Cyprus company does not have to own a certain minimum percentage in the capital of a company of which shares are disposed by the Cyprus company in order to obtain tax exemption for such disposal);

-          ownership period (the Cyprus company is not obliged to own the shares it disposes for a minimum period of time in order to obtain tax exemption for any gain upon such disposal);

-          the activities of the company of which shares are sold by the Cyprus company;

-          the tax burden to which the company whose shares are sold by a Cyprus company, is subject etc.

There is no other jurisdiction in the entire EU with such a broad tax exemption for gains upon the sale of shares. This exemption is based upon general income tax in Cyprus involving sale of securities.

It should be noted that this exemption also covers currency exchange gains arising from the denomination in another currency of a subsidiary owned by a Cyprus company. At the same time, any currency exchange gains realised by a Cyprus company upon a loan taken up to buy a foreign subsidiary should normally not be taxable in the hands of the Cyprus company, as such gain would normally not qualify as so-called ‘trading gain’ for Cyprus tax purposes. So, currency exchange results are fiscally neutral, which is a comforting aspect of the tax system to which Cyprus companies are subject, for international investors.    

Furthermore, the tax exemption system for dividends from foreign companies received by companies based in Cyprus is also extremely broad.

These dividends are exempt from tax without any condition to be met by the Cyprus company in terms of;

-          capital ownership percentage (the Cyprus company must not own a certain minimum percentage in the capital of a company of which shares are disposed by the Cyprus company in order to obtain tax exemption for such disposal), and;

-          ownership period (the Cyprus company is not obliged to own the shares on which it receives a dividend for a minimum period of time in order to obtain tax exemption for such dividend).

The company in which the Cyprus company participates must either pay tax over its profits at a rate higher than 5% or the former company must receive so called ‘trading income’ for at least 50% of its total income , the term ‘trading income’ being interpreted very broadly.

Withholding tax or other tax to be borne by foreign shareholders

Cyprus does not levy withholding tax over dividend payments made by Cyprus companies to foreign shareholders, so there is full flexibility for repatriation of profits accumulated at the level of a Cyprus company.

Cyprus does not levy withholding tax on interest payments made by Cyprus companies to foreign creditors.

Furthermore, Cyprus does not normally levy withholding tax over royalty payments made by Cyprus companies either.

Last but not least, foreign shareholders are not subject to income tax over any gains upon the sale of shares in Cyprus companies.

Double tax treaties and EU-Directives

When it comes to using SPVs in international tax planning, it is not only important to learn what is the unilateral tax treatment of income received by such SPVs in their countries of residence. It is also important to learn whether there is any taxation over such income in the source state, i.e. the country from which the income is received by the SPV (in this case a Cyprus company).

If a Cyprus company receives royalty income from another State, it is important whether the latter State levies withholding tax over this income. If a Cyprus company receives a dividend from a subsidiary in another State it is important whether the latter State levies withholding tax over such income. If a Cyprus company derives a profit from the sale of shares in a company based in another country, it is important whether the latter country levies tax over this profit etc. 

In the case of Cyprus companies, there are two ways in which taxation over income from foreign sources derived by Cyprus companies can be reduced; a ‘standard’ way and a ‘European’ way.

The standard way is access for Cyprus companies to double tax treaties, concluded by the Cyprus Government with other countries.

It is important to note that Cyprus is party to tax treaties with almost 50 countries worldwide.

Moreover, based upon Cyprus’ membership to the European Union (EU), applicability of the so-called EU Parent-Subsidiary Directive can under circumstances lead to withholding tax exemption for dividend payments made by companies in other EU Member States to Cyprus companies.

The so-called EU Interest and Royalty Directive can under circumstances lead to withholding tax exemption for interest- and royalty payments made by companies in other EU Member States to Cyprus companies.

Double tax treaties; it is not only the quantity, but also the quality

When speaking about double tax treaties the following should also be kept in mind. The availability of a large number of double tax treaties per se is not sufficient to make a country an interesting platform for international tax planning. What is also important is;

-          with which countries there are double tax treaties (preferably there should be double tax treaties with major, fast growing economies), and;

-          the conditions of these double tax treaties.        

In this regard it is worthwhile mentioning that Cyprus companies have access to highly competitive double tax treaties (for different reasons) concluded by Cyprus with the following countries;

-          India (Cyprus’ double tax treaty with India is the most competitive in the entire world)

-          Russia (idem);

-          Ukraine (idem);

-          South Africa (idem);  

-          Poland;

-          The US, and;

-          The UK.

No frequent changes

Since 2003, Cyprus companies have been subject to a new tax regime, which Cyprus introduced as a result of the country’s accession into the EU.

International investors rightfully attach much value to the stability of a country’s tax system. Too many changes in a system do not add to the credibility and trustworthiness of a country’s tax system.

In this regard it should be stressed that Cyprus’ tax system has been stable for almost 10 years now. No (significant) changes to the system have been introduced during that period. This stability is obviously much appreciated by our respected customers.

Important; no hidden surprises (always watch out for the things people do not tell you)

Tax practitioners in many countries will often brag about how advantageous their countries’ tax systems are. However, what usually remains untold is that the tax systems of many countries have hidden, unpleasant surprises.

YOU CAN REST ASSURED THAT THE TAX SYSTEM TO WHICH CYPRUS COMPANIES ARE SUBJECT DOES NOT HAVE SUCH UNPLEASANT SURPRISES.

At least no surprises, which are insoluble.

There are four example countries with a favourable participation exemption system, but they also levy a net wealth tax annually payable over the net wealth of companies established in such country.  Or holding companies in these countries may be liable to a minimum corporate taxation, even though all they do is acting as owner of participations qualifying for the participation exemption of the country in question etc.

Non-fiscal advantages of Cyprus companies

There are also a lot of non-fiscal advantages related to the use of Cyprus companies. Below you will find a number of examples.

No minimum capital requirement

Cyprus does not have minimum capital contribution requirements for the incorporation of Cyprus companies.

Shelf companies and incorporation procedures

There are countries, which disallow the trade in so-called ‘shelf companies’, i.e. companies that have been set up by fiduciary services providers  for the sole purpose of selling them on to clients, for the sake of saving time.

In Cyprus the use of shelf companies is allowed and these companies are abundantly available. So, if you want to set up a Cyprus company and you need the company urgently, it is possible to buy a registered Cyprus company ‘off the shelf’.

Other than that, the incorporation procedure of a Cyprus company is definitely not overly burdensome. Usually incorporation can take place in a time-span between one and two weeks.

EU VAT registration

There are countries in the EU, which have decided to put up barriers against VAT registration for companies, which in their view do not have sufficient economic substance in terms of office space and/or employees etc. to justify such registration.

Compared to many other (competing) EU jurisdictions it can definitely be argued that registration of Cyprus companies for VAT is not an overly burdensome procedure.

Opening bank accounts

The number of countries where banks have decided not to open bank accounts anymore for companies, which in their view do not have sufficient ‘substance’ in terms of business activities and/or employees and/or (net) cash inflow etc., is rapidly increasing.

It should be kept in mind that in Cyprus any company, regardless of size or substance etc., can open a bank account, provided of course that the banks’ Know Your Client requirements (KYC) are met.  

Importance financial services industry

Related to the aspect of stability of a country’s tax system is the question of how important the financial services industry is for a country where an investor considers setting up an SPV. It is obvious that the bigger the importance of a country’s financial services industry in terms of percentage of its total Gross Domestic Product represented by the country’s financial services industry, the more stable the country’s tax system will usually be.

In this regard it is worthwhile mentioning that in Cyprus the financial services industry is the biggest industry in the entire country. This is an important aspect to be aware of for an investor who is considering setting up a Cyprus company; the idea that the Government of the country where the company is being set-up, is committed to maintaining a low tax envelop to ultimately foster an investor friendly environment over the long term.

Talent pool and language skills

Investors want skilful and educated people to manage their overseas operations. In this regard it is important to note that Cyprus ranks third in the world in terms of percentage of the population with a University degree. The country has a well-educated workforce.

Furthermore, since English is one of the country’s official languages, relevant Cyprus company documents, such as tax returns, articles of incorporation and even rulings are always available in the English language.

Conclusion

Based upon a combination of fiscal and non-fiscal advantages, Cyprus offers a unique, investor friendly business climate. Cyprus companies are highly tax efficient tools for international holding-, financing-, licensing-, trading- or other kind of operations.

For more information, please contact at info@consulco.com.