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Sometimes foreign companies are used for the employment of personnel, mostly for the operation of special projects abroad.
Under this scenario, a special purpose vehicle is set up, employing personnel necessary for the execution of one or more projects. This company will conclude a contract for the execution of the project and will make the services of its employees available for this purpose, for which it will receive a remuneration.
1. Reasons for setting up foreign employment companies
There are various reasons for setting up foreign employment companies. An important reason for using such special purpose vehicles may be risk insulation; companies often strive to separate risk-bearing activities legally from their other operations and valuable assets, resulting in the structuring of different risk-bearing activities on an ‘entity by entity basis’.
Fiscal reasons for setting up foreign employment companies are in general twofold; the possibility to qualify for a low tax rate (or tax exemption) for profits derived from the activities in question and the possibility to lower the tax burden on the gross salaries of the employees deployed for the project in question; in that way salary expenses can be kept low and the company’s competitiveness can be protected.
Especially in case of projects abroad, companies have a high flexibility in structuring these activities through special purpose vehicles in low-tax jurisdictions, since the risk of a successful challenge of the vehicle’s place of residence is relatively low.
2. Important characteristics for a country to be regarded as tax advantageous jurisdiction for employment companies
A country should meet the following criteria in order to be regarded as tax efficient jurisdiction for employment companies
it should have a low general corporate income tax rate, or, such as Malta, in spite of the low general corporate income tax rate, there should be ways (in the case of Malta; through distribution of the profits) to mitigate the effective tax burden over such profits
in certain circumstances the availability of a double tax treaty network may be helpful, e.g. for reduction of withholding tax over income generated by employment companies in the countries of operation (e.g. because of re-qualification of payments by foreign tax authorities, therewith subjecting them to withholding tax) or to mitigate the risk of another taxable presence in these countries, such as permanent establishments
under (rare) circumstances, a low general VAT rate in the country in question may be of importance
ideally, the country of establishment of the employment company would not have withholding taxation over dividend payments (or it should be relatively easy to circumvent such taxation)
the country should a generous income tax- and social security for salary income (from employment abroad -generated by non-resident employees-).
3. Issues to consider
Especially within EU-context, employment company structures should be set up diligently. It would be naïve to think that by setting up a brass-plate company in a low tax jurisdiction through which employees services are made available, low corporate income taxation over all the profits can be obtained and (more importantly) one can benefit from the low social security rates over the salaries in the jurisdiction question.
There are very important EU Regulations dealing with the social security aspects of cross-border assignments of personnel between different EU Member States, which have to be taken into account when setting up this kind of structures within the EU. In addition, there is important EU jurisprudence, such as ‘the Manpower ruling’ and, especially, ‘the Fitzwilliam ruling’, which must be taken into consideration as well, especially when it comes to the creation of the necessary substance in the employment company.
Furthermore, for the use of employment companies in the shipping services industry, special EU regulations may apply, which may provide for more structuring flexibility. In Cyprus, this kind of employment companies may have the possibility to opt for Cyprus’ shipping regime.
4. What we can do for you
Consulco has unique experience and expertise in the field of the fiscal- and legal guidance of employment companies in Cyprus. We have also significant experience in dealing with the Cyprus authorities when it comes to obtaining so-called ‘E 101 forms’ for employees assigned to other EU member States.
We are able to assist clients using this kind of companies in all the relevant areas, such as incorporation, domiciliation, taxation, legal matters and accounting matters.
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