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A common way of using foreign companies is as portfolio investment companies. Under this scenario, portfolio investments (usually on international stock exchanges) are made through such companies.
1. Reasons for setting up foreign portfolio investment companies
The decision to structure portfolio investments via a foreign company is in the vast majority of the cases tax driven; clients undertaking portfolio investment activities want the return on their investments to be as lowly taxed as possible.
2. Important characteristics for a country to be regarded as tax advantageous jurisdiction for portfolio investment companies.
A country should meet the following criteria in order to be regarded as tax efficient holding jurisdiction:
it should have a broad tax exemption system for portfolio investment income, especially in terms of the minimum percentage that a company is required to own in the capital of another company, in order to qualify for tax exemption for benefits from such company.
A person making investments on the international stock exchanges will usually own small percentages in the capital of the companies he invests in. Therefore, the minimum capital participation threshold for tax exemption for the benefits from the investments should not be too high, at the risk of having to pay tax over such benefits.
it should have a large double tax treaty network, in many cases providing for reduction of (and preferably exemption from) withholding tax over dividend (and interest) payments made to holding companies established in such countries by subsidiaries of such companies and protection from taxation over gains upon the sale of shares in foreign companies by investee countries. Although it must be stressed that this is not an element as important as for ‘regular’ holding companies dealt with in section 1 (i.e. companies that are often are used for majority- or 100% participations).
Many countries levy withholding taxes. These taxes are usually levied over payments of dividends, interest and/or royalties made by residents of those countries. The rates of these taxes vary, but in some countries they may rise to 30%. The availability of double tax treaties, which may provide for reduction of such withholding taxes in case of payments to companies in countries that have tax treaties with the countries of residence of the paying parties, is an essential element in international tax planning. So is the capability to choose the right jurisdiction for each individual investment.
ideally, the country of establishment of the portfolio investment company would not have withholding taxation over dividend payments (or it should be relatively easy to circumvent such taxation)
It is safe to say that, within the EU, Cyprus is by far the most attractive jurisdiction for portfolio investment activities. It combines a general income tax exemption for profits from the sale of securities with a very broad tax exemption system for dividends, which does not include a minimum capital participation requirement. So, it is safe to say that, if somebody makes investments on international stock markets via a Cyprus company, all the benefits of such a company should per definition be tax exempt.
Last but not least, Cyprus does not levy withholding tax over outbound dividends.
ideally, the country of establishment of the portfolio investment company would not levy tax over gains upon the sale of shares in local companies by non-resident shareholders either.
3. Issues to consider
Before deciding to incorporate a foreign portfolio investment company, other issues need to be considered as well. Below you will find a couple of these issues.
First of all, the investor’s home country may have so-called ‘CFC (controlled foreign corporation) legislation’, leading to immediate taxation over profits realized by (lowly taxed) foreign portfolio investment companies (even without distribution of such profits) established in certain countries (these may be so-called ‘blacklisted countries’) owned by the investor. Therefore, it is always advisable for investors to liaise with local tax specialists before setting up foreign portfolio investment structures.
Investors should be prepared for a possible challenge of the structure by the tax authorities in their home countries. The risk of such challenge depends on various factors, such as the attitude of these authorities in general towards foreign structures, their available audit tools and policy etc. Tax authorities could argue that the management and control of a foreign portfolio investment company is de facto exercised in the country where the ultimate owner of the company is based (or that the company has a so-called ‘permanent establishment’ in such country). A way to reduce the risk of success of such challenge may be the appointment of a majority of directors resident in the portfolio investment company’s preferred country of establishment on the board of directors of the company.
The appointment of an external portfolio investment manager who will be responsible for the foreign company’s investment strategy is also advisable to mitigate a management and control challenge.
These, and other issues, are also aspects, which an investor should discuss with a tax specialist in his home country.
4. What we can do for you
Consulco has an impressive amount of clients who use Cypriot companies for portfolio investment activities. Based thereupon, we have gained exceptional expertise in the area of taxation and bookkeeping when it comes to such activities. We are in the best position to render you advice on how to structure your portfolio investment activities in a tax efficient way.
Consulco also has expert knowledge on the policy conducted by the Cyprus Inland Revenue, also in light of relevant EU jurisprudence, with respect to the Cypriot VAT aspects of this kind of companies.