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GreekCyprus: A Tax Haven for Arab Investors?
Cyprus has for the past few years been removed from the OECD tax haven list and it is now included amongst the Jurisdictions that have substantially implemented the internationally agreed tax standard.
Since Cyprus’ accession in the EU in 2004, the concept of Cypriot offshore company (having only 4% corporate tax) does not exist. It has been replaced by the ‘Cyprus International Company’ with a 10% corporate tax rate, according to the Cypriot Income Tax Law No. 118(I)/2002. The corporate tax rate of 10% applies unilaterally to both local and International Cypriot companies.
Cyprus is not a “Tax Haven” with the strict sense of the word. However the 10% corporate tax rate is the lowest within the EU. Furthermore other benefits arising out of the Cypriot Tax Regime also exist; namely, the payment of dividends is tax free and both the income arising out of Company restructuring and sale of shares are exempt from tax. The above are able to make Cyprus an attractive location to establish a company.
HOW CAN THE CYPRIOT CORPORATE TAX REGIME BE UTILIZED?
The main type of Cypriot Companies is the Private Limited Liability Companies with shares. It is important to state that non-Cypriot nationals (both natural and legal persons) are allowed to be the sole (100%) owners of Cypriot Companies. The term Cyprus International Companies is widely used, merely to indicate companies which are totally owned by foreigners.
The Cypriot Tax Regime can be best utilized through the establishment of a Cypriot Holding Company. In reality it is a widely used practice by foreign investors to establish Holding companies in Cyprus for tax reasons.
A holding company is in fact a mother company, whose activity is to hold/own shares in other local or foreign companies. It has the same form and type as a regular Cypriot company; the sole thing that differentiates such company from any other Cypriot company is the express mention of its intended activities in its Memorandum and Articles of Association.
In practice these Holding Companies hold the shares of the Investor’s operating subsidiaries. Holding Companies receive as dividends the profits from the subsidiaries activities. Since such dividends – according to Cypriot Tax Law – are tax free, the investor essentially succeeds to reduce the tax actually paid.
Besides investors from the Middle East wishing to trade within the European Union or purporting to engage in triangular trade may opt to incorporate a Cypriot Trading Company, not only in order to take benefit from the 10% corporate tax rate, but also from the low VAT rate, which is currently at 15%. Furthermore expenses incurred entirely and exclusively for business purposes – included but not limited to payroll, advertising and consultancy expenses, rent – are allowable fro deductions from the corporate income in order to calculate the taxable profit.
WHY USE A CYPRIOT HOLDING COMPANY?
The reasons that make the Cypriot Holding Company an attractive business vehicle to use are various.
First of all according to Cypriot Law no foreign withholding tax is imposed on dividends extracted from the Holding Companies’ operating subsidiaries. Holding companies need to extract dividends from their operating subsidiaries. The majority of jurisdictions worldwide impose a withholding tax on dividends distributed by a resident to a non resident company. Cyprus, nevertheless does not impose a withholding tax on dividends distributed by a resident to a non resident company.
Moreover no further tax structuring is necessary to distribute dividends to the foreign shareholders of the Holding Company free from any withholding tax. That means that the dividends from the Holding Company are further distributed to its non-Cypriot shareholders at a zero tax rate.
Furthermore in Cyprus no capital gains tax is attached to the disposal of the holding in an underlying company. There is no occurrence of capital gains tax after the disposal of any assets owned by the Cypriot Company, with the exception of immovable property assets located in Cyprus or shares representing such immovable property. Any other shareholding whatsoever is exempted from the obligation for the payment of capital gains tax.
In addition the flexible reorganization regime in Cyprus can act as a stimulating factor for investors wishing to consolidate their assets in a different location. The respective Cypriot rules follow the provisions of the EU Merger Directive 90/434, nonetheless these provisions were implemented in a much wider way. These reorganization rules apply both to local and international companies, however the international companies should have a permanent establishment in Cyprus. According to section 27 of the Cypriot income tax law any accumulated losses of a transferring company may be transferred to the new company to be set off against the income of the new company provided that there exists a permanent establishment in Cyprus and according to section 28 of the said law all profits accumulating to the receiving company on the cancellation of the holding in the capital of the transferring company will not be liable to tax. These tax benefits together with the group relief rules that provide for group relief of tax losses among companies of the same group make Cyprus an attractive destination for investors wishing to reorganize its activities.
STATISTICS
The records of the Cyprus Registrar of Companies indicate that the registration of Cyprus international companies for the year 2010 was raised by 20%. Moreover according to the Cyprus News Agency (www.cna.org.cy) the number of new companies that were registered in Cyprus until the middle of June 2011 was 9,473, while according to the Registrar of Companies until the 30th of June 2011 the total number of the registered companies in Cyprus reached 246,521 (http://www.mcit.gov.cy/mcit/drcor/drcor.nsf/company_statistics_en/company_statistics_en?OpenDocument).
It is a fact that the majority of the investors that incorporate Cyprus International Companies come from Russia and Ukraine.
However there is a raised interest from Investors from Arab Countries. The reasons for this vary. Namely the proximity of Cyprus to the Middle East, the existence of numerous Double Tax Treaties with Middle Eastern Countries such as Lebanon, Syria, Egypt and Qatar, the fact that English is widely spoken on the island and is considered to be the 2nd official language of Cyprus, the existence of efficient and modern Legal, Accounting and Banking Services and the recent agreements for cooperation, investments and air connection between the Government of the Republic of Cyprus and the State of Qatar, are many of the grounds that could urge potential investors and entrepreneurs coming from Middle East to incorporate a Cypriot Company.
CONCLUSION
Cyprus may not be a tax haven, but it is in fact a very attractive destination for investors coming from outside of the EU and especially from Middle Eastern Countries. It is actually considered as a pathway leading straight to European and Western markets.
Stella Strati
Lawyer –Legal Consultant