Cyprus - The gateway to global investments

Transcription

1 Cyprus - The gateway to global investments

2

3 Why Choose Cyprus for International Business Activities? Cyprus has long been established as a reputable international financial centre, the ideal bridge between East and West. As an EU Member State since May 2004, Cyprus offers unique business opportunities to investors and trading partners. The prevailing pro-business attitude, the multi-lingual and highly skilled human capital, the state-of-the-art telecommunications infrastructure and the favourable tax system have made the country one of the most progressive and efficient business locations in Europe.

4 Cyprus Tax System in a Nutshell Being an EU Member State, Cyprus applies fully the EU directives. The country is also fully compliant with the OECD requirements on transparency matters. In brief the tax system provides as follows: 12.5% corporation tax on business profit. exemption from tax of foreign dividend income with easily met conditions exemption from tax of profits from foreign permanent establishments (PE) with easily met conditions unconditional exemption from tax of profit generated from transactions in titles (shares, bonds, debentures and other financial instruments) profit emanating from royalty income is allowed a notional expense deduction equal to 80% of the profit generated. profit generated from the disposal of intellectual property rights is allowed a notional expense deduction equal to 80% of the profit generated. exemption from withholding tax on the repatriation of income anywhere in the world in the form of dividends and interests. exemption is also available on royalty payments in most cases. However when intellectual property is used in Cyprus there is a withholding tax of 10% or 5% for cinematographic films. This withholding tax is subject to double tax treaty provisions and the EU Interest and Royalty Directive. extensive double tax treaties network ( necessary for inbound income flows whereas outbound flows are in most case exempt by local legislation ) access to EU directives group loss relief The tax payer may apply for a ruling for any matter that he wishes to get the written opinion of the Commissioner of Income Tax. In brief the tax system Under Cyprus corporation tax law a company, regardless of its place of registration, is subject to tax when resident in Cyprus. Residency is determined by the place where effective management and control of the company are exercised. Management and control are not defined but it is generally accepted that a company is managed and controlled at the place where key business decisions of day to day activities of the company take place. Companies engaged in international cross border activities must ensure that their place of tax residence is not in dispute by maintaining appropriate substance in the country where they claim to have their residence.

5 Trading Companies Enterprises choosing to carry out their trading operations from Cyprus do so from an EU location with the inherent reputational benefits of such a choice. Profit generated from trading operations is subject to tax at 12.5%. All expenses incurred for the earning of the income are deductible for tax purposes. Profit repatriation is totally tax exempt under Cyprus legislation. Therefore no Double Tax Treaty protection is necessary when non-resident shareholders of Cyprus resident companies receive dividend income. Holding Companies / Investments Funds Companies holding shares in other companies regardless of the percentage of their ownership are all treated for tax purposes the same way. Dividend received by a Cyprus company from another Cyprus company is unconditionally exempt from tax. Dividend received from abroad is totally tax exempt, if received from a company engaged in an active trade or subject to tax at a rate of at least 6.25%. Any profit generated from the sale of shares held by the company is unconditionally tax exempt. The above mentioned tax position applies equally to pure holding activities as well as portfolio holdings and investment fund activities. Dividend received from abroad, where applicable, is collected under the provisions of the Double Tax Treaties or the EU directive. Thus, withholding tax is lowered and/ or eliminated in most cases. Transactions in shares in the majority of cases are also Double Tax Treaty protected. Profit repatriation is totally tax exempt under Cyprus legislation. Therefore no Double Tax Treaty protection is necessary when non-resident shareholders of Cyprus resident companies receive dividend income. Dividend received from abroad, where applicable, is collected under the provisions of the Double Tax Treaties or the EU directive. Thus, withholding tax is lowered and/ or eliminated in most cases. Transactions in shares in the majority of cases are also Double Tax Treaty protected. Profit repatriation is totally tax exempt under Cyprus legislation. Therefore no Double Tax Treaty protection is necessary when non-resident shareholders of Cyprus resident companies receive dividend income.

6 Intellectual Property (IP) Companies Cyprus has probably the best IP regime in the EU, which is as follows: The capital cost to acquire the IP can be amortized for tax purposes over a period of five years. Profit generated from the disposal of IP rights is allowed a notional expense deduction equal to 80% of the profit generated. Profit generated from royalty income emanating from the use of the IP is allowed a notional expense deduction equal to 80% of the profit generated. Profit is arrived at after deducting all direct expenses including tax amortization and finance costs. Profit repatriation is totally tax exempt under Cyprus legislation. Therefore no Double Tax Treaty protection is necessary when non-resident shareholders of Cyprus resident companies receive dividend income.

7 Taxation of Royalty Income (Practical Examples) Example 1 Revenue from licensing of IP A company resident in Cyprus for tax purposes acquired on 1 January 2013 an intellectual property (IP) at cost of 1m Euros which was licensed out to a non- Cyprus company for royalty of Euros per annum. The acquisition has been financed out of a loan payable, bearing interest at the rate of 5%. Such a company would be subject to Cypriot corporation tax as follows. For the purpose of this example it is assumed that the company has other directly related expenses of Euros, and the royalty is received without withholding tax. Royalty Income Amortization (1mx20%) ( ) Interest expense (1mx5%) (50.000) Other related expenses (20.000) Example 2 Gain from the disposal of IP It is assumed that by the end of the year 2016 the company decides to sell the IP for 1.5m Euros. For the purpose of this example it is also assumed that commission of Euros was paid, which directly relates to the disposal of the IP. Sale proceeds Cost (cost 1m - amortization 200k) ( ) Commission (30.000) Profit Notional expense (80%) ( ) Taxable profit Tax (12.5%) Effective tax rate (16.750) = % Profit ( ) Notional expense (80%) ( ) Taxable profit Tax (12.5%) Effective tax rate ( ) = %

8 Cyprus Tax System in a Nutshell Notional interest deduction regime ( NID ) As from 1 January 2015 new equity capital introduced at par and/or share premium is allowed a notional interest deduction calculated by reference to the 10 years government bonds yield plus 3. The yield is that as at 31 December of the preceding year of the country where the new equity is invested. The minimum NID to be deducted is that which results by reference to the 10 year Cyprus government bond. Companies eligible for this deduction reduce their effective tax rate substantially below the 12.5% standard corporate tax. Non domicile regime Individuals tax resident in Cyprus are taxed on their worldwide income which includes inter-alia dividend interest and rent. However as from 16 July 2015 individuals who are tax resident in Cyprus but who are non domicile in Cyprus are not subject to tax on dividend interest and rental income. For the purposes of this publication it is sufficient to say that an individual is non domicile if he/she was not born in Cyprus and does not have a Cyprus passport. The rules apply to persons described in the previous sentence, already tax resident but not for a long period. It also applies to domicile persons who have not been tax resident in Cyprus for a long period. This new regime enables foreign owners of Cyprus companies to obtain tax residence in Cyprus without being liable to worldwide taxation of their dividend, interest and rental income. They can thus take up residence in Cyprus to manage their business more effectively. Setting up and maintaining a Cyprus Company Although there are no restrictions on the legal form of a company in Cyprus, the most commonly used form is the private limited liability company. There are no legal requirements as to the minimum or maximum share capital of the company. Specifically, it is recommended that a company is set up with the level of capital appropriate to its business requirements. If there are no specific capital needs, it is recommended that the share capital should be at least that may conveniently be divided into shares of 1 each. Not all of these shares have to be subscribed for, but it is recommended that at least shares are issued and fully paid upon incorporation.

9 Accounting requirements & filing Under Cyprus Company Law Cap.113, financial statements of Cypriot companies are prepared in accordance with the International Financial Reporting Standards (IFRS s). These standards require the Cyprus companies to prepare audited financial statements on an annual basis. Accounts are submitted to the Registrar of Companies with the annual return. Audited financial statements must also be prepared for corporation tax law purposes. A tax return is submitted to the Income Tax Office for each tax year. The tax year is the calendar year. Shareholders Under Cyprus law, every company, limited by shares, must have at least one shareholder. Companies are managed and controlled by the board of directors. Under Cyprus Company Law, a Cyprus private company must have at least one director. In all other cases at least two directors are required. Management and control of a company determines under Cyprus corporate tax legislation the tax status of the company. Therefore, where the key business decisions are taken determines the tax residence of the company. The role of the company secretary The company secretary s role is to keep the company in good order with the Registrar of Companies, prepare and file annual returns, effect changes in the directors, shareholders, memorandum and articles share capital e.t.c, prepare and keep minutes of all directors meetings and communicate with the Registrar of Companies on behalf of the company. Period needed for Registering a Company The formation and registration procedures including the completion of the various administrative needs that would have the company ready to start operations, can normally be completed within a period of one week.

10 Double Tax Treaty Double Tax Treaty Network (DTT) Cyprus has an impressive network of DTTs (see appendix), which includes countries that attract inbound investment and countries which are known as key players in outbound investments. As an EU Member State the EU directives are also applicable to all activities within the EU. The significance of the existence of the DTTs and/or the directives is that the usual type of income arising from investment activities, namely dividend, interest and royalties, can flow from one country to the other without withholding or low withholding tax. Double tax is avoided either by exempting the flowing income from tax at source or by allowing a deduction of the tax paid at source in one country from the tax payable in the other country. Taxation of activities of a Cyprus Company The table below shows a non-exhaustive list of how activities undertaken by Cyprus companies are taxed under the corporation tax law of the country. Activities Effective Tax % Trading profit 12.5 Dividend Nil Finance activity profit 12.5 Intellectual property profit 2.5 Fund industry Profit from shares Nil Profit from other titles Nil It should be noted that when these activities occur cross border, they are treaty protected. Cyprus has traditionally been a country aiming to attract foreign investment. Consequently, it does not tax income repatriated to foreign investors. Thus, on the repatriation side, the potential investor does not need DTT or EU directive protection. Double taxation is avoided through Cyprus local legislation. Dividend Nil Interest 12.5

11 Appendix Double Tax Treaties Azerbaijan Germany Moldova Swiss Confederation Armenia Greece Montenegro Syria Austria Hungary Norway Tajikistan Belarus Iceland Poland Thailand Belgium Bosnia Bulgaria Canada China, P.R. Czech Republic Denmark Egypt India Iran Ireland, Rep. of Italy Jersey Kingdom of Bahrain Kuwait Kyrgyzstan Portugal Qatar Romania Russia San Marino Serbia Seychelles Singapore The States of Guernsey Ukraine United Arab Emirates United Kingdom United States Uzbekistan Estonia Latvia Slovak Republic Ethiopia Lebanon Slovenia Finland Lithuania South Africa France Malta Spain Georgia Mauritius Sweden

12 Our offices NICOSIA, CYPRUS 73 Metochiou Street Engomi 2407, Cyprus T: F: info@consulco.com LONDON, UNITED KINGDOM T: +44 (0) london@consulco.com DUBAI, UAE T: dubai@consulco.com Consulco Limited All rights reserved. DISCLAIMER This content is for general information only and does not represent legal or professional advice. Any liability for any loss resulting from activity on this basis of information is expressly disclaimed.