PRIMEGLOBAL Southern Europe Meeting Andreas Koutounas FCCA Managing Director KKP Cyprus KKP CYP 1
Cyprus is well placed at the eastern-most point of Europe, occupying a key strategic position at the gateways of Europe, Asia and Africa. Its geographic location together with its tax and business environment make Cyprus the ultimate country for investors. KKP CYP 2
What we are going to see: A. Top reasons to invest in Cyprus B. Formation procedure and uses of Cyprus Companies C. Cyprus Companies-Compliance requirements D. Cyprus Tax System and the benefits for a foreigner who decide to move to Cyprus General the tax System Personal taxation Non Dom Corporate Tax rates Intellectual Property Rights (IPR) Notional interest deduction upon the introduction of new equity Group Loss relief Capital gains and income tax exemption for securities No withholding tax Social Insurance VAT Rates KKP CYP 3
A. Top reasons to invest in Cyprus Tax System Cyprus offer an attractive and transparent tax regime, fully compliant with EU, OECD and international laws and regulations. It main features are : One of the lowest corporate income tax rates in the EU at 12.5% Dividend participation exemption ( under conditions) Exemption of Disposal of Titles ( e.g. shares, bonds, debentures etc.) No withholding taxes Attractive IP regime Notional interest deduction Personal tax exemptions for new residents and non-domiciles Tonnage tax for shipping companies KKP CYP 4
EU Member and Member of the European Monetary Union As a member of the European Union since 2004 and the European Monetary Union since 2008, Cyprus offer a great number of advantages within a common European market. Legal and Regulatory Framework Cyprus has a well-functioning common legal system based on English common law principles. Cyprus legal and regulatory framework is business friendly and effective system that ensures transparency and reliability in business practices. The familiarity of the legal and commercial systems assist international business people in working within Cypriot commercial environment. Level of Services Cyprus offers a highly educated and skilled individuals ready to service the need of any business. It is well recognized as a centre for provision of professional services. KKP CYP 5
Advanced Infrastructure Cyprus benefits from a modern and advance infrastructure as well as an extensive telecommunications networks, ideally suited for business people with demanding schedules. The island has two international airports ( Larnaca and Paphos) from which there are daily flights to other EU counties, Russia and Middle East. High Standard of living-low cost base Centre Cyprus offers a high standard of living with an enjoyable climate and low crime and stress levels. The cost of setting up and maintaining structure in Cyprus are low when it comes to incorporation cost and fees for meeting Cyprus tax and company law compliance obligations. The cost of labor, rents and other infrastructure are highly competitive and offer lower than in other EU countries KKP CYP 6
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CYPRUS an Attractive Business international Centre KKP CYP 8
B. The formation procedure and uses of Cyprus Companies Setting Up A Business Registering a company Companies registered in the Republic of Cyprus are governed by the Companies Law, Cap 113, which is based on the English Companies Act of 1948. Any amendments made throughout the years in the Cyprus Companies Law, were mainly made in order the Companies Law of the Republic to be harmonized with the EU Law standards. The following type of business entities may be registered under the Cyprus companies Law: Limited Liability company which can be either Private or Public General or Limited Partnerships Business/Trade name European Companies Branches of foreign companies KKP CYP 9
Registration Procedure Registrar of Companies and official Receiver is the responsible government body for the registration of Companies in Cyprus. It is also responsible for keeping the Register for: Companies Partnerships Business names Trade Marks Patents KKP CYP 10
What are the steps to set up the company? Step A Find Service Provider. The services of a service provider ( i.e. accounting firm ) are essential since will offer you the initial advice for the company incorporation in order the structure to be tax effective. Usually the service providers has in house lawyers or cooperate with external lawyer/law firm. Step B Approval of Company name. Companies should submit an application of approval of company name to the Registrar of Companies. Step C Preparation of Memorandum and Article of Association. The Memorandum and Article of Association specify the activities in which the company may engage and the means by which it will governs it affairs. The M&AA should be signed by (a)the shareholders whose signatures should be attested by at least one witness and (b) by the lawyer who has drawn up the M&AA. KKP CYP 11
Step D Application Processing and Approval by the Registrar of companies. Once the application package has been submitted to the Registrar and the applicable fees have been paid to it, a process is set in motion, which in the absence of any problems results in the issuance of the Registration certificate. The Registrar of companies can issue four certificates, (a) the certificate of Incorporation, (b) directors and secretary, (c)shareholders and (d) the Registered office, Also a certified copy of its M&AA. Step E Post Registration Procedure. All companies must Register with the TAX Department and obtain a tax identification number. They may also need to register for VAT, as well as with the of the social insurance Department. Even if having to register for all three elements above, the process should take approximately 1-2 working days, provided that the applicant submits the necessary information and documentation without errors or omissions. KKP CYP 12
Basic initial Information/documents requested during the procedure of acceptance the client by the service Provider ( before start the procedure to set up the company) A. FOR THE COMPANY Details of the company s activities and how the company will be used. The names, addresses, passport details of the proposed directors and secretary of the company The names, addresses, passport details of the shareholders The proposed registered address of the company B. For the shareholders /Ultimate Beneficial Owners Certified copy of passport/id card Original bank reference letter Original recent Utility bill( less than 3 months) CV Full contact details Any other information necessary to satisfy the requirements of the Know Your Client requirement KYC in order to comply with the Anti-Money Laundering Law and the guidelines issued by the regulatory bodies KKP CYP 13
The use of Cyprus company-common Cypriot Companies The Investment Holding Company A Cypriot investment holding company serves as a perfect gateway to EU and enjoys the following main advantages: No withholding tax on dividends received No withholding tax on dividend paid to the shareholders No capital gains tax on the disposal of foreign subsidiary The IP holding Company A Cypriot company owning qualifying intangible assets/intellectual property ( IP) can claim 80% of its net profit from the exploitation of such qualifying IP as tax exempt. The net profit is calculated after deducting from the licensing income of IP, all expenses directly associated with it production. The qualifying IP enjoy an annual capital allowance at the rate of 20% Any profit arising from their disposal also benefits from the 80% exemption. KKP CYP 14
The financing and/or treasury company A Cypriot company can receive interest on loans to EU group companies with no withholding tax and can pay interest without deduction of withholding tax A Cyprus company trading in securities ( e.g. Shares, bonds etc.) will have no tax on the disposal of such securities since are exempt from Cypriot tax Ship owning & management Cyprus has the 10 th largest merchant fleet in the world by registration Specific tax exemptions apply to companies owning ships or managing and employing crews working in international waters. Cyprus has a very competitive tonnage tax regime. KKP CYP 15
C. Cyprus Companies- Compliance requirements Every Cypriot Company is required to maintain proper accounting books and records and prepare financial statements in accordance with IFRS According to the provisions of Companies Law Cap 113, every company private limited company including any small or dormant company shall submit its financial statements to an auditor for auditing Tax Compliance. Submission of income tax return and employers Return Submission of Annual Return HE32 to the Registrar of Companies. The HE32 should be submitted along with the copy of the previous year audited financial statements. Pay the annual Government fee of 350 Submission of VAT Returns.( if applicable) KKP CYP 16
Cyprus tax Framework KKP CYP 17
Tax System The Cyprus tax regime is efficient, straightforward and fully transparent, providing and excellent framework for the operation of international businesses. Cyprus tax law have been fully amended to incorporate all EU Directives, including the interest, and Royalty directive, the Parent subsidiary directive etc. Tax Highlights which will be analyzed today: Personal tax rates with the fist 19.500 tax free Non dom and the benefits of foreigner who decide to move in Cyprus Corporate tax rate Group Loss relief Capital gains and income tax exemption for securities Notional interest deduction upon the introduction of new equity No withholding taxes Intellectual Property Rights (IPR) KKP CYP 18
Personal tax rates and contributions The main types of direct taxes applicable for an individual in Cyprus are the below: Income tax Special Defense Contribution( SDC) on dividend, interest and rental income Capital gains tax on gains from the sale of Cypriot real estate An individual working in Cyprus is subject to social insurance and other contributions The personal income tax rates are progressive with the maximum tax rate being that of 35% on income exceeding 60.000 per annum. KKP CYP 19
Personal tax rates Taxable Income Tax rate Accumulated tax First 19.500 Nil Nil From 19.501 - to 28.000 20% 1.700 From 28.001 - to 36.300 25% 3.775 From 36.301 - to 60.000 30% 10.885 Over 60.000 35% Foreign pension income is taxed at the flat rate of 5%. An annual exemption of 3.420 is granted. The taxpayer can however elect to be taxed at the normal tax rates. This is a choice which may be made year-on-year. KKP CYP 20
Tax residency for Individual An individual who spends more than 183 days in Cyprus is a tax resident of Cyprus. As from 1 January 2017 an individual can be a tax resident of Cyprus even if he/she spends less than or equal to 183 days in Cyprus provided that he/she satisfies all of the following conditions within the same tax year (1 January 31 December): does not spend more than 183 days in any other country; is not a tax resident of any other country; spends at least 60 days in Cyprus; maintains a permanent home in Cyprus that is either owned or rented; carries on a business in Cyprus, is employed in Cyprus or holds an office in a Cyprus. If the employment/business or holding of an office is terminated during the year, then the individual would cease to be considered a Cyprus tax resident for that tax year KKP CYP 21
Key tax benefits for a foreign individual who is employed in Cyprus The following are exempt from income tax: 50% of the remuneration from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his/her employment in Cyprus. The exemption applies for a period of ten years starting from the first year of employment provided that the above income of the employee exceeds 100,000 per annum. This exemption does not apply in case the employee was a Cypriot tax resident in the preceding tax year or for at least three out of the last five tax years immediately prior to the tax year of commencement of employment. 20% of the remuneration or 8,550 (whichever is the lower) from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his/ her employment. This exemption applies for a period of five years from 1 January following the year of commencement of the employment and may be claimed up to tax year 2020. No tax on Interest income ( under non dom status) No tax on Dividend income ( under non dom status) No tax on gains arising from the disposal of securities such as shares and bonds No capital gains tax arising from the disposal of non Cypriot real estate No inheritance tax Nil/reduced withholding tax on income received from abroad KKP CYP 22
The Cyprus non-domicile concept for tax purposes As part of the overall effort to continuously improve and simplify the Cyprus tax system as well as to remain highly compliant and attractive jurisdiction, various bills have been passed into new laws in July 2015. One of the new laws is the Non-domiciled What does it mean? Foreigners who decide to move their personal tax residency in Cyprus, will automatically be considered as non-domiciled in Cyprus. The change affects physical persons that consider to use Cyprus as their tax seat and gain from the favorable tax regime both in corporate and personal level. For tax purposes, non-domicile persons who became Cyprus tax residents will now be completely exempt from the Special Defense Contribution tax ( SDC). SDC generally applies on dividends and interest. The change is applicable from 16 July 2015. In order to understand the change we need to outline the applicable SDC tax rates to Cyprus residents non-dom prior and after to the change. The SDC rates prior to the Amendments are as below: Dividend income 17% Interest income 30% Rental income KKP CYP 23 3%( on 75% of the income)
After the amendments the SDC tax rates will be as following: Dividend income: NIL Interest Income: NIL Rental Income: NIl How is the domiciled status determined? The SDC law defines the term domicile with reference to the Will and Succession Law: An individual is considered to have a domicile in Cyprus as below: By domicile of origin. i.e. the domicile received at birth ( generally dependent on the father side). By domicile of choice i.e. domicile acquired by establishing physical presence in a particular place. A person can obtain domicile of choice by setting up their home anywhere within Cyprus with the intention to reside permanently or indefinitely. The domicile of origin prevails and is maintained until a domicile of choice is obtained. The domicile of choice is maintained until a new domicile of choice is obtained or the domicile of origin is reclaimed. KKP CYP 24
Example 1: Let us suppose that Mr. Marek from Poland who is sole shareholder and employee in a Cypriot company became Cyprus tax resident, non-dom. Mr. Marek has three sources of income: He receives salary 200.000 per year from his employment in his company He receives dividends from his company and several other companies 400.000 per year He receives interest income from his deposits 100.000 per year Total income per year is 700.000 How much tax he will pay? Mr Marek will be liable to pay 24.885 income tax on the 200.000 salary and nothing else. He is also eligible to 50% tax exemption from income tax as an employee. The exemption applies for a period of ten years starting from the first year of employment provided that the employment income of the employee exceed 100.000 per annum. Prior to the amendments he would pay an additional tax of 98.000 on dividends and interest. KKP CYP 25
Example 2: Source of income Amount Taxation/ contribution Comments Employment income in Cyprus 150.000 18.892 50% exemption Interest income 50.000 Nil 100% exemption Dividend Income 2.000.000 Nil 100% exemption Rental Income 50.000 5.250 100% exemption on SDC. The 5250 is personal income tax Gains from sale of shares 1.000.000 Nil 100% exemption Gains from disposal of real estate 700.000 Nil 100% exemption Total 3.950.000 24.142 KKP CYP 26
Tax deductions for individuals Among others the followings are tax deductions for tax purposes: Social Insurance contribution Contributions to approved pensions and provident funds Payments to medical funds ( up to 1.5% of remuneration) Subscriptions to trade unions Life insurance premiums ( maximum to the 7% of the insured amount) 20% on the rental income Donations to approved charities ( with receipts) KKP CYP 27
Example 3: Cyprus holding company pay dividend to the individual shareholder NO Withholding tax Overseas company pay dividend to the Cyprus company NO Withholding tax Individual Non dom 100% Cyprus Holding company 100% Overseas EU company KKP CYP 28
Corporate tax rate All trading profits of a Cyprus companies are taxed at a flat rate of 12.5%, following the deduction of related expenses wholly and exclusively incurred in the productions of this income. KKP CYP 29
Example: Cyprus Company has the below. The shareholder is non resident or non dom. Euro Income 5.000.000 Salary for the non dom 20.000 Other Expenses 2.980.000 Taxable profit 2.000.000 Tax at 12.5% 250.000 Profit after tax 1.750.000 Dividends paid to the shareholder 1.700.000 The individual will have total income of 1.720.000 without to pay tax. The tax will be only on the level of corporate tax Tax on dividends NIL KKP CYP 30
Cyprus IP Regime Amendments to Cyprus IP regime Changes of IP regimes has took place on 27 October 2016 ( publication date of the Government gazette). The new legislation is effective as of 1 July 2016 and it is in line with the latest international developments on the taxation of IP income. Old IP regime. Under old IP regime, 80% of the net profits from the exploitation of IP is exempt from taxation. The net profit is calculated after deducting all direct expenses associated with the production of the income, as well as capital allowances at the rate of 20%. The qualifying assets are defined broadly to include: Copyrights Patented inventions Trade marks KKP CYP 31
Transitional period to the old IP box regime. The old IP regime will continue to apply until 30 June 2021, provided that the intangible asset meet the following criteria: Were acquired before 2 January 2016 Were developed or acquired from a related party during the period 2 January 2016 to 30 June 2016, and the IP qualified for the benefits of the old regime before the acquisition or qualified for a similar regime in another country and the IP was not acquired for the main purpose of avoiding tax. Was acquired from an unrelated party or was self-developed during the period 2 January 2016 to 30 June 2016. In addition, there are also transitional period until 31 December 2016 for IP developed or acquired from related party during the period 2 January 2016 to 30 June 2016 that does not fall within the scope of 2 above. KKP CYP 32
New IP regime Under the new regime, 80% of qualifying profits generated from qualifying assets will be deeded to be tax deductible expenses. Qualifying assets Qualifying intangible asset means an asset which was acquired, developed or exploited by a person in the course of his business, (excluding intellectual property associated with marketing) and which is the result of research and development activities and includes intangible assets for which the person is the economic owner. This means that related marketing IP assets such as trademarks will not be treated as qualifying assets. These assets are the following: patents as defined in the Patents Law computer software Qualifying Profits The level of the profits eligible for the 80% tax exemption will depend on the level of R&D expenditure carried out by the taxpayer to develop the qualifying asset. The qualifying profits are calculated with the following formula: Q1X QE+UE OE KKP CYP 33
Explanations of the ab0ve formula: OI is the overall income derived from the QA. OI is the gross profit( gross income less any direct costs) QE is the qualifying expenditure on the QA. QE is sum of R&D expenditure that is directly related with the asset UE is the uplift expenditure on the QA. UE is the lower of (i) 30% of the qualifying expenditure and ( ii) the total acquisition cost of the QA and any R&D cost outsourced to related parties. OE is the overall expenditure on the QA. OE is the sum of (i) QE and (ii) the total acquisition cost of the QA and any R&D expenditure outsourced to related parties. KKP CYP 34
Example: Let assume that the Cypriot company has below: Euro Gross income from IP 500.000 Direct expenses 200.000 Cost of acquisition of IP( from non related parties) 50.000 What will be the tax? KKP CYP 35
Example Solution: I.P. Stream Income 500000.00 Direct Costs 200000.00 TOTAL DIRECT COSTS 200000.00 GROSS PROFIT 300000.00 Amortisation of Intangible (Max 20yrs) 2500.00 2500.00 Total Other Costs 2500.00 2500.00 NET PROFIT BEFORE TAX 297500.00 LESS DISCOUNT CLAIMED 238000 PROFIT 59500 Tax At 12.5% 12.50% 7437.5 Effective Tax 2.50% KKP CYP 36
Notional interest deduction upon the introduction of new equity As from 1 January 2015, Cyprus tax resident companies are entitled to a notional interest deduction ( NID) upon the introduction of new equity employed in the production of taxable income. The new equity is equity introduced in the form of : Paid-up share capital and share premium It includes shares of any class, including ordinary, preference, paid either in cash or in kind. The NID is calculated by multiplying the new equity by a reference rate. The reference rate is the yield of the 10-year government bond( as at 31 December of the prior year) of the country where the funds are employed in the business of the company plus 3% premium The deduction cannot exceed the 80% of the taxable profit of the company KKP CYP 37
Example: Let assume that new equity amounting to 1.000.000 is introduced to Cyprus company and the reference rate is 8% Example Solution Without the NID With NID Taxable profits 200.000 200.000 NID - 80.000 Taxable profits 200.000 120.000 Tax at 12.% 25.000 15.000 Effective tax rate 12.5% 7.5% KKP CYP 38
Group relief provisions Cyprus tax resident company can include in the calculation of its taxable profits, tax losses of a company which is a tax resident of another EU country as long as both companies are part of the same group according to Cyprus group relief provisions. The surrendering EU company must first exhaust all possibilities available to utilise the losses in its country of residence or in the country of any intermediary EU holding company in order to establish whether two Cyprus tax resident companies are part of the same tax group, the interposition of a non-cyprus tax resident company will not affect the eligibility for group relief as long as the interposed non-cyprus tax resident company is tax resident: in a EU country or in any other country with which Cyprus has signed a Double Tax Treaty Two companies are considered to be a group for Cyprus group relief purposes if: One is a 75% subsidiary of the other, or Both are 75% subsidiaries of a third company. The tax losses surrendered can only be utilized by the claimant against profits of the same tax year. KKP CYP 39
Tax Losses of the Cyprus company : Tax losses incurred during a tax year can be carried forward over the next five years from the end of the tax year in which they were incurred, and be offset against future taxable income KKP CYP 40
Corporate tax Exemptions Interest Income ( i.e. bank interest ) Dividend income ( dividend income may be subject to SDC at 17%) Profit from sale of securities Exemption 100% exemption 100% exemption 100% exemption Profits relating to foreign exchange differences 100% exemption ( from 1/1/2015) KKP CYP 41
The term Interest income means the following: interest income on commercial (current) bank accounts; Interest income of companies that act as a vehicle for the purpose of financing group companies (e.g. a holding company, a subsidiary company or an associated company that borrows money and subsequently lends these to other group companies). This is taxed on corporate tax at 12.5% KKP CYP 42
Examples of Securities: Ordinary shares Preference shares Options on titles Debentures Bonds Futures/forwards on titles Swaps on titles KKP CYP 43
Example : A Non- resident company No withholding tax on Dividends B 100% Cyprus resident company KKP CYP 44
Dividends Received from Abroad Dividends received from abroad are exempt from any tax if one of the following conditions is satisfied: More than 50% of the activities of the foreign company paying the dividend lead to investment income The foreign tax burden on the income of the company paying the dividend is not substantially lower than the tax burden in Cyprus (An effective tax rate of at least six and half percent (6,5%) in the country paying the dividend satisfies this condition) If neither of the above conditions is satisfied, then dividends received from abroad are taxed at the level of the Special Contribution for Defence (SCD) at the rate of seventeen percent (17%) for years 2014 onwards. KKP CYP 45
Examples of Cyprus Structures 1. Securities Trading Company Individual Non dom/non resident Shares, options, bonds Cyco Gain on sales of securities are exempt No withholding tax on dividend distribution to the individual KKP CYP 46
Examples of Cyprus Structures 1. Holding company Individual Non dom/non resident 100% Cyco 100% Overseas Trading Subsidiary No Withholding tax on dividends No tax on disposal of subsidiary KKP CYP 47
Social Insurance The Social insurance system provides for several benefits such as maternity allowance, sickness benefit, unemployment benefit, old-age pension, widow pension etc The social insurance rates are as following: Employer Employee Total Social Insurance fund 7.8% 7.8% 15.6% Redundancy fund 1.2% 1.2% Industrial Training fund 0.5% 0.5% Social Cohesion fund 2% 2% Total 11.5% 7.8% 19.3% The maximum amount of monthly earnings on which the contributions are payable for the year 2017 was 4.533 KKP CYP 48
VAT Rates Standard rate at 19% Applicable to all taxable supplies not exempted or subject to one of the reduced or zero rates Reduced rate of 9% Reduced rate at 5% Zero rate 0% Accommodation by hotels, restaurant and catering services Supply of water, gas, medicine, newspapers, food, books etc Applicable for exports of goods The above present the most common activities KKP CYP 49
Thresholds Registration threshold (taxable supplies in Cyprus) 15.600 Registration threshold for distance sales (sale of 35.000 goods to persons not subject to VAT registration in Cyprus, by suppliers resident in another EU Member State) Registration threshold for acquisition of goods in 10.251,61 Cyprus from suppliers resident in another EU Member States. Registration threshold for intra-community supply of No threshold services KKP CYP 50
Thank you!! You are welcome to Cyprus!!! KKP CYP 51
Questions!! KKP CYP 52
61 Lordou Vironos Street Lumiel Building 4 th floor 6023 Larnaca, Cyprus Tel: +357 24818300 Email:info@kkp.com.cy www: kkp.com.cy KKP CYP 53