Cyprus - Iran
CYPRUS - IRAN CONTENT Introduction 3 Cyprus: Tax Benefits 4 New Treaty Cyprus - Iran 5 Cyprus Holding Company 6 Cyprus Holding Company in International 7 Investments Cyprus Back-to-Back Financing 8 Notional Interest on Cyprus Financing Structures 9 Cyprus IP Box Regime 10 Capital Gains treatment 11 Cyprus Shipping: Tonnage Tax Scheme Cyprus International Trust Cyprus-Iran: Conclusion 12 13 15 LEDRA HOUSE, 15 Agiou Pavlou Str. Agios Andreas 1105, Nicosia, Cyprus P. O. BOX: 24444, 1704 Nicosia, Cyprus E-MAIL: cgv@vasslaw.net www.vasslaw.com TEL: +357 22 55 66 77 FAX: +357 22 55 66 88
INTRODUCTION Our long lasting and vast experience in international business consulting enables us to fully understand the needs of your business and contribute towards its success. This publication concentrates on the business development between Cyprus and Iran in the context of the Double Tax Treaty Agreement signed between the Government of the Republic of Cyprus and the Government of the Islamic Republic of Iran on 4 August 2015. This, along with strong incentives given by the Cyprus Government with regards to Cyprus citizenship by investment scheme is expected to further develop the cooperation potentials of the two contracting states in the upcoming years. Furthermore, we will endeavour to explain the benefits offered by Cyprus and the purposes served by Cypriot companies as Holding, Financing and Intellectual Property companies, as well as the benefits secured through the establishment of an International Cyprus Trust. 3
CYPRUS: TAX BENEFITS Cyprus provides for numerous tax benefits. Its tax and legal systems are in full compliance with the EU and the OECD s requirements against harmful tax practices. Cyprus has low corporation tax rate of 12,5%. Under the Cypriot Corporation Tax, inbound dividends are not taxable with easily met conditions. Outbound dividends are not subject to any withholding taxes. They are only subject to the Special Defence Contribution (SDC) if the dividends are distributed to Cyprus tax resident individuals. However, if outbound dividends are distributed to non-cyprus tax Residents or to non-domicile Cyprus tax resident individuals are not taxable. Cyprus does not impose capital gains tax on the disposal of shares unless it relates to immovable property situated in Cyprus. If the immovable property is located outside of Cyprus, such gains are exempt. Since 2004, Cyprus has been an official member of the EU and, as required by law, has implemented all EU Directives. This has resulted in Cyprus obtaining all relevant tax benefits granted to intra-community transactions. In addition, Cyprus has expanded the applicability of the tax benefits obtained by the EU Directives to all third countries through the incorporation of relevant EU Directive provisions into its national legislation. EU Directives that have been implemented are the Parent Subsidiary Directive, the Merger Directive, the Tax Savings Directive, the Interest and Royalties Directive and the Administrative Cooperation in the field of Taxation. Cyprus provides for no inheritance tax; Cyprus has concluded an extensive number of Double Tax Treaties (DTTs) for the avoidance of double taxation. Tax paid abroad can be credited against any tax payable in Cyprus on such income, irrespective of any Double Tax Treaty. CYPRUS: FURTHER BENEFITS It is important to mention that Cyprus is a common law jurisdiction and its Companies Law is based on the UK Companies Act of 1948. During the last few decades Cyprus has become known as an international financial center, located at the crossroads of three continents: Europe, Asia and Africa. Overall, Cyprus offers a unique European base for international business companies. 4
NEW TREATY CYPRUS IRAN Cyprus and Iran took a significant step forward in establishing their bilateral relations. On 4th August 2015 a treaty for the avoidance of double taxation was signed and shall enter into force once each country completes the ratification process. The most significant provisions of the treaty are highlighted below: The withholding tax rate on dividends is 5% if the beneficial owner holds directly at least 25% of the capital of the dividend paying company. In all other cases the withholding tax rate is 10%. Currently Cyprus and Iran do not impose withholding tax on dividends. The treaty rates will apply only when any or both of the two states impose withholding tax in their domestic legislation. The withholding tax rate on interest is 5%. The withholding tax rate on royalties is 6%. The permanent establishment definition included in the treaty is in line with the meaning provided in the OECD Model Tax Convention. In particular, under the treaty, a building site or construction or installation project or any supervisory activities in connection with such site or project, constitutes a permanent establishment only if its duration extends beyond 12 months. Gains from the disposal of immovable property may be taxed in the country where the immovable property is situated. Gains from the disposal of shares, deriving more than 50% of their value directly or indirectly from immovable property may be taxed in the country in which the immovable property is situated. Cyprus- Iran: Double Tax Treaty Under the Cyprus Income Tax Law, it is vital to outline the beneficial tax terms that apply for dividends, interest and royalties paid from Cyprus. Dividends: 0% withholding tax Interest : 0% withholding tax Royalties: 0% withholding tax Royalty payments are exempt from any withholding taxes provided that were exercised outside Cyprus. 5
CYPRUS HOLDING COMPANY Principal Company/Ownership 100% No participation requirements No holding requirements Cyprus Holding Co Iranian Co Investments Dividends No Withholding tax Dividends No Withholding tax CYPRUS treatment: Dividends received: Dividends are not subject to corporation tax and are likely to be exempt from SDC Dividends paid: 0% withholding tax IRANIAN treatment: Dividends paid: 0% withholding tax on dividends paid by an Iranian Subsidiary to a Cyprus Holding company. Interest paid: 5% withholding tax on interest paid. Royalties paid: 6% on royalties paid. Cyprus companies can effectively be used as holding entities for Iranian companies involved in international cross border transactions. In the diagram above, Cyprus company holds 100% participation in an Iranian company conducting various investments. From a Cyprus perspective, no participation or holding requirements exist in order to obtain tax benefits. Incoming dividends from Iran, are exempt from Cyprus corporation tax and may also be exempt from SDC provided that one of the below is met: > no more than 50% of the Iranian Company s activities lead to investment income; or > the foreign tax rate must not be significantly lower than the tax payable in Cyprus (In practice lower than 6,25%). 0% withholding tax is imposed on dividends distributed by the Cypriot companies to the Iranian companies as per the provisions of the Cypriot tax legislation. 6
CYPRUS Iranian Co/persons HOLDING COMPANY Dividends IN INTERNATIONAL CYPRUS HOLDING Co INVESTMENTS Dividends Investments RUSSIA INDIA USA SOUTH AFRICA MIDDLE EAST CHINA EU CYPRUS treatment: Dividends received: Dividends are not subject to tax in Cyprus with easily met conditions CYPRUS treatment: Dividends paid: 0% withholding tax at the level of Cyprus REGION Russia India USA Ukraine Middle East South Africa China EU (Application of EU Directives) DIVIDENDS 5-10% 10-15% 5-15% 5-15% 0-15% 5-10% 10% 0% INTEREST 0% 0-10% 0-10% 2% 0-15% 0% 10% 0% Royalties 0% 15% 0% 5-10% 0-15% 0% 10% 0% 7
CYPRUS BACK- TO-BACK FINANCING COMPANY INTEREST Taxable interest income Principal Co Cyprus Financing Co ---------------------------- INTEREST Iranian Co LOAN LOAN CYPRUS FINANCING COMPANY Financing the group companies in two ways: (a) by way of debt or (b) working capital; CYPRUS LEGISLATION Interest income received from intra-group lending bears 12,5% Corporation tax; No thin cap rules / no debt-to-equity restrictions; No Transfer Pricing legislation in place, however, the arm s length principle applies; Interest paid to non-resident creditors is not subject to any withholding taxes. Financing: Back-to-back The minimum profit margin on the lending interest rates acceptable by the Cypriot tax authorities is as follows: Less than Eur 50mln Eur 50mln - Eur 200mln Over than Eur 200mln 0.35% 0.25% 0.125% Cyprus companies are beneficially used as finance investment vehicles suitable for financing group of companies and resulting in an efficient accumulation of interest income. In the figure above, a Cyprus company is the subsidiary of a foreign company, and the parent company of an Iranian company. A loan from the Parent company can be passed down to the Iranian company with respective interest received. In Cyprus, interest income received from intra-group lending is liable to 12,5% corporation tax on the net minimum margins profit applicable. Additionally, interest paid to non-resident creditors is not subject to any withholding taxes. 8
NOTIONAL INTEREST DEDUCTION ON CYPRUS FINANCING STRUCTURES DIVIDENDS Taxable interest income INTEREST Principal Co Cyprus Financing Co ---------------------------- Iranian Co EQUITY LOAN CYPRUS FINANCING COMPANY With the introduction of Notional Interest Deduction (NID), a deemed expense is allowed on the taxable income of a company resident in Cyprus and is calculated, by multiplying a reference interest rate on the New Capital that is issued by the company. The term new capital means the capital that has been contributed to the company after 1 January 2015 such as issue of share capital and share premium, if paid by the shareholder; The term " reference interest rate" is the ten year government bond rate of return of the State that the new capital is invested in, increased by 3%. However, the rate of return cannot be lower that the ten-year Cyprus Government bond increased by 3%. The allowable deemed expense on New Capital cannot exceed 80% of the taxable income. 80% is before the deduction of the deemed expense and in case of a tax loss the deemed expense on the New Capital cannot be claimed. CYPRUS LEGISLATION Principal company contributes funds to Cyprus Financing Co in the form of equity; Cyprus Financing Company lends the funds to the Iranian Company in the form of finance; Interest income received from lending is subject to 12,5% Corporation tax; Cyprus Financing company can claim notional interest deduction on equity contributed by the Principal Company; 80% maximum notional interest deduction on taxable profit reducing the effective tax rate in Cyprus to 2,5%; Dividends paid to non-resident Principal Co are not subject to any withholding taxes. Interest paid by the Iranian Company to Cyprus Financing Co is subject to 5% withholding tax in Iran; Overseas Tax paid in Iran can be credited against tax due in Cyprus Since,Cyprus Financing Co received the funds in the form of equity and then lends the funds to Iranian Co, no beneficial ownership issues should arise in Iran. 9
CYPRUS IP BOX REGIME Cyprus IP Tax Regime Cyprus offers an advantageous regime for business investing in IP rights; Dividends Tax incentives Net royalty profits are subject to 12,5% corporation tax. However, 80% of any income generated from Intellectual Property owned by Cypriot resident companies is exempt from Corporation tax reaching at a maximum effective tax rate of 2,5%; Royalties Principal Co Cyprus IP Co ---------------------------- Iranian Co Contribution of IP Licence IP 80% of profit generated from the disposal of IP by Cypriot resident companies is exempt from corporation tax; Gains on the sale of shares of Cyprus IP Co is exempt from corporation tax; In the diagram above, a Cyprus IP Company licenses its IP Iranian Co and in return it receives royalty income which will be taxed in Cyprus under corporation tax reaching at a maximum effective rate of 2,5%. Qualifying IP rights/ What kind of intangibles does the Cypriot IP Box cover? The Cyprus IP Box regime applies to a wide range of IP rights falling within the meaning of the Patent Law, the Intellectual Property Rights Law and the Trademarks Law. More specifically but not exhaustively the list includes intangible assets such as: Copyrights taking the form of literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, Software programs, etc. Patented inventions etc. Trademarks and service marks, designs, models, etc. The efficient IP tax regime of Cyprus in conjunction with the protection offered by EU and all major IP treaties and protocols in which Cyprus is signatory is what makes Cyprus highly attractive for the acquisition or development of IP assets. For an IP to secure the above benefits the taxpayer should be the owner of the IP, officially registered either in Cyprus or abroad. 10
CAPITAL GAINS T REATMENT Principal Company/Ownership Dividends 100% Cyprus Holding Co Real Estate Property CYPRUS treatment: Disposal of immovable property held by Cyprus Holding Co, is exempt from tax in Cyprus, given that the immovable property is not situated in Cyprus. Gains on the sale of shares of Cyprus Holding Co are not subject to tax in Cyprus, given that does not hold any immovable property situated in Cyprus. Double Tax Convention treatment: Any gain derived by Cyprus Holding Co from the alienation of immovable property situated in Iran may be taxed in Iran. Any gain from the alienation of shares, deriving more than 50% of the value directly or indirectly from immovable Property situated in Iran may be taxed in Iran. 11
CYPRUS SHIPPING: THE TONNAGE TAX SYSTEM The Cypriot maritime registry is today one of the largest in the EU and the 10th largest worldwide. Moreover,Cyprus is a major ship management centre with several of the ship management companies operating on the island ranking among the largest in the world. The current Tonnage Tax (TT) system was adopted in 2010, has been fully approved by the European Commission, for the first time for an EU member state with an Open Registry. Under the TT system ship owning companies, charterers and ship management companies may be taxed on the net tonnage of their ship rather than with Corporation tax on their actual profits. Under the TT system the benefits may be extended to include the owners and charterers of ships with foreign flags, provided they are tax residents of Cyprus. Specific qualification requirements need to be satisfied in order to obtain the tax benefits granted under the TT system. Tax benefits under the Tonnage Tax System > No income tax and taxation on profits from the operation of a qualifying ship doing a qualifying activity, for the qualified ship owner and charterer > No income tax on ship management services on qualified ships, for the qualified ship manager > Tax free dividends from profits at all levels > Gains deriving from the disposal of or transfer of such vessels or the shares of the ship owning company are tax exempt > The emoluments of officers or of the crew on board of such qualified vessels are exempt from income tax > Bank interest earned on working capital or shipping revenue is tax exempt provided that the said capital/revenue is used by a qualifying owner/charterer/ship manager in the financing and the maintenance of a qualifying ship/ in expenses arising from a charter party/ in paying expenses relevant to the ship management of a qualifying ship > Allows mixed activities within a company, where the shipping activities are subject to Tonnage tax while the other activities are subject to corporation tax at 12,5%. 12
CYPRUS INTERNATIONAL TRUST Key legislation: Trusts are primarily enforceable pursuant to the Trustees Law of 1955, Cap. 193 (as amended). Specific legislation regarding Cyprus International Trusts: International Trusts Law, L. 69(I)/1992 (as amended). Key characteristics of Cyprus International Trusts (CITs) pursuant to L. 69 (I)/1992 (as amended): The settlor (being a natural or legal person) is not a Cyprus tax-resident in the calendar year which precedes the year of creation of the CIT; At least one of the trustees must be a Cyprus tax-resident throughout the duration of the CIT; and This criterion ensures that the courts of Cyprus have effective jurisdiction over the trust. None of the beneficiaries (natural or legal persons) are Cyprus tax-residents in the calendar year which precedes the year of creation of the trust. The term Cyprus tax-resident is determined in Section 2 of the Income Tax Law, L.118(I)/2002 (as amended). Key Benefits of CITs: CITs are efficient wealth-management instruments ideal for high net-worth clients : -Income, gains and profit from non-cyprus sources are exempt from income tax, capital gains, special contribution and other taxes paid in Cyprus (only taxed in Cyprus on Cyprus-sourced incomes); -Only the beneficiaries who are Cyprus tax-residents will be subject to tax on their worldwide income; and -No estate duty or inheritance tax is paid in Cyprus. Its duration is not subject to any limitation period. Offers stability and predictability: - any matters relating to the validity of the CIT or its administration, such as the trustee s fiduciary powers, will exclusively be governed by the laws of Cyprus; - powers and duties of protectors (if any) and trustees are exclusively interpreted with reference to the laws of Cyprus; and - succession/heirship, tax laws and judgments accorded by foreign courts cannot affect the validity of a CIT or the transfer of trust prop erty; thus the beneficiaries interests are safeguarded from forced inheritance, claw-back rules and/or complicated situations like divorces, separations etc. It is a flexible vehicle: - Settlors have increased autonomy and flexibility to adapt the CIT to future circumstances and needs; and - trustees have investment powers equivalent to those of an absolute owner (e.g. may invest in property - moveable and immovable - both within Cyprus and abroad). 13
CYPRUS INTERNATIONAL TRUST TRUST BVI CO Consists of: Non-resident Settlor, At least one Cy tax-resident Trustee, Non-Cy tax-resident beneficiaries. Possibility for the settlor and beneficiaries to relocate to Cyprus after the establishment of the Cyprus International Trust. Alternatively, a Cyprus Holding Co can be used CYPRUS CO IRANIAN CO Cyprus taxation regime: No inheritance or estate duty tax; No withholding taxes on dividends received by Iranian Co; No withholding taxes on dividends, royalties and interest paid from Cyprus; 12,5% corporation tax on net profits; and No capital gains are taxable unless immovable property in Cyprus is involved. Investments 14
CYPRUS - IRAN CONCLUSION Cyprus is a modern country offering a unique European base for international business companies. It also constitutes a key to the Middle East, Asian and African markets. Countries like Iran are one of the upcoming business partners of Cyprus playing a leading role in direct foreign investments, both in and out of the country. Cyprus is located in a key geographical position and due to its vast treaty network is suitable for worldwide investments. Cyprus has become an attractive destination for structuring international investments with unique benefits. From an international investment perspective, Iranian companies, through Cyprus, can gain access to destinations with which they do not themselves maintain a treaty. The exploitation of such additional targeted markets can result in further global investments. In other words, Cyprus can be considered a passport for investments into the Central and Eastern European markets, Middle East, the Balkan markets and beyond. 15
Copyright 2015 CAUTION: The information in this booklet does not create a precedent. It is intended only as a general Guide and is not to be relied upon as the basis for any decision or outcome on the subject matter. Professional advice and consultation by Lawyers as applicable to the specific matter in question and in accordance to the laws and regulations in force at that time,must beobtained.