International investors have a broad choice when it comes to the selection of jurisdictions for the establishment of their special purpose vehicles (SPVs). Cyprus companies nowadays appear very frequently on the shortlists of these investors.
This has to do with a significant number of advantages Cyprus companies have, compared to companies in other jurisdictions, whether it be offshore or onshore jurisdictions. These advantages can be divided into two categories; fiscal advantages of Cyprus companies and non-fiscal advantages of Cyprus companies.
Hereunder we will highlight a number of these advantages, some of which are often ignored.
Fiscal advantages of Cyprus companies
General corporate income tax rate
The first fiscal advantage of Cyprus companies is that, if such companies carry out trading-, servicing-, group financing- or other activities, these profits will be subject to Cyprus' general corporate income tax rate of 12.5% only. The 12.5% rate is a flat out rate, without any conditions to be met in terms of level of turnover, number of employees etc.
Income from the exploitation of intellectual property (IP) will be subject to an effective tax rate of 2.5% only, based upon a provision in the Cyprus income tax laws allowing companies receiving such income a deduction equal to 80% of their chargeable profits.
In addition to the above, given the broad definition of a so-called 'permanent establishment' followed by the Cyprus income tax laws and the income tax exemption system for such profits applicable under these laws, profits derived by Cyprus companies from activities in overseas places of business will even easily qualify for full income tax exemption. So, in many cases Cyprus companies are equally tax advantageous as offshore companies, offering a zero income tax option, but with the advantage of an onshore status, including access to double tax treaties (see also hereafter).
Cyprus companies also enjoy the benefit of a tax exemption system for holding company income, which can easily be described as the broadest in the entire EU.
After all, gains upon the sale of shares in other companies realised by Cyprus companies are always exempt from income tax, without any condition to be met in terms of;
• capital ownership percentage (the Cyprus company does not have to own a certain minimum percentage in the capital of a company of which shares are disposed in order to obtain tax exemption for such disposal);
• ownership period (the Cyprus company is not obliged to own the shares it disposes for a minimum period of time in order to obtain tax exemption for any gain upon such disposal);
• the activities of the company of which shares are sold by the Cyprus company;
• the tax burden to which the company of which shares are sold by a Cyprus company, is subject etc.
There is no jurisdiction in the entire EU with such a broad income tax exemption system for gains upon the sale of shares as Cyprus. This exemption is based upon Cyprus' general income tax exemption for profits upon the sale of securities and this exemption as such even covers profits from the sale of call options, put options and other derivatives.
Furthermore, the tax exemption system for dividends from foreign companies received by Cyprus companies is also extremely broad.
These dividends are exempt from tax without any condition to be met in terms of;
• capital ownership percentage (the Cyprus company must not own a certain minimum percentage in the capital of a company of which dividends are received in order to obtain tax exemption for such dividend), and;
• ownership period (the Cyprus company is not obliged to own the shares from which it receives a dividend for a minimum period of time in order to obtain tax exemption for such dividend).
In order to qualify for tax exemption for an overseas dividend, the company in which the Cyprus company participates must either pay tax over its profits at an effective rate higher than 6.25% or at least 50% of the former company's total income must represent so-called 'trading income', the term 'trading income' being interpreted very broadly.
Withholding tax or other tax to be borne by foreign investors
Cyprus does not levy withholding tax over dividend payments made by Cyprus companies to foreign shareholders, so there is full flexibility for repatriation of profits accumulated at the level of a Cyprus company.
Cyprus does not levy withholding tax on interest payments made by Cyprus companies to foreign creditors.
Furthermore, Cyprus does normally not levy withholding tax over royalty payments made by Cyprus companies either.
Last but not least, foreign shareholders are not subject to income tax over any gains upon the sale of shares in Cyprus companies.
Double tax treaties and EU-Directives
When it comes to using SPVs in international tax planning, the unilateral tax treatment of income received by such SPVs in their countries of residence is not only important. It is also important whether there is any taxation over such income in the source state, i.e. the country from which the income is received by the SPV (in this case th SPV being the Cyprus company).
If a Cyprus company receives royalty income from another State, it is important whether the latter State levies withholding tax over this income. If a Cyprus company receives a dividend from a subsidiary in another State it is important whether the latter State levies withholding tax over such income. If a Cyprus company realises a profit from the sale of shares in a company based in another country, it is important whether the latter country levies tax over this profit etc.
In the case of Cyprus companies, there are two ways in which taxation at source over income from a foreign country received by Cyprus companies can be avoided; a 'standard' way and a 'European' way.
The standard way is the access that Cyprus companies may have to double tax treaties, concluded by Cyprus with other countries. It is important to note that Cyprus is party to tax treaties with more than 50 countries worldwide.
Moreover, based upon Cyprus' membership to the European Union (EU), applicability of the so-called EU Parent-Subsidiary Directive can under circumstances lead to withholding tax exemption for dividend payments made by companies in other EU Member States to Cyprus companies.
The so-called EU Interest and Royalty Directive can under circumstances lead to withholding tax exemption for interest- and royalty payments made by companies in other EU Member States to Cyprus companies.
In other words, there are various ways to ascertain that income received by Cyprus companies does not suffer foreign withholding tax, which, even if it can be fully credited against Cyprus tax payable over the income in question, could still cause cash flow disadvantages.
Double tax treaties; it is not only the quantity, but also the quality
When speaking about double tax treaties the following should also be kept in mind. The availability of a large number of double tax treaties per se is not sufficient to make a country an interesting platform for international tax planning. What is also important is;
• with which countries there are double tax treaties (preferably there should be double tax treaties with major, fast growing economies), and;
• the conditions of these double tax treaties.
In this regard it is worthwhile mentioning that Cyprus companies have access to highly competitive double tax treaties (for different reasons) concluded by Cyprus with, amongst others, the following countries;
• South Africa;
• The US, and;
• The UK.
No frequent changes
Since 2003, a new income tax regime was introduced in Cyprus as a result of and precondition for the country's accession into the EU.
International investors rightfully attach much value to the stability of a country's tax system. Too many changes in a system do not add to the credibility and trustworthiness of a country as financial center.
In this regard it should be stressed that Cyprus' tax system has been stable since 2003, the year of introduction of the new income tax regime. No (significant) changes to the system have been introduced during that period. This stability is obviously much appreciated by international investors.
Important; no hidden surprises (always watch out for the things people do not tell you)
Tax practitioners in many countries will often brag about how advantageous their countries' tax systems are. However, what usually remains untold is that the tax systems of many countries have hidden, unpleasant surprises.
The Cyprus tax system does not, or hardly has, such surprises. It is straight forward and therewith highly user friendly. At least the system does not have surprises, which are insoluble.
Non-fiscal advantages of Cyprus companies
There are also a lot of non-fiscal advantages related to the use of Cyprus companies. Below you will find a number of examples.
No minimum capital requirement
Cyprus does not have minimum capital contribution requirements for the incorporation of Cyprus companies.
Shelf companies and incorporation procedures
There are countries, which disallow the trade in so-called 'shelf companies', i.e. companies that have been set up by (e.g.) fiduciary services providers for the sole purpose of future sale to clients, for the sake of saving time.
In Cyprus the use of shelf companies is allowed and these companies are abundantly available. So, if you want to set up a Cyprus company and you need the company urgently, it is possible to buy a Cyprus company 'off the shelf'.
Other than that, the incorporation procedure of a Cyprus company is definitely not overly burdensome. Usually incorporation can take place in a time-span between one and two weeks.
EU VAT registration
Registration of Cyprus companies for VAT is a relatively easy procedure.
Opening bank accounts
In Cyprus any company, regardless of size or substance etc., can open a bank account, provided of course that the banks' Know Your Client requirements' (KYC requirements) are met.
Importance financial services industry
Related to the aspect of stability of a country's tax system is the question how important the financial services industry is for a country where an investor considers setting up an SPV. It is obvious that the bigger the importance of a country's financial services industry in terms of percentage of its total gross domestic product, the more stable the country's tax system will usually be.
In this regard it is worthwhile mentioning that in Cyprus the financial services industry is the biggest industry in the entire country. This is an important aspect to be aware of for an investor who is considering setting up a Cyprus company; the idea that the Government of the country where he sets up his company is committed to a low tax and investor friendly environment.
Talent pool and language skills
Investors want skilful and educated people to manage their overseas operations. In this regard it is important to note that Cyprus ranks third in the world in terms of percentage of the population with a university degree. The country has a well-educated workforce.
Furthermore, since English is one of the country's official languages, relevant Cyprus company documents, such as tax returns, articles of incorporation and even rulings are always available in the English language.
Last but not least, Cyprus has already functioned for decades as international financial centre and has as such built up a strong reputation.
Based upon a combination of fiscal and non-fiscal advantages, Cyprus offers a unique, investor friendly business climate. Cyprus companies are highly tax efficient tools for international holding-, financing-, licensing-, trading- or other kind of operations.
For more information, please contact Rutger Kriek at email@example.com