Cyprus company formation
We work in Cyprus sice 2005
Company formation in Cyprus
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Cyprus companies: how they are exploited now
There are many reasons why entrepreneurs used to settle Cyprus companies. But nowadays one should be very careful applying old schemes. Still there are several variants how Cyprus companies can be used for tax planning.
The scheme with dividends
It used to be and it is still a very popular variant. A Cyprus company owns Russian company. It has the right to receive dividends. As far as there is the Double tax treaty between Russia and Cyprus, it is possible to use the preferences given by point 2 Article 10 of this Treaty. The dividends may be taxed in Russia at the 5% rate, if the Cyprus company invested minimum 100 000 EURO in the share capital of Russian company.
As far as the incoming and outcoming dividends are not taxed in Cyprus, the only tax to be paid is 5% tax, which is paid to the Russian budget.
The dividends are transferred to Cyprus, and from Cyprus company the money may be transferred to its shareholders (a BVI company, a Belize company, or even directly to beneficial owners).
So, if Russian company earns 1000EURO and transfers the money as dividends, the sum to be paid to the Russian budget is
But the thing is that the tax rates of double tax treaties can be applied only if the company is a beneficial owner of the dividends. It means, that if the company is created only to benefit from double tax treaty, it has no right for application of double tax treaty.
Let's see the well-known case of Severstal (А40-113217/16-107-982).
Severstal paid dividends to 4 Cyprus companies, and then these companies transferred the money to BVI companies.
The tax authorities and then the courts examined financial statements and paid attention to the fact that Cyprus companies had no other assets besides the shares of Severstal.
Then the court paid attention to the fact that the by-laws of the 4 Cyprus companies restricted its directors from most of the actions concerning the shares.
The Cyprus companies had no other source of income besides dividends from Russia.
All 4 companies had the same address, the same director and the accounts in the same bank.
So the dividends paid by Severstal to its shareholders were taxed at 15% rate instead of 5% according to the tax authority decision supported by the courts.
So nowadays a Cyprus company should have some economic substance, not only collecting dividends. How can this "substance" be created?
There is no concrete scheme. But the most common way is to find a real office in Cyprus or maybe some other activity.
The Cyprus companies are often used as trade companies. As far as the corporate tax rate is 12,5% it is relativelyprofitable to accumulate all the profit on Cyprus. See the scheme:
The Cyprus company buys the goods for 1000 Euro, and sells it to Russian company for 1500 EURO. This Russian company sells it to final consumer for 1600,00 Euro.
If there wasn't a Cyprus company, the profit in the amount of 600 EURO shall be taxed on 24%. The tax amount is 144 EURO.
If 500EURO taxed in Cyprus and 100 EURO in Russia the tax amount is as following:
500*12,5% = 62,5
The total sum of corporate tax is 86,5 EURO.
Of course, in real life the situation is not so straightforward. There might be many additional issues, such as VAT, customs duties and so on.
The Cyprus International Trust regime enables non-tax residents of Cyprus to create a Trust in Cyprus and enjoy the highest possible degree of asset protection and create estate planning internationally along with the tax benefits and strict confidentiality.
HOW IT WORKS:
•The Settlor transfers the property/assets to a legal or physical person, the Trustee, who holds the property for the benefit of the beneficiary/ies in accordance with the terms of the Trust Deed.
•The following conditions must be met in order to have a Cyprus International Trust:
- The Settlor, must not be a resident of Cyprus during the calendar year, preceding the year of creation of the Trust; AND
- The beneficiaries, with the exception of charitable institutions, must not be resident of Cyprus during the calendar year, which precedes the year of creation of the Trust; AND
- At least one of the Trustees must be a tax resident of Cyprus throughout the life of the Trust
Advantages of an International Trust:
•Exclusive jurisdiction of Cyprus courts regarding the validity of the Trusts and the exclusion of foreign judgements on Cyprus International Trust issues.
•The provisions of the Cyprus International Trust Law have express superiority over any other law in Cyprus.
•Powers of a Trustee, Protector, Settlor and Trust Enforcement Supervisor.
•Possibility to grant extended powers to Settlors. Settlor may exercise control although appointment of Protector/Trustee.
•Avoidance of forced heirship rules.
•Asset protection vehicle.
•Flexibility of Terms.
•Ability on changing the proper Law.
•Ability in amending the Trust Deed.
•Strict confidentiality of Trust documents.
•Low stamp duty.
•Nil taxation of income and gains of a Cyprus International Trust abroad.
•Significant tax planning possibilities.
•No formal registration is required.
•Complete confidentiality - non disclosure of information.
•No requirements for submission of tax return.
•Confidentiality of beneficiaries and trust activities are prevented on Chapter 11 of Trust Law.
•Transferability: The Cyprus international trust can transfer to a trust of another destination at any time.
•The Trust is not affected in case the Settlor goes bankrupt.
•The Settlor, may through a Cyprus international Company controlled by the trust become a Trustee or its sole Trustee therefore effectively managing it.
The trademark (or another object of intellectual rights) is registered in the name of offshore company. Then it concludes license agreement with Cyprus company. The Cyprus company concludes sublicense agreement with the Russian company. The Russian company starts paying royalties. As per Article 12 of the Double tax treaty the taxes on royalties are paid in the country of the receiving company - on Cyprus. But the royalties are taxed only if the intellectual property is used on Cyprus. So the Cyprus company transferred the royalties to offshore company without any tax.
So the saving on taxes will be as following:
Russian company earned 1 000 EURO. Corporate tax is 240 EURO.
It pays royalty according to the above mentioned scheme in the amount of 300 EURO. The sum of royalty is deducted from the sum of tax base, so only 700 EURO are taxed. The tax is 168 EURO.
The saving is 72 EURO.
But one should remember, that there is the same situation as with dividends: double tax treaties are applied only if a foreign company is a beneficial owner of the income.
A company for IT
Profits from intellectual property are taxed per 12,5% rate. But 80% of income is excluded from taxation. In some cases the company has the right to add additional sum of expenditures (about 30%).
It looks like following:
A company spent 100 EURO to make a computer program. It has been selling the program the whole year and earned 1000 EURO.
The taxable income is 1000*20%=200 EURO.
The expenditures are 100+30=130 EURO.
The tax base is 200-130=70 EURO.
The tax amount is 70*12,5=8,5 EURO.
So, to make a conclusion we should say that Cyprus is still a very attractive jurisdiction for different types of business.
Loan restructuring through NIP
Cyprus resident Companies are entitled to a Notional Interest Deduction (NID) of up to 80% of their taxable income on qualifying new equity. Qualifying new equity includes share capital of any class and share premium issued and settled after 1 January 2015 paid either in cash or in kind.
The above provision, apart from reducing the effective tax of the Cyprus Company by up to 80% thereby decreasing the effective tax rate to as low as 2.5% can also allow for the Cyprus Company to be the beneficial owner of income. Especially in the cases where loans are granted by the Cyprus Company the resulting tax charge can be as low or even lower than in the case of using thin spreads (back-to-back arrangement).
For example, instead of engaging the Cyprus Company through back-to-back loan arrangement, one can take advantage of the NID provisions and grant out a loan through own funds that were introduced in the share capital of the Cyprus Company.
A Cyprus resident trading/financing Company issues new capital comprising of 1000 shares, with a nominal value of €1 each at a premium of €999 per share (total new equity €1.000.000). The funds are utilized in the business and generate income of i.e. €200.000. Reference Rate for year 2016 as published by the Cyprus Tax Department for funds employed in i.e. Ukraine at 9.622% (NID rate).
Income from application of new equity €200.000
Less: Cost of Sales €100.000
Less: Administration expenses €30.000
Profit before claiming NID: €70.000
NID Lower off;
• NID before restriction: €96.220 (9.622% @ €1 m)
• NID restricted 80%: €56.000 (80% @ €70k) €56.000
Taxable profits €14.000
Effective Tax = 2.5% (€1,750/€70.000)
Permanent Residency Scheme and Citizenship Scheme
Permanent Residency Scheme
The Permanent Residency Scheme is a simple process. It does not require the applicant or the applicant’s family members to permanently live in Cyprus but only requires the persons who acquire Permanent Residency to visit Cyprus at least once every 2 years. Provided that the documentation is in order and the investment requirements are met, a Residence Permit can be issued within 2 months.
Key benefits of this scheme are: it covers the whole family; low property tax; no language proficiency requirements; permanent residents of an EU country are entitled to lower tuition fees at European Union universities irrespective of the fact that they are not EU nationals.
Spouse and children under the age of 18: The permit granted to the applicant also covers his/her spouse and children under the age of 18.
Unmarried children aged between 18 and 25:
Unmarried children of the applicant, aged between 18 and 25, may submit a separate application to obtain a Residence Permit.
The children must be students of tertiary education abroad, with at least 6 months of the study period remaining as from the date of submission of their application. They must be financially dependent on the applicant.
The Applicant’s parents and parents-in-law
In addition to the applicant’s spouse and dependent children, the Residency Scheme, also covers the applicant’s parents and parents-in-law. If the applicant’s parents or parents-in-law wish to become permanent residents of Cyprus, they may apply for a Permanent Residence Permit.
The only additional requirement for the applicant who wishes his/her permit to also cover his/her parents and/or parents-in-law is that the applicant must present an additional secured annual income of €8,000 for each parent/parent-in-law.
This scheme sets out a fast track procedure for the acquisition of Cypriot citizenship by applicants, their spouses and dependent children of up to 28 years of age. The scheme gives the option to the parents of the applicant to also apply for citizenship provided they also acquire a privately owned permanent residence. A successful applicant will become a Cypriot national, with an EU passport. The fundamental freedoms of the EU will therefore apply including the free movement of people, capital, goods and services within the EU, Norway, Iceland, Lichtenstein and Switzerland. Travel visas are not necessary for more than 140 countries (including the EU). Dual citizenship is permitted in Cyprus, allowing for excellent international tax planning. There is no inheritance tax and property tax is low.
A non-Cypriot citizen with a clean criminal record, will be granted Cypriot Citizenship provided that he/she meets one of the investment requirements mentioned below and complies with the terms and conditions of the Scheme.
The investment(s) required for the purposes of this Scheme, can be made by a variety of methods. The applicant can make the necessary investments) either personally or jointly with a spouse, or through investment(s) made by a spouse.
The applicant may also make the investments) through a company or companies in which he/she owns shares. If the investment is made by a company in which the applicant is not the only person who owns shares, the percentage of the investment which will be considered as having been made by the applicant will be equal to the percentage of the shares he/she owns in the company.
Finally, where a company has made investment(s) in accordance with the investment requirements below, it is possible for a high-ranking senior manager of that company to apply for the Cypriot Citizenship, provided that he/she receives remuneration that generates tax revenues in the Republic of Cyprus of at least €100,000 over a 3-year period. This tax must have already been paid or prepaid.
The applicant should have made the necessary investment(s) during the three years before the date of their application and must retain the said investments for a period of at least three years from the date of their acquisition of Cypriot Citizenship.
It is important to note that the investment(s) can be sold by the applicant after the lapse of a 3-year period, from the date of acquisition of Cypriot Citizenship without their Citizenship being revoked.
The applicant should have made an investment in the Republic of Cyprus of at least €2,000,000 for the purchase or construction of buildings or for the construction of other land development projects such as residential or commercial developments. Investment in land under development is also included in this requirement, provided that an investment plan for the development of the purchased land is included in the application.
The applicant should have made a purchase or should have participated in companies or organisations established and operating in the Republic of Cyprus, with investment costs of at least €2,000,000. The funds invested by the applicant must be used by these companies or organisations exclusively in Cyprus, for their investment objectives. A specific investment plan by the companies or organisations must be prepared, indicating how the funds of the applicant will be invested. In addition, those companies or organisations must be able to prove they have a physical presence in Cyprus with significant economic activity and turnover. Further, these companies must employ at least five Cypriot citizens or other EU member citizens. The employees need to have legally and continuously resided in Cyprus during the five years preceding the application submission date.
The applicant must have bought units of at least €2,000,000 from Alternative Investment Funds (AIF) established in the Republic of Cyprus, licensed and supervised by the Cyprus Securities and Exchange Commission. The said AIFs must make their investments exclusively in the Republic of Cyprus in areas that meet the requirements of this Scheme (i.e. land, companies) or in areas approved by the Minister of Finance.
The applicant can proceed with a combination of the above investments provided that the total amount of the investment will be at least €2,000,000. Under this criterion the applicant has the option to purchase up to €500,000 of government bonds which will be issued by the Ministry of Finance. Those bonds must be retained by the applicant for at least 3 years.
Additional Conditions and Requirements
Residence in the Republic of Cyprus: In addition to the above investment requirements, the applicant must also purchase a permanent, privately-owned residential property in the Republic of Cyprus with a value of at least €500,000 excl. VAT. If the purchase value of the residential property is in excess of €500,000, then part of that amount can be used to supplement the total amount of the investment made on the basis of the above criteria.
Parents of the applicant: The parents of the applicant may also apply for Citizenship, regardless of their age. The applicant’s parents who want to acquire Cypriot Citizenship must hold a permanent privately-owned residence in the Republic of Cyprus, the purchase price of which is at least €500,000 plus V.A.T. It is also possible for the applicant and his/her parents to collectively acquire a residence provided that its value is at least €1,000,000 plus V.A.T.
Residence Permit prior to the Citizenship: The applicant prior to his Citizenship, must have held a Residence Permit in Cyprus for a period of at least 6 months. If the applicant is not already a holder of such permit, then he/she (and the family members applying for Citizenship with the applicant) may apply for such permits on the basis of the Permanent Residency Scheme, simultaneously with his/her Citizenship application. The clean criminal record requirement from their country of residence and the requirement for a Residence Permit for at least 6 months before to the Citizenship, apply to all members of the family of the applicant (i.e. spouse, children, parents), who are applying for Cypriot Citizenship.
Corporate Relocation Services
THE TWO STAGE PROCESS OF RELOCATION
COUNTRY OF ORIGIN
As with any tax planning exercise, before we move on to consider the tax considerations at the country of destination, the tax implications in the country of origin of the HNWI need to be considered. In brief, the same could be summarized as follows:
1) Do any exit taxes apply?
2) Do recapture rules apply to any income realised after migration?
3) Are there any specific tax rules to retain individuals?
4) Are there any reporting obligations?
All the above will have to be examined in the country of origin by the individual willing to migrate to another country preferably with the assistance of a tax consultant. As regards Cyprus, any person who has relocated in Cyprus and subsequently, for any reason wants to leave Cyprus will not have to pay any exit taxes and no recapturing rules will apply, making exit from Cyprus easy and effective.
COUNTRY OF DESTINATION
Moving on to the country of destination, the following considerations should inter alia be considered:
1) What are the tax residence criteria under domestic tax laws?
2) What are the available methods to avoid taxation in case of dual residence?
3) What are the main types of personal taxes applicable to individuals in the country of destination?
4) Are there any specific tax rules to attract individuals such as special regimes for new residents, tax holidays etc?
5) How is the profit from investments, including dividends, interest, capital gains and rental income taxed?
6) Do any wealth or succession taxes exist?
7) Are there any wealth structuring tools in the country of destination?
8) Are there any reporting obligations as well as voluntary disclosure programs and what are the mechanism available to tax authorities for the exchange of information?
General partner of the company
Vita Liberta Limited
2012-2016: Bank of Asia, Russia, Vice President of international Business (responsible for the development of two departments: international correspondent banking department and international corporate clients’ department).
2016 - present - founder and General partner of Vita Limirta Limited company.
Excerpt from the speech of Mr. Konon Sergey at the IV-th annual conference "Practice of international tax planning. Actual issues ", 2011.
The information contained in this web page is intended as a guide only and every reasonable effort was made to ensure the accuracy and timeliness of the information.
In no circumstances shall we be legally bound by any information contained in this document, and we shall accept no liability in respect of loss caused by reliance on such information.