cyprus -the new modern hub for investments into russia 2011

8/6/2019 Cyprus -The New Modern Hub for Investments Into Russia 2011

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Issue: March 2011


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WelcomeTraditionally, Russian and Cypriot relations werehighly developed in every aspect.

Business relations are becoming even stronger and

more concrete, especially after the announcement of the

removal of Cyprus from the Russian Central Bank list of

offshore zones

Trade relation gures show an intensive relation betweenthe two nations. More specically, the trade between twocountries reaches an extraordinary amount of several

billion dollars per year whilst the ministry ofcials in Cyprusestimate Russian deposits in Cyprus banks to exceed 10

billion Euros. From a Russian perspective the Republicof Cyprus constitutes one of the major investors into the

Russian economy.

Cyprus has all predispositions to be considered as a hub

of high international standards. Located at the crossroad

of three continents, enjoying a geographical privilege andin combination with its favourable tax regime, Cyprus isundoubtedly one of the most popular destinations amongst

Russian preferences in terms of business investments and

leisure.

About Eurofast TaxandEurofast Taxand provides a range of tax advisory services

in Cyprus. The rm is also the Cypriot member rm ofTaxand.

As well as providing tax advisory services in Cyprus,Eurofast Taxand delivers a range of legal and nancialservices in South Eastern Europe, including trust &

management and payroll & accounting services through

fully edged group companies throughout South EastEurope and Eastern Mediterranean area.

This geographic reach, coupled with the access to over2,000 fellow tax experts worldwide through its Taxandmembership, Eurofast Taxand has already accumulated a

wealth of expertise that can be turned into an invaluablecompetitive advantage for its Cypriot and international

clients alike.Eurofast in recent years has achieved worldwide marketrecognition for its exceptional tax advice, capabilities and

innovation in the area of international tax planning. In 2010Taxand has been voted European Indirect Tax Firm ofthe Year by International Tax Review (ITR) and EurofastTaxand has been recognised as Best Tax Practice in

Cyprus 2010 by the European CEO and ranked 2011 Tier

One Tax Transactional Practice in Cyprus by ITR.

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ContentsAbout Eurofast Taxand

Cyprus Russia the new Protocol

Cyprus & the OECD White List

Capital gains exemptions under the Protocol

Exchange of InformationsICIS and UCITS in Cyprus

Outbound Dividends

Intra group back-to- back loans through Cyprus

An introduction of Cyprus International Trustsfor use in investments into Russia

The Ultimate experience of CyprusHolding Companies

Double Tax Treaties

EU Directives in CyprusEU Citizenship via Cyprus Residency

About Taxand

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Cyprus is undoubtedly oneof the most popular destinationsamong Russian preferencesin terms of businessinvestments and leisure.

Russia& Cyprus Finally, on October 7, 2010 ofcial staterepresentatives from the Ministries of Cyprus andRussia signed in the presence of President Medvedev

the Protocol to the Double Tax Treaty (April 16, 2009)

that was signed back in year 1998. It is expected that

this important document will come into force as of

January 1, 2012.

The Protocol is considered highly benecial for internationalbusiness and it is expected to further enhance the economic

relationships between Cyprus and Russia by means of taxadvantages and incentives now available.

The main precondition to be achieved in establishing

better economic cooperation is the removal of Cyprus from

the Russian list of non-cooperative jurisdictions as soon asthe protocol comes into force.

Major changes were adopted with regards to the limitationof benets, exchange of information and the taxation ofcapital gains deriving from the sale of shares in a real

estate company provided in the protocol.

It is worth mentioning that further changes were beingbrought forward, besides the three key areas mentionedabove, with the initiated new Protocol. With respect todividends, the reduced withholding tax rate on dividendsfor the minimum investment of USD 100.000 in the capitalof the subsidiary company was revised to 100.000.Additionally the withholding tax rates on dividends remain

unchanged whilst the actual denition of dividendshas been revised in order to be compatible with theOECD model treaty. Nevertheless, payments for MutualInvestment Funds or similar collective investment vehicleshave also been included in the denition of dividends.

Furthermore, changes relating to the denition ofresidency and permanent establishment took place as wellas changes to the article on International Trafc.

A foremost consideration is the issue of substance.Substance refers to how legitimate looking is a company

(holding or trading). Providing a registered ofce or a localdirector will not sufce anymore. Now what needs to bedemonstrated is that the Company has employees, busy

ofces, assets, real job execution, decision making andeven an economic value for its Cyprus operations. A solidstructure with the appropriate substance can not be seenas an instrument for the avoidance of taxation.

Professional revision of current tax structures must be

sought immediately in order to take actions on re-structuring and being in line with the changes of theProtocol.

You MustRevisit your Russian - Cyprus structures immediatelyCritical restructuring may be required to sustain the

Protocol changes, especially in relation to substance

requirements.

Our tax and legal experts can assist to minimise

any possible tax exposure as well as enhancing thesubstance of your company.

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2 The new Protocol


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One of the main issues discussed at the G-20 meetingheld in London on April 2, 2009 was the prevention andelimination of tax evasion.

Stricter measures are expected to be implemented

and nations have to put in much more essential effort

in order to be classied in the white list of international

organisations.Countries shall implement the International Standardsof Transparency and Exchange of Banking Information,as well as, to release the names of the individuals thatpossess accounts in their territory. Extensively othercountries would be able to identify those residentswho do not supply the relevant information about theirinternational income to the tax authorities in their country

of residence. The G-20 threatened to take action againstnon-cooperative jurisdictions including sanctions andplacement in the non co-operating list.

Cyprus has amended its national legislation in respectof Exchange of Information by enacting the Law 72 (I)

thus making it possible for the disclosure of information to

take place.

Cyprus is now in full compliance with the internationalstandards and Exchange of Banking Information andtherefore it effectively joined the OECD white list.

The new developments have placed Cyprus one stepahead in the tax international arena due to the immediateadoption of the International Standards and Exchange ofinformation. Many countries have committed themselvesin order to comply; having an uneasy way to go throughsince demands for international tax compliance have

substantially increased in order to combat tax evasion.

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3 Cyprus & the OECD White list


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One of the main changes of the protocol relates to the

taxation of capital gains as a result of the alienation of

shares in real estate companies.

Additional paragraphs extended and brought about

signicant changes to Article 13 of the Treaty whoseapplicability doesnt correspond to the actual day of

coming into force of the protocol itself. Instead thisprovision was given a four- year grace period after theprotocol comes into effect, so it is expected to take effect

as of January 1, 2016. The changes mirror the principleslaid out in the OECD Model whereby gains realised fromthe disposal of immovable property shall be taxed wherethe property is located.

Currently, Article 13 grants Cyprus the right to tax such

disposal, which in its national legislation exempts all capitalgains, realised from the sale of shares of the Russian

subsidiary regardless of whether the Russian subsidiaryowns immovable property in Russia or not.

The new Article 7 provides that gains realised from thesale of shares by the resident of the contracting state e.g.a Cyprus Co. where those shares are representative of50% in value of immovable property located in the other

state i.e. Russia, shall be liable for tax in Russia. In turnany gain realised by the Cyprus Co. from the sale ofshares in the Russian Co. may also be subject to capitalgains tax in Russia.

The amended Article 13 will not apply in the

following instances:

1. Where gains are realised from the sale of shares

undertaken in the course of group reorganisation.Economic rationale may be required so as to prove

the reorganisation of the group is not purely designed

to evade tax.

2. Where the selling entity is a pension or provident

fund or the government of Russia or Cyprus.

3. Where the sale of shares is in a listed company

on a recognised stock exchange (The Cyprus StockExchange has recently been recognised by Russian

Federation as such).

Current Russian-Cypriot cross-border tax structuresdirectly or indirectly owing shares of companies orcollective investment funds shall seek professional

consultation well in advance of the implementation date ofthis provision.

Several solutions indeed exist to overcome the changes in

the taxation of capital gains brought upon by the Protocol.The sophistication, extent and complexity of such solutions

hugely depend on a case by case basis and can not really

be generalised.

Our Tips for you

The changes in the tax treatment of capital gains

under the Protocol probably represent the most

important element of the Protocol. Investors areurged to seek professional tax advice well ahead ofcoming into force of the Protocol to overcome this

and implement available solutions in their existing (orfuture) Russian Cypriot real estate structures.

We are able to help you!

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4 Capital gains exemptionsunder the Protocol


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The recent national legislation enacted in 2008 grants

the right for Exchange of Information regarding Tax

and banking information, with the aim of providing

such information in accordance with the double tax

treaties.

The recently incorporated Article 26 of the protocol is nowin line with the article 26 of the OECD Model 2005. Underthis article, both contracting states can request for the

exchange of information relating to tax issues. Furthermorethis change classies Cyprus within the jurisdictions fullycompliant with the international arena providing for, thedisclosure of information. This is seen as a measure totackle tax evasion which enabled the removal of Cyprusfrom various blacklists of non-complying jurisdictions.Cyprus discloses information only regarding non tax

residents of Cyprus and applies to nancial institutions,banks, corporate service providers, civil servants, welfarefunds, pension funds, trustees, representatives, nominees.

Certain preliminary provisions have to be met in order to

enable the Cyprus tax authorities to deal with the validity ofthe request.

As a general rule, all requests must be specicand must not lead to shing expeditions. In order toprevent this, the Cyprus legislators composed a procedure,

which primarily discloses information after overcoming andsatisfying the provisions required, currently in place. It issignicant to note that the written consent of the AttorneyGeneral of the Republic is required in order for the

research to be conducted and obtain the information found

under the possession of the Republic of Cyprus.

The relevant information has to be provided to the

Cyprus tax authorities:

The full name of the person under investigation

The nature of the information requested Reasons as in why it is believed that such information isin existence in the Cyprus jurisdiction. The name of the person that possesses such information Declaration of obtaining such information andevidence that all national means have been exhausted by

the tax authorities of the requesting state.

Provided that the Attorney General is satised with theamount of evidence provided by the requesting state, theresearch shall be approved to be executed. Once theresearch is in place, nothing can constitute a valid reason

or appear as obstacle to the completion of information

collection.

The request shall be addressed by the relevant

authorities in a precisely clear way, corresponding to theinitial question as brought forward and not any furtherbeyond. It is important to note that the person underinvestigation shall be informed about this request from the

very beginning.

1 | A link has to be established among non

resident tax payer and a Cy Co;

2 | A non - Cypriot tax resident has to be involved;

3 | A Double Tax Treaty has to be in place among the

two states involved under which both shall be obligedto disclose information;

4 | A tax offence or suspicion should exist;

Our Tips for youForeign investors no longer need approval from theCentral Bank of Cyprus to invest and do business

in Cyprus. This means that foreign investors are onequal terms with local investors. One of the practicalaspects of the liberalisation is that foreigners register

companies in Cyprus automatically enter the EUmarket of over 500 million consumers.

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5 Exchange of Information


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ICIS

Private Funds are registered by the Central Bank ofCyprus and governed by the International CollectiveSchemes Law which allows various forms of funds asfollows:1.) International Variable Capital Company2.) International Fixed Capital Company3.) International Unit Trust Scheme4.) International Investment Limited Partnership Schemes.

Quickly and easily incorporated with minimum expenses,the private funds are entitled to be granted all benets inplace from the extensive Double Tax Treaty network ofCyprus.

UCITSThe Undertakings for Collective Investment in TransferableSecurities (UCITS) are governed by the Cyprus SecuritiesExchange Commission (CySEC).

A UCITS is an undertaking having as its sole object thecollective investment in transferable securities or any

other liquid nancial assets. The procedure for registeringUCITS is more complicated than that of private funds.

Regulated Private Funds like the ICIS can ultimatelybenet funds for property investments in other countrieswith which Cyprus maintains a Double Tax Treaty. Settingup these Funds in Cyprus accrue attractive tax savings forthe Unit Holders.

According to the Cypriot Income Tax Law all gains derivedfrom the sale of ICISs and UCITSs are exempt fromtaxation. Dividends received by ICIS and UCITS are alsotax free irrespective of the participation. In most of the

cases gains from the redemption of units as well as anycapital gains that are derived from the sale of securities

are equally exempt from tax. Furthermore, these werereinforced with additional benets as far as interest isconcerned with recent legislation changes in Cyprus.Interest received by an ICIS or UCITS is solely subject toa 10% CIT and is outside the scope of Special DefenceContribution Law (SDC).

The recent Protocol brings some changes in the area of

mutual investments funds taxation.

More specically, the signed Protocol introduces awider denition on dividends and according to thisamendment every payment on shares of the mutual

investments funds or similar collective investment

vehicles will be considered as a dividend andextensively such distributions would be taxed at 5%or 10% as dividends

Under different circumstances and under Russiannational law, such distributions would have beensubjected to 20% withholding tax. The signicance ofthis development is the elimination of doubt whether

such relevant distributions could be classied asother income as it was the case under the currenttreaty.

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6 ICIS and UCITS in Cyprus


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Cyprus as a vehicle for outbound investments The New

Protocol will lead to the removal of Cyprus from the Blacklist

Despite the changes brought forward by the new Protocol, it should be noted that its entry into force will lead to theeffective removal from the Russian list of non-cooperative jurisdictions. As such, the exclusion of Cyprus from theBlacklist will allow for the qualication for the dividend participation exemption in cases of distribution of dividends byCypriot subsidiary companies to Russian parent companies.

Fig. 1

Russian Parent Company

Cyprus Holding

Company

Investments* /

Investment Company

Distribution of dividends

to the RuParentCo: nowithholding taxes at the

level of Cy.

Distribution of dividends

to the CypHoldCo:subject to low or nowithholding taxes

At the level of Cyprus:

No corporation tax on dividendsreceived;

In most cases no defence taxeither.

* Cyprus serves as an ideal holding company destination especially with regard to investments in:

China

CIS countries

European Union(all 27 countries - applicationof EU Directives)

India

Montenegro

Serbia

South Africa

Ukraine

USA

Cyprus is widely known as one of the most benecial holding company destinations. The exclusion from the Russianblacklist would extend the application of benets of the Cyprus Holding Companies to Russian Companies seeking toinvest abroad.

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7 Outbound dividends


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Cyprus has concluded a wide network of double taxtreaties providing for reduced or even no withholding taxeson income distributed in the form of dividends, interest, or

royalties between the contracting states.

Cyprus, through its domestic legislation, allows in mostcases the tax free treatment of interest income. Morespecically, and in line with the aforementioned, incomingdividends are exempt from Corporate Income Tax as wellas from defence tax, without the need of a minimum of1% participation as in the past. (However, the defence taxexemption may not be granted where both the income ofthe paying company has been taxed at source at a rate

substantially lower than the Cyprus taxes (


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Cyprus Financing Companies (CFCs) are commonly used

in international tax structuring mainly due to the wide rangeof tax related benets they have to offer. The advantagesthat have made Cyprus a favourable Financing Company

jurisdiction for Russian investors are based on two mainreasons:

Firstly, due to the countrys exible tax system; Secondly, the existence of the DDT between Cyprus andRussia which limits withholding taxes;

0% withholding taxon interest paid

Offshore

Jurisdiction

CFC

Russian Co

Loan with interest

Minimum marginfor taxable interest

0.125% - 0.35%

Loan with interest

In line with the above, the use of Cyprus for a FinancingCompany minimises the tax implications which are furtherreinforced by the recent clarications on the denition ofminimum / maximum interest margin.

Following the amendment introduced by Laws 110(I)/2009and 111 (I)/2009, interest income will be subjected toeither a 10% Corporation Tax or 10% Special Defence

Contribution, depending on the companys activities in

relation to the interest income. Thus, no matter of thenature of the interest, the interest will be taxed at a 10%

rate*.

Recently, further clarications were given by the Director ofthe Cyprus Inland Revenue Department with regards to theminimum acceptable margin on back-to back intra grouploans. The minimum interest margin has been determinedbetween 0,125% - 0,35% and it is based on the loanamount as follows:

It should also be noted though that interest free loanagreements would in turn be subject to a deemed interestmargin of 0.35%.

* DTT between Cyprus and Russia claries that no withholding tax is imposed on interest paid from a Russian Co to a Cyprus Co. Relevant stamp dutylegislation must also be looked at.

These deemed margin is used in identifying the basis

of the interest subjected to tax. The above mentioneddeemed interest margin provisions shall apply irrespective

of the loan amount.

Intra - group interest free loans shall be subjected inthis respect under the arms length principle. Using anintermediary Cyprus Financing company for Intra grouploans minimizes the tax luggage carried forward due tominimum margin frames and no withholding taxes oninterest paid are imposed.

It is also extremely important to note that Cyprus hasbeen removed from the black list of the Central Bank of

Russia. The removal effectively enables Russian banksoperating in Cyprus to deposit funds with Cyprus basedbanks without being subjected to them to those negativeterms, conditions and restrictions.

At times of economic downturn several groups are thinkingof ways to utilise funds that are left sitting idle offshorewithout having to repatriate them fully. The above reallypresents a viable way.

Fig. 3

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8 Intra group back- to- back loansthrough Cyprus


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In the suggested structure in Fig 4, a double layer ofCyprus Companies may be used as this may prove to be

benecial in cases of disposal of shares especially further

to the recently signed Protocol. Alternatively, the trustee, inits capacity as a Cyprus tax resident, may sell the Cyprus

Holding Company directly, thus not requiring the use and

incorporation of the Cyprus Investment Company to act asan intermediary.

CITs are entitled to various benets, among which thefact that any transfers of assets from the settlor to the

trust fund would be tax exempt in Cyprus, and also thefact that all trust income derived would be tax exempt inCyprus (given that trust property would be located outsideCyprus). The advantageous provisions under the extensivenetwork of double tax treaties concluded by Cyprus mayhave application to trusts in many cases.

Arguably, the suggested structure from a Russian

perspective is not anticipated to give rise to any

inheritance tax or gift tax at the time of the transfer of the

property from the settlor to the trust. Equally, no incometax or capital gains tax on a deemed disposal basis at

the level of the settlor on the disposal of property by the

trustees may be triggered. The transfer of the assets bythe settlor is not anticipated to trigger VAT given that thesettlor would be a private individual and thus not a VATpayer.

Any tax would only be imposed at the level of thebeneciaries on a remittance basis. The tax rates to beimposed would depend on the type and nature of theincome received.

A trust is a vehicle introduced in countries with a commonlaw tradition which is often used in international taxstructures as a wealth management tool. Cyprus legal

system has been greatly inuenced by English law andin turn by the application of common law and equitableprinciples, mainly due to the fact that it used to be a British

colony up until 1960.

Trusts create a relationship between the settlor, thetrustee, and the beneciaries whereby the settlor transfersthe trust property under the name of the trustees, who arein turn liable to manage the trust property to the benet ofthe beneciaries.

Fig. 4

A Cyprus Trust may obtain the status of a

Cyprus International Trust (CIT) where:

The settlor is a non-resident of Cyprus; At least one, or as the case may be, the majorityof trustees are Cyprus residents;

The beneciaries are non-residents of Cyprus; The trust property is situated outside Cyprus.

Among others, a trust may be useful in cases whereanonymity is a key requirement as well as for successionand inheritance purposes.

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9 An introduction of CyprusInternational Trusts for use in

investments into Russia


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INTRODUCTION

Being a trying time for the world economy and the worldcorporate nance market, the need for tax efcientstructures as well as restructuring options for existingstructures is growing rapidly. As such, in order to derivethe optimum results in such transactions, including

mitigation of risk and taxes, the jurisdiction to be used for

the implementation of such structures would need to becarefully selected.

The use of the Cypriot jurisdiction may indeed turn such

vision into practice. Cyprus reputation in the internationalbusiness world as a leading international business center,rests, among others, to its geographical position, its most

favourable tax infrastructure and modernised legal system,

its stable economy, its well established banking sector andequally its Membership to the European Union.

The EU Membership of Cyprus back in 2004 required theharmonisation of its legislation with the acquis communau-taire and hence led to a revision of the legislation, among

others via the adoption and implementation of a number of

EU Directives, providing for a harmonised and tax efcientregime within the Union.

In line with the above, Cyprus has long developed into akey venue for the worldwide operations of multinationalcompanies, primarily via the use of Cyprus holding com-panies (CHC), being a major vehicle for international taxplanning.

Conventionally and subsequently as a result of its EUmembership, Cyprus has been established as the main

connection of investors to Russia, Central and Eastern

Europe as well as to the European Union.

Dividends paid to overseas benecial owners No withholding taxes (defence tax) based on domesticlaw provisions and irrespective of the possible applicationof EU Directives or Double Tax Treaties.

Dividend income received at the level of the CHC

No Corporate Income Tax;

No Defence Tax (subject to some exceptions)

No or low withholding taxes at source on dividendspaid to the CHC

EU and other non resident subsidiaries application ofthe provisions of the EU Parent-Subsidiary Directive or ofthe Double Tax Treaties concluded by Cyprus eliminate or

reduce the withholding tax burden

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10 The Ultimate Experience

of Cyprus Holding Companies


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Holding companies, classied as tax residents of Cyprus,are, just like all Cyprus resident companies, subject to 10%

Corporate Income Tax on their worldwide income.

Management and Control

In line with the above, residency is determined by whethermanagement and control is exercised in Cyprus, and as

such, the mere incorporation of a company in Cyprus

is not adequate to that extent. Without management

and control being formally dened under the Cypriotlegislation, and based on the application of the EnglishCommon Law principles, management and control is saidto be established where:

The majority of the Directors of the Company areresidents in Cyprus, and

Important Company decisions are taken in Cyprusby the local directors,

The Company maintains real ofces in Cyprus,with distinct telephone/fax lines, domain names,etc. and the employment of professional staff;

The Company has an economic substance, i.e. commercial and economic activities in Cyprus.

Tax free dividends received

Cyprus Holding Companies are widely used due to thefavourable dividend income streams they have to offer.Most importantly, incoming dividends are exempt fromCorporate Income Tax. However, a 15% defence tax maybe imposed on incoming dividends, where BOTH of thefollowing are valid:

more than 50% of the activities of the subsidiary company result in investment / passive income; andthe foreign tax imposed on the income of thesubsidiary company is substantially lower than theCyprus taxes, i.e. under 5%.

Dividend payments between Cyprus resident Companiesare exempt from defence tax.

As evident from the above, specic anti-abuse provisionsare arguably provided for in the form of controlled foreign

corporation (CFC) provisions, which are intended to

prevent the inow of passive income from low taxedjurisdictions into Cypriot Holding Companies, which wouldin turn be converted into exempt dividend income.

In addition, the substance-over-form test is applied, whichis intended to trigger abusive and articial transactions,while at the same time the right of a taxpayer to arrangehis affairs in a tax efcient way is recognised.

Capital Gains on disposal of Securities

Another important advantage of Cyprus is the fact that

capital gains tax is only triggered by gains deriving from

the disposal of immovable property situated within Cyprus

or gains from the disposal of shares in companies in

possession of immovable property situated in Cyprus. Assuch, capital gains deriving from the sale of immovable

property situated outside Cyprus fall outside the scope of

capital gains tax.In line with the above, the disposal of securities is exemptboth under the Cyprus Income Tax Law, as well as underthe Cyprus Capital Gains Tax Law.

The extended list of instruments falling within the denitionof securities increases the competitiveness of the Cypriot

jurisdiction from a tax planning perspective given that the

ability of investors to reduce or even eliminate their tax

liability by the use of a Cyprus holding company in their

structure is further enhanced.

Dividend distributionThe prot after tax of a Cyprus Holding Companyis available for distribution to its shareholders. Thedistribution of dividends to Cyprus resident shareholders

is subject to a 15% defence tax, which is withheld atthe time of distribution. Deemed dividend distributionprovisions apply in cases of prots not distributed withina 2-year period following the end of the tax year in whichthey arose. Accordingly, 70% of the non-distributed protsare taxed at the rate of 15%. Equally, an exemption fromdefence tax is granted to non resident shareholders,

which is also extended to the deemed dividend distribution

provisions.Double Tax Treaty and EU Directives

Apart from the most favourable domestic law provisions,Cyprus Holding Companies may also benet from the widenetwork of Double Tax Treaties Cyprus has concluded,and derive dividend payments from its subsidiaries withlow or no withholding taxes. Equally, the provisions of theEU Parent - Subsidiary Directive have application wherethe Cyprus Company receives dividend income from an

associated company established in another EU-MemberState, thus providing for an elimination of withholding taxesover the dividend distributed.

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Cyprus is considered one of the most tax advantageous

jurisdictions for establishing a holding company, mainly due to

its extensive network of double Tax Treaties combined with itsfavourable tax regime.

With the enactment of its New Tax Legislation effective fromJanuary 1, 2003, Cyprus has put a simplied, effective and

transparent tax system in place that is fully EU and OECD(Organization of Economic Cooperation and Development)compliant.

In addition, the wide number of Double Tax Agreement Networkhas rendered considerable advantages to businesses and

individuals who have chosen to establish legal entities in Cyprus.

Tax treaties legally supersede local tax legislation and for this

reason they are a useful tax-planning tool to protect businessesand individuals against double taxation of income earned in other

countries.

All Double Tax Agreements that Cyprus has entered into include

provisions that explain the right of a contracting state to tax

dividends, interest and royalties, inbound and outbound. Thetable below provides for the extended network of Double TaxTreaties concluded, when Cyprus entities are involved.

New treaties not yet entered into force:

On February 18, 2011 Germany and Cyprus signed a new taxtreaty, which upon entry into force will replace the existing treaty

of 9 May 1974;

On February 27, 2011 new treatysigned between United Arab Emiratesand Cyprus waiting to be ratied.

On June 4, 2009 Cyprus and Italysigned an amending protocol to the

income tax treaty of 24 April 1974 asamended by the 1980 Protocol andExchange of Notes. The protocolentered into force and applies from

November 23 2010.

Amending protocol to treaty betweenRussia and Cyprus was signed onOctober 7, 2010 but did not yet come

into force. Important provision of theamending protocol is the introduction

of a new article on the exchange ofinformation. It is expected that Cypruswill be removed from the Russianblack list as soon as the protocol

becomes effective. On October 5, 2010 Cyprus andKuwait signed a new Tax Treaty thatwaits ratication by both country toenter into force.

On October 12, 2010 Cyprus andDenmark signed a new Tax Treaty thatwill enter into force after ratication byboth countries.

On October 13, 2010 Cyprus andSlovenia signed a new Tax Treaty andonce again pending ratication.

On January 17 2011 Armenia andCyprus signed a new Tax Treaty whichwaits for ratication.

Notes:

*All the treaties refer to those,which have been ratied. Thereare 32 treaties covering 42 countries.The numbers in the brackets refer to the explanatory notes here below.**Under Cyprus tax law, dividends paid to non-resident companies are not subject to withholding tax.*** Application of the Treaty between the Republic of Cyprus and the USSR.**** Application of the protocol of 2009 to the treaty between the Republic of Cyprus and Czechoslovakia.***** Application of the Treaty between the Republic of Cyprus and Yugoslavia.****** The rates of the existing treaty of 1974 between Germany and Cyprus.

1. 5% of the gross amount if the beneficial owner has a holding in the share capital ofthe paying company of at least Euros 200.000; 10% if the beneficial owner holds directlyat least 25% of the share capital of the paying company; 15% in all other cases.2. 10% of the gross amount if recipient is a company with at least 25% direct (also indirectin the case of Belgium) share interest; 15% in all other cases.3. Subject to certain exemptions.4. 5% if beneficial owner is a company which holds directly at least 25% of the capitalof the company paying the dividends; 10% in all other cases.5.Nil if interest is paid or guaranteed by the government of the other state or a statutorybody thereof or to the central bank of the other state.6. These rates shall not apply if at least 25% of the capital of the Cypriot resident is

owned directly or indirectly by the Bulgarian resident (either alone or with other relatedpersons) that is paying the interest of royalties, except when the resident of Cyprus i snot liable to tax which is lower than the usual tax rate.7.Nil if royalties are copyright and other literary, dramatic, musical or artistic work notincluding film or videotape royalties.8.Nil if royalties are on literary, artistic or scientific work including cinematography filmsand films or tapes for television or radio broadcasting.9. 10% if recipient is a company with at least 10% if recipient is a company with at least10% direct share interest; 15% in all other cases.10.5% on cinematography films including television films.

11.10% if recipient is a company with at least 25% direct share interest; 27% if recipientis a company with more than 25% direct or indirect share interest as long as the Germancorporate tax on distributed profits is lower than that on undistributed profits and thedifference between the t wo r ates i s 15% or more; 15% i n all other cases.12.5% on cinematography films not including television films.13.5% if recipient is a company with at least 25% direct share interest; 15% in all other cases.14.Nil if received by a company which controls, directly or indirectly, at least 50% of thevoting power.15.At the rate applicable in accordance with domestic law.16. 5% if the beneficial owner has directly invested in the capital of the company mor ethan the equivalent of US$100.000:10% in all other cases.17.

7% if it is received by a bank or a similar financial institution; 10% in all other cases.Interest paid to the government of the other state, as defined, is exempt from tax.18.Nil if shareholder is a company that holds directly at least 25% of the capital of thecompany paying the dividends; 15% in all other cases.19.15% for any patent trade mark, design or model, plan, secret formula or process orany industrial, commercial, or scientific equipment or for information concerning industrial,commercial or scientific experience.20. 10% of the gross amount if it is received by any finical institution (including aninsurance company) or in connection with the sale on credit of any industrial, commercialor scientific equipment, merchandise; 15% in all other cases. Interest paid to the

government of the other state is exempt from tax.21.5% of the gross amount of the royalties for the use of or the right to use any copyrightof literary, dramatic, musical, artistic or scientific work, including software, cinematographyfilms, or films or tapes used for television or radio broadcasting ; 10% of the gross amountof the royalties received as consideration for the use of, or the right to use industrial,commercial or scientific equipment or for information concerning industrial, commercialor scientific experience; 15% of the gross amount of the royalties received as considerationfor the use of, or the right to use, any patent, trade mark, des ign or model, plan, secretformula or process.22.A resident of Cyprus, other than a company which either alone or together with oneor more associated companies controls directly or indirectly at least 10% of the voting

power, is entitle to a tax credit in respect of the dividend. W here a resident of Cyprusis entitled to a tax credit, tax may also be charged on the aggregate of the cash dividendand the tax credit, tax may also be charged on the aggregate of the cash dividend andtax credit at a rate not exceeding 15%. In this case any excess tax credit is repayable.Where the recipient is not entitled to a tax credit, the cash dividend is exempt from any tax.23.5% if recipient is a company with at least 10% direct share interest; 15% in all other cases.24.5% on cinematography films25. Interest withheld depending whether income is deriving in the ordinary course ofbusiness or not.10% or 15% are charged respectively.26.Royalties charged should not exceed 5%,.

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Cyprus is an EU ofcial member statesince 2004, enjoying ever since full

membership privileges. Extensively,Cyprus can benet from the EU Directivesenacted into the legislation of the country,

permitting immediate implementation of

the following Directives whose analysis isprovided further below:

Parent - Subsidiary directive

Interest & Royalties Directive

Mergers DirectiveTax Savings Directive

Parent - Subsidiary Directive

The EU Parent - Subsidiary Directive aimstowards the elimination of tax obstacleson prot distribution in the EU. It providesfor an exemption on withholding taxes ondividends distributed by the subsidiary

given that a holding of at least 10% exists.

The pre - conditions for the Directiveto apply is a minimum shareholding of

10% (as of 01/01/2009), and a minimum

holding period of 2 years.

Cyprus adopted and fully implemented

the Directive. According to the nationalprovisions, an exemption on withholdingtax on dividends is granted irrespective

of the holding in the subsidiary shares.Cyprus has not applied the minimum 2

years of holding period.

Combining the EU Parent- SubsidiaryDirective and the Cyprus Holding

Company creates an unprecended

combination, which is indeed the ultimate

in Tax effectiveness.

Interest & Royalties

Directive

The purpose of the Interest andRoyalties Directive is the abolition of

withholding taxes on Interest and Royaltypayments in a member state.

The provisions for the applicability of the

Directive is the direct minimum holding

of 25% and member states are given

the option to opt out from applying theDirective in cases wherethis requirement has not been maintained

for an uninterrupted period of at least 2

years.

Cyprus has incorporated the Directive

without imposing any minimumshareholding requirement and minimum

holding period for the applicability of the

Directive.

Mergers Directive

The merger Directive is applicable to

mergers, divisions, partial divisions,

transfers of assets and exchanges of

shares between member states. Underthis Directive, a capital gains exemption is

granted in the difference between the realvalues of assets and liabilities transferred

and their actual values for tax purposes.The signicance of this directive lies uponthe member states which shall guaranteeapplication by all appropriate means thattax exemptions are carried over upon the

transferring of the company.

Tax Savings Directive

The Tax Savings Directive guarantees

that savings income in the form of

interest payments on debt claims, as

encompassed in the taxable income of

individuals who are tax residents in amember state, are effectively taxed. Themean to achieve this is the automatic

exchange of information. It is applicableto interest payments conducted through

a paying agent throughout the EUirrespective of where the issuer of thedebt-claim generating the interest isestablished.

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The Cypriot government revised its current policy

with an ultimate aim to simplify the procedureof applying for a resident permit as well as workpermit for non-EU citizens. The procedure in placewas recently challenged for being too complicated,therefore the government has decided to take the

appropriate action towards this matter.

The newly adopted policy came into effectand ultimately aims at targeting the complexity

of the application procedure, the excessive

documentation required and the unreasonable time

frames for the examination of such applications.Thus, multi-entity visas shall be granted, usually

on the same day without a need to visit the Cyprusembassy to frequent yers and visitors. Cases withhigh complexity shall be examined by a permanent

committee established for such purposes.

In order to obtain the EU Citizenship via Cyprusresidency, the applicant must: Obtain a Category F visa (permanent residencepermit) which is valid for at least 5 years. Purchase a property in Cyprus of at least

300,000 of value and the property must not beused for the production of income.

The minimum annual income (non- CY sourced)of the applicant must be at least 9560 and 4613for each of his/her dependants.

These new arrangements are expected toeliminate obstacles for resident permit application

procedure and establish tidier country relations

among Cyprus and its partners.

Our Tips for youYou can travel easily within Europe via a Cypriotresidency which will ultimately lead to a Cypriot(EU) citizenship.

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13 EU Citizenshipvia Cyprus Residency


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Eurofast is Taxand Cyprus. Taxand provides high quality,integrated tax advice worldwide. Our tax professionals,nearly 400 tax partners and over 2,000 tax advisors in

nearly 50 countriesgrasp both the ne points of tax andthe broader strategic implications, helping you mitigate

risk, manage your tax burden and drive the performance of

your business. Were passionate about tax. We collaborateand share knowledge, capitalising on our collectiveexpertise to provide you with high quality, tailored advicethat helps relieve the pressures associated with makingcomplex tax decisions.Were also independentensuring that you adhere both to

best practice and to tax law and that we remain free fromtime-consuming audit-based conict checks.

The award recognises Tax-ands indirect tax advisory

excellence across Europeincluding Belgium, Cyprus,

Denmark, Finland, France,Germany, Greece, Hungary,

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leading companies, the

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afuent executives.

2009

CyprusTax Firm

of the yearInternational Tax Review

2009Ranked

Tier One TaxTransactional

Practice in CyprusInternational Tax ReviewWorld Finance Magazine

2009

BestInternational

Tax Teamin Cyprus

Mass Media International

2009Best Regional

Business PartnerSouth East

Europe

Best TaxPractice

in Cyprus

2010

European CEOTax & Accountancy Awards

EuropeanIndirect Tax Firm

of the Year:TAXAND

ITR European Awards

2010Ranked


Practice in CyprusInternational Tax Review

2010Ranked


Practice in CyprusInternational Tax Review

2011

Tier -1 Tax Transactional Firm Cyprus 2011. Readers of International Tax Review, which include tax executives frommultinational companies, tax ofcials and advisers voted in an online poll for their top three tax planning and top threetax transactional rms in 51 jurisdictions with Eurofast being Ranked a Tier 1 Tax Transactional Practice in Cyprus.

www.eurofast.eu www.taxand.com

CyprusRussia 17


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cyprus -the new modern hub for investments into russia 2011

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