leading tax advice in cyprus... and across the world cross border transactions via cyprus case...

Leading Tax Advice in Cyprus... and across the World

Cross Border transactionsvia Cyprus

Case analysisPrague, 17th June 2010

Agenda• Tax planning and the use of Cyprus in cross

border transactions

• Practical examples– Cyprus Trading Companies

– International Collective Investment Schemes

– Cyprus Holding/ Real Estate Companies

– Cyprus Financing Companies

– Cyprus International Trusts

Leading Tax Advice in Cyprus... and across the World www.eurofast.eu

Tax planning and the use of Cyprus in cross border transactions

• The beneficial tax & legal regime of Cyprus supports the use of Cyprus companies in international structures

• Cyprus companies may be utilised for any purpose in the course of business

• Most commonly Cyprus Companies are used as:– Cyprus Holding Companies– Cyprus Trading Companies– Cyprus Financing Companies– Cyprus Royalty Companies– Special Purpose Vehicles– Investment Vehicles


Cyprus Trading Company

EU/Non EU Czech Republic

Cyprus Company

Purchase of goods and/or services

Sale of goods and/or services

Cyprus•Realized business profits taxable with 10%

•Profits accumulated can be distributed to the holding company and non-resident shareholders by way of dividends with no WHT

•Companies with trading activities require VAT registration • No transfer pricing regulations; arm’s length principle applies

Fig: 1


International Collective Investment Schemes • Purpose:

The collective investment of funds of the unit holders

• Who can benefit from the use of ICIS?– Investment firms– Fund managers– High net worth individuals – Financial services companies– Investment firms

• Why?– Accumulate funds for RE investments (Central & S.E. Europe, Russia,

Ukraine, India, etc.)– Accumulate funds for investments in securities– Etc.


Investments via Cypriot International Collective Investment Schemes

Cyprus ICIS

Accounting and assets

calculations inCyprus

Cy Resident

RussiaUkraine

ChinaIndia

Balkans LatinAmerica

CentralEasternEurope

Investments in RE Cos, Securities, bonds, shares, debentures,

other investments

Cyprus:- Generally no tax on dividends- Tax treaty network

Dividends interestroyaltiesNo/low WHT

independent

MiddleEast

ProfessionalTrustee

Cy Resident

Funds

Manager (Cy

resident)

No WHT on distributions of dividends, interest, royalties (rights outside Cyprus)

•Int’l Unit Trusts•fixed capital co.

•variable capital co.•limited partnership

Investors

International Financial Services

and Collective Investment Funds


Ordinary shares, Founder’s Shares, Preference Shares, Option on titles, Debentures , Bonds, Short positions on titles, Futures and forward titles, Swap on titles, Depositary receipts on titles – ADR + GDR, Rights of claim on bonds and debentures, Repurchase agreements or Repos on titles,

Participation / shares in companies like Russian OOO, OAO and ZAO, the American LLC provided (taxed on their profits), the Romanian SE and SRL and the Bulgarian AD and OOD,

Units in both, open and closed end collective investment schemes founded, registered and are operating according to the provision of the specific and relevant legislation of the country in which they have been founded and Index participations only if they (result on) represent titles

• Cyprus: profits deriving from the disposal of securities are exempt from taxation.

Definition of ‘securities’

• The term ‘securities’ has been extended to include:


Direct investments in and exit from the Czech MarketBVI

Cyprus Company

Czech Republic

Capital Gains

Fig: 3

• CypCo invests in CZ Real Estate via a CZ real estate company

• EXIT ROUTE– direct sale of CZ property by a CZ Co

• Gains taxed in accordance with the CZ legislation (generally subject to 19% CIT)

– CZ Co profits distributed as a dividend to the CypHoldCo• CZ tax treatment:

– Dividend distribution:» 0% WHT assuming 100% holding

• Cyprus tax treatment:– Incoming Dividends:

» Exempt from CIT» Exempt from SDCF (assumption: CZ Co

is taxed at 19% CIT)

– CypCo profits distributed as a dividend to the BVI Company• Cyprus tax treatment

– Outgoing Dividends:» No WHT


Investing in Real Estate

Disposal of Shares of Czech Co

BVI

Cyprus Company

Czech Republic

Capital Gains

Fig: 4

• Direct disposal of immovable property implies a substantial tax leakage

• ALTERNATIVE EXIT ROUTE– Indirect sale of immovable property –

disposal of Czech Co shares• DTT provisions apply:

– Gains arising in Cyprus from the disposal of CZ real estate Co shares may be taxed in CZ

» 19% CIT in CZ– Distribution of dividends

» 0% WHT in CZ assuming a 100% participation by the CypCo

– Cyprus tax treatment:• Capital Gains

– Exempt from tax in Cyprus

• Incoming Dividends:– Exempt from CIT– Exempt from SDCF (assumption: CZ Co is

taxed at 19% CIT)

• CypCo profits distributed as a dividend to the BVI Company

– Outgoing Dividends:» No WHT



Indirect Acquisition in and Exit from the Czech Market

Fig: 5

Sale of Cyprus Subsidiary Co

• Transaction taking place only at the level of Cyprus– Only subject to tax in Cyprus

• Gains on the disposal of shares of the CypSubCo:– No capital gains– No corporate income tax

• Outbound Dividends:– No WHT (defence tax) assuming

payment to non-resident UBO or resident/non-resident company

Cypriot Holding Company

Cypriot Subsidiary Company

Czech Republic Company

B.O

Capital Gains



• Cyprus Financing Company– Financing of group companies by

way of debt or working capital;– Efficient accumulation of interest

income.

• Cyprus Law– Interest income received from

intra-group lending - 10% CIT;– No thin cap rules / no debt-to-

equity restrictions;– No specific TP legislation, the

arm’s length principle applies;– Interest paid to non-resident

creditors is not subject to WHTs.

• Back-to-back financing– Minimum interest margin / spread

of 0.125 – 0.35% accepted.

Fig. 1

Back-to-back financing structuresFig: 6

Cyprus Holding Company

Cyprus Financing Co

Czech Republic Company

Interest

Interest

Loan

Taxable interest income

Loan


• Advantages of CITs:

All income derived would be tax exempt in Cyprus given that trust property is located outside Cyprus;

The advantageous provisions under the extensive network of double tax treaties may have application in certain cases.


Cyprus International Trust

• Using a Cyprus International Trust: No inheritance tax or gift tax on

the transfer of the property of the settlor to the trust;

No income tax or capital gains tax on a deemed disposal basis at the level of the settlor;

No VAT on the transfer of the assets by the settlor (private individual & not a VAT payer);

Tax imposed at the level of the beneficiaries on a remittance basis (depending on the type of income).

• Alternative trust jurisdictions to Cyprus may be used

Fig. 1 The use of a CIT

Cyprus Holding CoCyprus Holding Co

Cyprus Subsidiary CoCyprus Subsidiary Co

Czech CoCzech Co

TrustTrust


Thank you!


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