International Business and Tax Planning

Cyprus as a Regional and Global Gateway

Regional Gateway
Due to its strategic location in the Eastern Mediterranean, the island of Cyprus has always been an attractive location for commerce and business activities. The usefulness of Cyprus as a base for international business is the result of its long history, and a unique blend of influences.

Accession to the European Union has anchored Cyprus to the developed world, and provides an element of political and economic stability to the vibrant business potential of a dynamic region that borders Europe, Russia, Central Asia, the Middle East and even North Africa.

Geography
Located in the North-Eastern corner of the Mediterranean, Cyprus has an area of roughly two thirds the size of the state of Connecticut, or half the area of the country of Belgium. Cyprus is the third largest island in the Mediterranean, after Sicily and Sardinia. The total population is about 800,000. The capital, Nicosia, has a population of approximately 300,000. Greek and Turkish are the official languages, however, English is widely spoken, and is used by professional offices and banks.

Government
Cyprus is an independent Presidential Republic. Executive power is exercised by the Council of Ministers, whose members are directly appointed by the President. The highest legislative body is the House of Representatives, consisting of fifty-nine members elected for a five-year term of office.

Judiciary
The Cypriot legal system is based upon British Common Law. British Case Law is closely followed, and all statutes regulating business matters and procedure are based on British law.

Political Stability – EU Membership
Shortly after its founding in 1960, Cyprus went through a period of political unrest as a result of inter-communal conflict between the Greek and Turkish communities, which are the two main ethnic communities on the island. These events reached a climax in 1974 with a Turkish military intervention. However, for over three decades the island has enjoyed uninterrupted peace, which has encouraged exceptional economic development.

Both the Greek and Turkish communities have declared their determination to reach a peaceful resolution of their dispute.

In April 2004, Cyprus signed the EU Treaty of accession, and became a full member of the European Union. As part of its European integration, Cyprus entered into the Euro-zone on January 1, 2008.

Double Taxation Treaties
Cyprus has a large network of double taxation treaties. Constructive use of this network has rendered considerable advantages to businesses and individuals who have either chosen to establish their business in Cyprus, or included Cyprus in international structures. Currently, Cyprus has signed treaties with over 40 countries (for a full country index please click here);

Telecommunications
Cyprus offers one of the most efficient telecommunication systems in the world, which comprises the following services:

Fully automatic 24-hour direct dial telephone connection with most countries. All other countries can be reached through the operator;
Telegraph service connection with every part of the world; International automatic telex and facsimile service;
Datel service for the transmission of computer data both nationally and internationally over the public telephone network; ISDN and ADSL connections for Internet service;
Radiotelegraph and radiotelephone services with ships at sea on a 24-hour basis;
Automatic telex for ships through the Marisat service (maritime service through satellite);
TV transmission and reception on a 24-hour basis available to news agencies ,television and radio networks, through the Makarios satellite earth station;
International courier service including Datapost operated by the Cyprus Department of Postal Services, DHL, Skypak, and Tradewinds Express, all delivering parcels to Europe and the US within 48-hours from time of collection.

Civil Aviation
Due to its position between three continents, Cyprus’s role as a transit hub for air travel has increased. The travel time from several major European and international business centers to Cyprus are illustrated as follows:

London

4h 30 min

Brussels

4h 00 min

Cairo

1h 15 min

Frankfurt

3h 30 min

Amsterdam

4h 00 min

Zurich

3h 30 min

Moscow

3h 20 min

Vienna

3h 00 min

Athens

1h 20 min

Bahrain

3h 00 min

Tax Regime

The Cypriot tax system was harmonized with that of the EU through a general tax reform that took place in 2002. The features of the Cypriot tax system are especially beneficial to those who want to use Cyprus to locate a holding company, or an international investment fund, as well as to those who would like to use Cyprus as an intermediate for business operations in Central and Eastern Europe, Russia and South East Asia.

Attractive Features for Holding Companies
Cyprus is an especially attractive jurisdiction for holding companies. First, a Cypriot holding company may receive dividends from a foreign operating company free of withholding tax, or at a lower rate of withholding tax, by virtue of the extensive network of double taxation treaties Cyprus has, or in the case of other EU countries, by virtue of the EU Parent-Subsidiary Directive. Second, it permits the Cypriot holding company to enjoy the tax exemption of these dividends; in other words, the Cypriot holding company pays no tax on the dividends. Finally, it allows the Cyprus holding company to pay out dividends, and interest, to non-residents without any withholding tax, or without giving rise to any tax charge. In short, Cyprus law makes it possible in many cases to pass on dividends from a foreign operating company to a Cypriot holding company, or to non-resident shareholders, or a non-resident parent company, without incurring virtually any tax along the way.

International Investment Funds
Some of these same benefits also make Cyprus an ideal location for the establishment of international investment funds, and other collective investment instruments. Profits from the trading of shares and stocks are exempt from income tax. There is no capital gains tax on the disposal of shares listed on any recognized exchange, or on the sale of immovable property held outside Cyprus, nor on the sale of the shares of companies whose property consists of immovable property outside of Cyprus.

Mergers and Acquisitions
Cypriot law creates a very favorable environment for mergers and acquisitions. There are no taxes on the transfer of a business, no taxes on the transfer of assets, no taxes on the exchange of shares, and no stamp duties are payable on documents to effect the merger. Moreover, losses incurred prior to the merger can be carried forward.

Shipping Tax Regime
There is a special tonnage tax regime applicable for ship-owners, charterers and ship managers based in Cyprus. The regime is approved by the European commission and Cyprus is the first EU member state to apply such a regime. The tonnage tax is calculated on the net tonnage of the ship according to a broad range of bands and rates prescribed within the Law. All non-Cyprus shipping operations may, provided certain criteria are met, choose between a corporate tax at 4.25%, or the tonnage tax regime.

Intellectual Property
Cyprus has adopted an Intellectual Property (IP) Regime which provide favorable taxation of a wide range of IP related income. The regime provides for an 80% deduction on income derived from IP rights such as trademarks, patents and copyrights, making the effective tax rate on IP related income 2.5%.

Legal Entities

Limited Liability Companies (LLC)

Partnerships

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International Branches

European Companies (SE)

Limited Liability Companies (LLC)

The Limited Liability Company is the most common of all legal entities used in Cyprus.

Incorporation Procedure

Approval of Name

Application is filed with the Registrar of Companies. Ten business days are required from the date of application, to the date of approval, and approval is subject to regulations of the Registrar concerning misleading or already existing names.

Documents to be filed

Duly executed Memorandum and Articles of Association in Greek, must be filed with the Registrar of Companies.

(i) The Memorandum of Association must contain the following information:

General meetings of the company
Voting rights of members
Appointment and powers of directors
Dividends
Accounts and audit

Share Capital

Standard practice is to authorize share capital of €10,000 divided into 10,000 shares of €1 each and issue 1,000 Shares. Registration fees and stamp duties are payable on authorized capital at the rate of 0.60% plus €105.

Shareholders

The company will originally be set-up with local subscriber(s). The shares will then be transferred to the ultimate beneficial owner(s). If required, Seaward can provide nominee shareholders, who will hold shares in trust for the ultimate beneficial owner(s).

Appointment of Directors

Directors can be either individuals or legal entities. With respect to the proposed directors, disclosure of full name, occupation, residential address and nationality is required. Local directors can be provided by Seaward in the event that, for tax purposes, the company needs to establish that its effective management and control is carried out from Cyprus.

Appointment of a Secretary

The company secretary may be either an individual or a legal entity. A service company is normally provided for this purpose. Local secretaries can be provided by Seaward.

Registered Office

Cypriot companies must maintain a registered office in Cyprus, with a fully updated Register of Members, as well as a record of all directors’ and shareholders’ resolutions, and minutes of directors’ and shareholders’ meetings. In addition, companies must file annual returns with the Registrar of Companies, as well as routinely file any changes of directors, secretary or ownership of the company.

Audited Accounts/Taxation

Companies in Cyprus must also submit audited accounts to the Registrar, and the Cypriot Tax Authority. Companies are also obliged to annually submit a provisional tax declaration with the Tax Authority. The corporation tax arising is payable in three installments: 1st August, 30th September, and 31st December. Failure to pay at least 75% of all taxes due by the last installment will result in penalties. For more information regarding the Cypriot tax regime click here.

Effective Management and Control

Moreover, for the purpose of establishing that Cyprus is in fact the place of effective management of a Cypriot company, it is advisable that decision-making as well as management activities are seen to be performed in Cyprus. To this effect, it is advisable that the majority of the Company’s board members be residents of Cyprus. Furthermore, for ease of administration (filing of annual returns and notices with the Registrar) it is again advisable that the company secretary or the assistant company secretary also be residents of Cyprus.

Incorporation/Timing

Incorporation of a Cypriot company can normally be completed within ten business days of the approval of the proposed name by the Registrar of Companies.

Partnerships

Registration Procedure

The registration of partnerships, whether general or limited, shall be effected by submitting a statement in writing signed by all of the partners to the Registrar of Companies, within one month of the date of its establishment.

The statement should contain the following:

The firms company name
The general nature of the business
The principal place of the business
Names, nationality, place of residency and business occupation of each of the individuals who are partners, and the corporate name and registered or principal office of every corporation which is a partner
The term, if any, for which the partnership is entered into, and the date of its commencement
A statement, if such is the case, that the partnership is limited
The sum contributed by each limited partner and whether paid in cash, or how it is otherwise paid
The names of the general partners who are authorized to administer the affairs of the partnership
Every partnership must keep books of accounts. Partnerships engaged in any retail trade in which it would be a hardship or against the usual custom of the trade to keep accurate books, may be excused from this requirement

General Partnership

A general partnership is defined as a relationship which subsists between persons carrying on a business in common with the view of profit. However, the relation between the members of any company or association which is:

Registered as a company under any Law relating to the registration of Limited Liability Companies
–or–
Formed or incorporated by or in pursuance of any Law,

is not considered a partnership under Cyprus Law.

A general partnership may have between 2 and 20 individual members (up to 10 only, if it intends to conduct banking activities). Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he/she is a partner. In the event the partner dies, his estate is severally liable in a due course of administration for such debts and obligations.

Limited Partnerships

A limited partnership must be registered to avoid being deemed as a general partnership. A limited partnership must consist of one or more persons called general partners, who are liable for all debts and obligations of the firm, and one or more persons to be called limited partners, who shall not be liable for the debts or obligations of the firm beyond the amount that they have contributed. A limited partner shall not take part in the management of the partnership business, and shall not have the power to bind the firm.

Advantages of Partnerships

A special advantage of partnerships worth noting is that the profits of the partnership are not taxable, either in the partnership or through the partners. The disadvantage of unlimited liability may be overcome by establishing a limited partnership with a corporation as the unlimited partner, or by having a partnership of two or more corporations.

International Branches

Registration Procedure

The following documents must be delivered to the Registrar of Companies after the exchange control permit has been granted, and within one month from the establishment of a local place of business:

A certified copy of the charter, statutes or memorandum and articles of association of the company, translated into Greek;
A list of the directors and secretary;
The name of one or more persons resident in Cyprus (Cypriots or non-Cypriots) who are authorized to accept service of process on the company;
Annual accounts of the overseas company must be filed annually with the Registrar, and translated into Greek.

Advantages of Registering a Foreign Branch

A foreign branch registered in Cyprus can enjoy all the advantages extended to all Cyprus legal entities. However, whenever the management and control of the business of the international branch is not in Cyprus, the profits of the branch are exempt from all taxes. If the management and control of the business of the international branch is in Cyprus, then the profits of the branch are subject to a tax rate of 10%. Every overseas company that maintains a branch in Cyprus must deliver copies of financial accounts, directors’ reports and auditors’ reports to the registrar of companies every financial year. Companies located in EU member states are subject to exemption from this requirement.

European Companies (Societas Europaea “SE”)

Under Council Regulation (EC) No 2157/2001, companies incorporated in one Member State may have the option to merge, form a holding company or form a joint subsidiary, while avoiding the legal and practical constraints arising from the existence of different European legal systems.

Nature of an SE

An SE is regarded as a Public Limited Liability Company governed by the laws of the Member State in which it has its registered office. An SE may also set-up one or more subsidiaries in the form of SEs.

Share Capital

The capital of an SE shall be expressed in Euro, and the subscribed capital shall not be less than €120,000. The laws of a Member State requiring a greater subscribed capital for companies carrying on certain types of activity, shall apply to SEs with registered offices in that Member State.

Registered Office

The registered office of an SE shall be located in the same Member State as its head office. A Member State may, in addition, impose on SEs registered in its territory the obligation of locating their head office, and their registered office, in the same place. The registered office of an SE, may be transferred to another Member State which does not result in the winding up of the SE or in the creation of a new legal person.

Formation

There are four ways of incorporating an SE:

Merger

Public limited liability companies, formed under the laws of a Member State, with registered offices, and head offices within the EU may form an SE by means of a merger, provided that at least two of the companies are governed by the laws of different Member States. In the case of a merger by acquisition, the acquiring company shall take the form of an SE. In the case of a merger by the formation of a new company, the new company shall be the SE.

Holding SE

Public and private limited liability companies formed under the law of a Member State, with registered offices and head offices within the EU may promote the formation of a holding SE, provided that each of at least two of the companies:

- is governed by the law of a different Member State, or
- has for at least two years had a subsidiary company governed by the law of another Member State, or a branch situated in another Member State.

For each of the companies promoting the operation, the draft terms for the formation of the holding SE shall be publicized in the manner laid down in each Member State’s national law.

Subsidiary

Companies and firms formed under the law of a Member State, with registered offices and head offices within the Community may form a subsidiary SE by subscribing for its shares, provided that each of at least two of the companies:

- is governed by the law of a different Member State; or
- has for at least two years had a subsidiary company governed by the law of another Member State, or a branch situated in another Member State.

Companies, firms and other legal entities participating in such an operation shall be subject to the provisions governing their participation in the formation of a subsidiary in the form of a public limited liability company under national law.

Conversion

A public limited liability company, formed under the law of a Member State, which has its registered office, and head office within the EU may be transformed into an SE if, for at least two years, it has had a subsidiary company governed by the law of another Member State.

Taxation

An SE registered in Cyprus is taxed just like any other entity.

International Trusts

Legal Framework

Trusts formed in Cyprus are governed by the Trustees Law, Cap. 193, which is based on the English law of trusts. The English Common Law and equity rules are also applicable.

International Trusts are regulated by the International Trusts Law 69(I)/92. The legislation is of particular importance to international business companies, and to international business partnerships amongst others, who may wish to take advantage of the benefits made possible by the trust regime.

By definition, a Cypriot, and/or a permanent resident of Cyprus, cannot set-up an international trust, as defined in the Law. However, international investors, or non-permanent residents in Cyprus, who wish to set-up a trust in Cyprus, enjoy substantial tax benefits, and flexibility in the management of their assets.

Conditions for the set-up of an International Trust

The settlor cannot be a permanent resident of Cyprus (nb: the settlor may be a partnership or a company
At least one of the trustees must be a permanent resident of Cyprus, for the whole duration of the trust’s life
No beneficiary, with the sole exception of a charitable institution, may be a permanent resident of Cyprus
The property of the trust must not include any immovable property situated in Cyprus.

By way of illustration…

By way of illustration, one can consider a company that is both the trustee and the beneficiary of the trust, and where the settlor is the sole owner of the company’s shares, as well as its sole director. Property held by such a company as trustee would be exempt from estate duty, and would be safe from law suits against the settlor, bankruptcy, expropriation, or settlor’s business risks. Similarly, proceeds from the Trusts activities would be tax exempt

No Exchange Control

Cyprus trusts are not subject to exchange control. Bank deposits with Cyprus banks, either onshore or offshore, are also not subject to exchange control. The absence of exchange control restrictions, and the availability of excellent communication and international banking services, makes Cyprus a convenient base for the remittance and transfer of funds.

Management Services

The existence of a number of reputable international fund management companies in Cyprus, combined with the high standing of the legal and accounting professions, ensure the availability of expert advice, as well as the competent management services required for the operation of a trust.

Confidentiality

There are no registrations or reporting requirements for trusts established in Cyprus, nor are the names of the trust or of the persons referred to in the trust deed, disclosed.

Removal from the Jurisdiction

Cyprus Law allows for the removal of a trust from its jurisdiction, hereby providing for the necessary flexibility, in cases where ,a change of circumstances may mean that such transfers would be advantageous, for fiscal, or other reasons.

Taxation

The income and gains of an international trust derived, or deemed to be derived, from sources outside Cyprus are exempt from tax in Cyprus and no estate duty shall be chargeable in respect of assets belonging to an international trust.

Stamp Duty

The creation of an international trust is liable to stamp duty at a fixed rate of €427.15

Types of Trusts in Cyprus

Discretionary Trust

Under this trust, the trustees have a general discretion over the amount of benefits, and the manner by which the beneficiaries might enjoy such benefits. The beneficiaries may be defined according to name or reference to a class (i.e. the settlor’s children) or simply left to the full discretion of the trustees. Usually, the settlor indicates to the trustees his wishes for the disposal of the trust property by means of a letter of wishes.

Should the settlor wish to give a more positive guidance than relying on a Letter of Wishes, it is possible to include a third party in the trust deed known as the “protector” or “nominator”. The protector’s role is to prevent the trustees from exercising their discretion in certain circumstances. The trustees will usually exercise their discretion with the prior consent of the protector or nominator.

Fixed Trust

Under a fixed trust, the trustees have no discretion in distributing the trust assets to the beneficiaries. For example, under such a trust the trustees are directed to distribute the income to a designated individual for a fixed period of time, and thereafter, distribute the capital of the trust to a specific beneficiary or beneficiaries.

Fixed and Discretionary Trust

This type of trust gives discretion to the trustees over the distribution of income for a period of time. However, they may be required to distribute the income to a specified individual or individuals, in fixed amounts, while maintaining discretion over the distribution of the capital amongst a class of beneficiaries.

Protective Trust

This trust is appropriate when a beneficiary is given a life interest, which may become discretionary on certain defined events, such as the bankruptcy of the beneficiary.

Declaration of Trust

This is a variation of the discretionary trust in which the settlor is not named in the trust deed, and the trustees declare that they hold the assets which were transferred to them on trust. In such a case, the trustees accept a letter of wishes.

Trading Trust

Under this trust, the trustee is usually a limited liability company which has powers to carry on business, and the trust has trading functions and employees to manage its business. Since all documentation used is in the name of the trust company, third parties are not aware of the existence of the trust.

Purpose Trust

A purpose trust, is a trust other than (a) a trust with beneficiaries, certain individual or legal persons, readily ascertainable or not and (b) a trust with beneficiaries, the whole of certain individuals or legal persons, which are ascertainable with reference to some personal relation or affinity. This type of trust can be a useful adjunct to international corporate planning, and can be used to accumulate corporate earnings for general corporate purposes, rather than for a defined group of individuals.