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A gateway to the booming Asian market

Contributed by Fiducenter (Cyprus) Ltd
02 August, 2012


Contributed by Fiducenter (Cyprus) Ltd [www.fiducenter.com.cy]

Introduction

Considering that the markets of Asian countries, headed by China and India, are going against the current negative market trend in the rest of the world, the appetite of western firms to explore the potential of these markets is ever growing. We will examine in this article how Cyprus can assist in ensuring that the investment of these firms in Asia is done in the most effective and flexible way, while allowing for the optimization of after tax returns.

In the past the use of Cyprus in commercial operations was mainly through agency structures, where the Cypriot company was basically subcontracting its operations to another entity, which depending on the set-up was either the “main” company of the group (the one actually carrying out the activities) or an entity based in an offshore jurisdiction.

However, the Corporation Tax rate of 10%, together with some other advantages Cyprus has to offer, as analysed below, provide a first class opportunity to work on a fully operational (or substantive) basis thus avoiding any disputes as to the role of the company in a structure. Considering the ever heavier fiscal requirements (including Controlled Foreign Companies – CFC regulations) worldwide as well as the advantages Cyprus has to offer, the fully operational basis is regarded as a more rational and beneficial solution than the agency structure, and will thus be the focus of the analysis below.

Advantages of using Cyprus for commercial operations

In addition to the Corporation Tax rate, which is the lowest in the European Union and is a flat rate irrespective of type and level of income (which is usually not the case in other traditional financial centers), Cyprus has the following main advantages to offer for commercial companies:

  • its membership to the European Union, which in combination with its strategic geographical position render Cyprus as a gateway for booming manufacturing countries such as China and India to enter the EU and vice versa for European and other countries to expand their operations to the Far East;
  •  the absence of any Withholding Tax for payments of dividends to non-Cyprus residents;
  • the excellent telecommunications and other infrastructure available in the island, which, together with the business-friendly time zone, eliminates the barrier of distance in carrying out commercial activities from Cyprus;
  • the well educated, skilled and multilingual workforce of the country;
  • the extensive network of Double Tax Treaties Cyprus has signed with countries from every part of the world with beneficial provisions related not only to corporate but also to personal taxation aspects;
  • the high quality of professional services offered in Cyprus.

In the tables below you can find a summary of the most important tax advantages of using Cyprus in international business structures.

 

Tax Benefits

lowest rate of Corporation Tax in EU at 10%;

extensive double tax treaties network;

exemption from Corporation Tax on dividend received;

exemption from tax of profit on disposal of securities;

no withholding tax on dividends, interest and royalties (the latter for rights used outside the country) and dividends paid to non-residents;

unrestricted access to EU directives;

no Controlled Foreign Corporation legislation;

no Thin Capitalization requirements;

no Inheritance Tax;

no Net Wealth Tax;

no tax on Permanent Establishments of a resident company abroad under certain conditions.

included in OECD White List

 

Other Benefits

strategic geographical position, in the crossroad of three continents and business-friendly time zone

member of the EU since 2004

pro-business government approach

classified by IMF as one of the 33 advanced economies in the world in 2010

98% literacy rate and higher rate of university graduates in EU

high quality of life and low crime rate

stable and comprehensive legal system

first rate infrastructure

 

All the above advantages, and many other, mean that operating through Cyprus and using appropriate tax planning/structuring to mitigate Cyprus tax, sometimes to effective levels well below 10%, is nowadays a far superior strategy than trading through an offshore company registered in a tax haven.

Commercial Activities

Cyprus companies, can be used for the invoicing / re-invoicing of goods and services (as well as for the receipt of trading commissions) from any country to any destination and for transit trade activities in combination with the operation of bonded warehouses, bonded factories and free trade zones.

Furthermore, Cyprus companies may provide services such as marketing, accounting, provision of labour – executive staff, consulting, market research, commission agency, intermediation, client introduction and many others. They may employ expatriate staff (relocated from the main company), who benefit from double tax treaty provisions, by paying tax and social insurance in Cyprus at low rates, thus avoiding perhaps much higher tax rates in their home country.

Substance

As mentioned at the beginning of this article, commercial companies present a peculiarity in terms of the quantity and extent of the resources required for carrying out their operations. This peculiarity is known as “substance” and is usually translated in to:

  • own employee/s (i.e. the company is registered with the Social Security as an employer)
  • office space
  • telephone and fax line
  • email address
  • website

 

It should be stressed that whatever the qualification of the employee/s, some real work which adds value to the company must be performed from Cyprus. This also has the advantage of reducing some of the costs currently incurred elsewhere in the group (in case of structures with existing operations, which is usually the case), since some of the work will be done in Cyprus.

A trading company having all or some of the above factors implemented, will not only enhance its substance but will also strengthen beyond any doubt its Cyprus tax residency claim.

It is imperative that the establishment and maintenance of a substance structure will increase the overall cost of a Cyprus company but the benefits stemming out of it, as presented above, far outstrip this extra burden. Furthermore, there are various ways in which the cost of the “substance” factors outlined above can be kept at a minimum, including use of part-time employees, business-center facilities, etc.

VAT

Depending on its activities a commercial company will also have to register for VAT. The VAT Authorities require supporting documentation evidencing the trading nature of the company’s activities before proceeding to the registration. Indeed VAT can be a significant reason for including Cyprus in international business structures since it has one of the lowest permissible standard VAT rates in the EU at 17%.

The way forward

The global trend related to commercial companies seems clearly to be gaining ground in Cyprus as well, involving establishment of a fully operational commercial set-up with offices, staff and qualified managers, doing real work from Cyprus. The efforts actually undertaken by all European and other countries to act against “virtual” set-ups will make life for such arrangements (also known as “empty box”, “letterbox”, “registered office” etc.) more and more difficult.

 

George Savvides

Partner

george.savvides@fiducenter.com.cy

www.fiducenter.com.cy

Phone: 357 25 50 40 00 Fax: 357 25 50 41 00

 

© Fiducenter (Cyprus) Ltd

All rights reserved.

No part of this publication may be reproduced, sorted in a retrieval system, or transmitted, in any form or by means, electronic, mechanical, photocopying, recording or otherwise, without the prior written consent of Fiducenter (Cyprus) Ltd.

The information provided in this publication does not constitute legal, tax or investment advice and no responsibility is accepted for any loss occasioned directly or indirectly as a result of persons acting, or refraining from acting, wholly or partially in reliance upon it.




 


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