Cyprus has been established as the main connector of investors to India, Russia, Central and Eastern Europe as well as the European Union. The key factor in favour of the Cypriot jurisdiction is its tax regime. In line with the above, its advantageous tax system, extensive network of double tax treaties concluded and EU membership place Cyprus in the lead for international structures. The island, imposes a favourable Corporate Income Tax rate of 10 percent on the worldwide income of Cyprus companies. Important exemption from corporate income tax such as dividend income and gains deriving from the disposal of securities enhance even further the competitiveness of Cyprus in the international arena.
Notwithstanding the above, the amendments to its legislation and respectively the elimination of the participation requirement leading to the tax relief from defense tax, expands the competitiveness of the jurisdiction further to portfolio investors. Refusal of the application of the relief may be enforced where both more than 50 percent of the activities of the subsidiary company result in investment / passive income; and the foreign tax imposed on the income of the subsidiary company is substantially lower that the Cyprus taxes, i.e. under five percent; in which case a 15 percent defense tax is applied.
Moreover, the domestic legislation of Cyprus is structured so as not to impose any withholding taxes on dividend and interest payments to non-resident shareholders and creditors respectively. Royalty payments are neither subject to withholding taxes unless they relate to rights exercised in Cyprus. Considering the aforementioned, the EU Parent – Subsidiary Directive and Interest and Royalties Directive have an extended scope of application in Cyprus.
From an interest income perspective, tax is capped at 10 percent, either in the form of Income Tax (allowable expenses are deducted) or Special Contribution to the Defense, depending on the nature of the said interest income; interest income derived in ordinary course of business or closely connected to the ordinary course of business of a company, is ultimately treated as income and solely subject to 10 percent income tax, whereas other income is only subject to special contribution to the defense at the rate of 10 percent.
Royalty income falls within the scope of corporation tax and is respectively taxed at the rate of 10 percent, whereas gains deriving from the sale of intellectual property may be exempt from tax.
Equally, 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.
Last but not least, Cyprus has incorporated and fully implemented the provisions of the EU Merger Directive, which is another valuable tool for domestic, cross-border and international reorganisations.
Benefits of the EU merger directive
The current economic crisis facing the world today constitutes a great threat to the business world and to the surviving capability of many firms. A number of firms are at the edge of bankruptcy due to this downturn, while most of those that remain above this level need to increase their profitability in order to secure their success for the coming years.
Such extraordinary challenges faced by the global economy, increase the need for added tax efficiency. Accordingly, there are a number of instruments available to groups of companies, especially to those based within the European Union, aiming to that direction.
The tendency of groups of companies to move towards company reorganisations, whether internally or otherwise is increasing rapidly. As such, the use of the Cypriot jurisdiction may prove to be most favourable, due to the tax neutral reorganisation provisions incorporated under the domestic laws of Cyprus, which are in line with the EU Merger Directive. Investment opportunities for companies with sufficient cash flow are available. The lack of liquidity forces companies towards reorganisations, whether in the form of mergers or acquisitions.
Mergers and acquisitions
A French Company is interested in directly investing in Real Estate in Bulgaria. A Cypriot holding company with investments in Bulgarian real estate (via a Bulgarian company), is facing certain liquidity constrains. From the French company’s perspective, this is seen as an immense investment opportunity, given that the downfall of the global economy in general will enable it to merge with the Cypriot company and as a result participate, along with the shareholders of the Cyprus company in the Bulgarian real estate investments.
The direct sale of part of the participation in the Bulgarian company by the Cypriot company to the French company would create a significant tax liability, assuming that despite the financial turn down the value of the Real Estate and in turn the value of the Bulgarian company has increased over time.
The potential merger mentioned above hereto would entail that the Cyprus company, on being dissolved without going into liquidation, transfers all of its assets and liabilities to the French company. As a result of this merger, and in consideration of such transfers, the shareholders of the Cyprus company obtain shares in the share capital of the French company. Subject to the condition that no cash contribution can be made in excess of 10 percent of the nominal value or, in the absence of a nominal value, of the accounting value of the shares, such merger will not give rise to any Cyprus taxes.
Existing Cypriot legislation, in line with the application of the EU Merger Directive throughout the European member states, enables cross border tax neutral reorganisations between companies established within the European Union.
The EU Merger Directive is targeting at increasing the efficiency and effectiveness of such reorganisations, which may take the form of mergers, divisions, partial divisions, transfers of assets, exchange of shares and transfer of registered office.
Tax benefits
– Reorganisation profits are exempt from Corporate Income Tax.
– The receiving company may deduct from its future profits possible losses of the transferring company.
– Capital Gains Tax exemption on profits deriving from the transfer of immovable assets
in the course of reorganisation.
– Stamp Duty exemption on agreements concluded for reorganisation purposes.
– Transfer fees exemption on the transfer of immovable assets in the course of reorganisation.
– Mortgage fees exemption when transferring mortgaged property from a company to another in the course of reorganisation.
For more information tel: +357 22699222; email: sophie.stylianou@eurofast.net; www.eurofast.net
