There
are many benefits for foreign investors using Cyprus
to carry out commercial activities. A fully operational
basis provides a more rational and beneficial solution
than the traditional agency structure.
In
the past, the use of Cyprus in commercial operations
was mainly through agency structures, whereby the Cypriot
company would basically subcontract 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,
thanks to a Corporation Tax rate of 10% and various
other advantages that Cyprus has to offer, companies
now have a first-class opportunity to work on a fully
operational (or substantive) basis, thus avoiding any
disputes as to the role of the company within a structure.
Considering the ever-heavier fiscal requirements, including
Controlled Foreign Companies (CFC) regulations worldwide,
the fully operational basis is regarded as a more rational
and beneficial solution than the agency structure.
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 (this is not usually the
case in other traditional financial centres), Cyprus
offers the following main advantages to offer commercial
companies:
- its
membership of the European Union which, in combination
with its strategic geographical position, makes Cyprus
a gateway to the booming manufacturing countries such
as China and India via which they may 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, irrespective of
the country in which the shareholder is based and
irrespective of the legal form of that shareholder;
- the
island’s excellent telecommunications and other
infrastructure which, together with the business-friendly
time zone, eliminate the barrier of distance in carrying
out commercial activities from Cyprus;
- the
country’s well-educated, skilled and multilingual
workforce, which means that there is an abundance
of talent available to service the needs of such structures;
- the
extensive network of double tax treaties that Cyprus
has signed with countries from every part of the world
with beneficial provisions relating not only to corporate
but also to personal taxation;
- the
high quality of professional advisers which can provide
a sound background of support services, such as banking,
audit, and legal.
Thanks
to these and many other advantages, operating through
Cyprus and using appropriate tax planning/structuring
to mitigate Cyprus tax (sometimes to effective levels
well below 10%) is a far better strategy nowadays than
trading through an offshore company registered in a
tax haven.
Depending
on its activities, a commercial company also needs to
register for VAT. The VAT Authorities require supporting
documentation indicating the trading nature of the company’s
activities before proceeding with registration. Indeed,
VAT may be another significant reason for including
Cyprus in international business structures since it
applies the lowest permissible standard VAT rate in
the EU (15%).
Cyprus
companies can be used for the invoicing/re-invoicing
of goods and services (and 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, executive staff, consultancy, market research,
commission agency services, intermediation, client introduction
and many more. They may employ expatriate staff (relocated
from the main company) who benefit from double tax treaty
provisions by paying tax and social insurance at low
rates in Cyprus and thus avoiding possibly far higher
tax rates in their home country.
‘Substance’
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 usually means that a company has:
- its
own employee/s (i.e. the company is registered with
the Department of Social Insurance as an employer)
- its
own office space
- a
telephone and fax line
- an
e-mail address
- a
website
It
should be stressed that whatever the qualifications
of the employee/s, real work which adds value to the
company must be performed from Cyprus. This also has
the advantage of reducing some of the costs incurred
elsewhere in the group since some of the work will be
done in Cyprus.
A
trading company which implements all or some of the
above will not only enhance its ‘substance’
but will also strengthen its Cyprus tax residency claim
beyond any doubt.
The
establishment and maintenance of a substance structure
will undoubtedly increase the overall cost of a Cyprus
company but the resulting benefits 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 centre facilities,
etc.
Efforts
currently being undertaken by all European and other
countries against ‘virtual’ set-ups will
make life for such arrangements (also known as ‘empty
box’, ‘letterbox’, ‘registered
office’, etc.) increasingly difficult.
In
its ruling on the well-known Cadbury case (Cadbury Schweppes
Plc and Cadbury Schweppes Overseas Ltd v Commissioners
of Inland Revenue), the European Court of Justice decided
that the application of UK’s Controlled Foreign
Companies (CFC) legislation, which required the inclusion
of profits of Irish subsidiaries of Cadbury Schweppes
Plc to its taxable base in the UK, constituted a restriction
on the freedom of establishment. The cornerstone of
the decision was the fact that added-value work was
being carried out by the company’s Irish subsidiaries.
The Court further ruled that such a restriction is justified
only in relation to ‘wholly artificial arrangements
which do not reflect economic reality’. In defining
such ‘artificial arrangements’, the Court
pointed to a ‘letterbox’ or ‘front’
company as an example, and indicated that objective
evidence about premises, staff and equipment should
be requested in order for an arrangement to be justified
as real or non-artificial.
The
global trend as regards commercial companies, involving
the establishment of a fully operational commercial
set-up with offices, staff and qualified managers doing
real work clearly seems to be gaining ground in Cyprus
too.
Fiducenter
is an independent provider of corporate and domiciliation
services, with Luxembourg origins and more than 30 years
of existence. It has offices in Luxembourg (head office),
Cyprus and a recently opened office in Singapore. Fiducenter
offers corporate and fiduciary services, as well as
tax, legal and financial advice and planning, asset
management, accounting, tax and VAT registration and
administration, business centre services and other.
For
more information visit www.fiducenter.com.cy,
or e-mail fiducenter@fiducenter.com.cy
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