Nicosia, 27 June 2008 – Cyprus is one of the most advantageous places of residency for Russian and Ukrainian companies. It offers a high level of banking, auditing, accounting and legal services, as well as its real estates, which developed Cyprus into a successful international business and financial centre.
Some of the main factors and advantages which secure Cyprus ‘ attractiveness to international businesses and investments are the following:
1. 10% corporate tax rate for business profits;
2. No withholding taxes imposed on dividends, interest and royalties for non-residents (whether a company or an individual);
3. Income from dividends is exempt from income or corporation tax;
4. The attractive platform and tax regime that Cyprus provides for a holding company (i.e. subject to certain conditions full exemption from local taxation in respect of dividends received by a holding company from its local and foreign subsidiaries);
5. The attractive platform and tax regime that Cyprus provides for international trusts;
6. The network of favorable double taxation treaties that Cyprus maintains with more than 40 countries including Russia and most of the ex Soviet Union Republics;
7. Tax advantages available to non-residents including non – E.U. residents;
8. Cypriot tax regime permits losses to be carried forward indefinitely;
9. The geographic location of Cyprus, located at the crossroads of Europe, Asia and Africa;
One of the mentioned above factors is a double taxation treaty between Russia and Cyprus, which provides to Russians many tax advantages. Agreement was signed between Russia and Cyprus for the avoidance of double taxation with respect to taxes on income and capital, back on 17 August 1999. The treaty provides for either the exemption of income in the source country or the provision of tax credit in respect of the foreign tax paid by the country of tax residence.
Usually, Russian companies would pay 35 percent tax on profits, plus a 20 percent VAT tax, and a 40 percent tax for social security and employee benefits, in Russia. However, when Russian business is structured in a way that a Cyprus company owns it (which does not require any physical presence in Russia), all its profits will be legally transferred to Cyprus and is liable for only a 4.5 percent tax on profits and a 15 percent VAT tax. Russian business escapes the 40 percent tax for social services, accordingly. This tax advantage makes it possible to channel profits in the form of dividends at a reduced rate.
As for example, a Cyprus Holding company can be used for international investment purposes. Basically, it is use of the tax incentives and the treaties for the avoidance of double taxation. The most important advantage of a Cyprus Holding Company is that the dividends received by the foreign company can flow totally tax free in Cyprus through the Holding Company, avoiding in this way the payment of any tax on dividends. Furthermore, payments made to non-Cyprus Resident Shareholders there is zero (0) withholding tax, so the Shareholder receives the dividends absolutely tax free.
Payment of interest on loans is another advantageous method for Russian businesses. Under the Cyprus Law, Russian Company partly owned by Cypriot Company and paying its interest on loans to the Cypriot company, effectively minimizing its taxation. However, the interest payments are not necessarily will be paid to the Cyprus Company. It is the most effective method which allows Russian company to avoid almost all its tax payments.
Russian businesses which structured into a Cypriot companies for maintaining its business activities within territory of Russia, are able to transfer there revenue earned in Russia abroad in the form of dividends and interest, at considerable tax savings. Companies registered in Cyprus jurisdiction pay lower taxes than those paid in Russian jurisdictions.
All the above mentioned structures are based on “Cyprus economic zone” of reduced taxation and perfectly legal, furthermore its tax advantage may be enhanced even more when, under certain circumstances, is combined with other jurisdictions in appropriate legal structures.
In the last 30 years, Cyprus Law Firm has developed into a reputable international business and financial centre due to the very favorable tax regime that the island offers. The admission of Cyprus to the European Union as full member in May 2004, established Cyprus as a prestigious, stable and attractive jurisdiction.
Though the offshore company status was abolished as from January 1, 2003 the favorable tax regime for the international investor has been maintained. In addition, the liberalization of investments coming from non-EU countries and the abolition of maximum and minimum participation percentages in investments in all the sectors of the economy in October 2004 (unless it is otherwise provided by the Law), has transformed Cyprus into a major destination for the location of international, holding companies and worldwide investments.
Olga Kosareva, NCI Law Group
Author: Ioannis John Neocleous