Cyprus: Tax And Corporate Aspects Of Cross-Border Investment In Russia, Using Cypriot Finance And Holding Vehicles

Last Updated: 31 August 2005

INTRODUCTION

Cyprus is a low-tax jurisdiction, not a tax haven, and its fiscal and regulatory regimes are now aligned with the EU’s acquis communautaire and Code of Conduct for Business Taxation and the requirements of the OECD, the FATF and the FSF.

The framework of controls imposed on business activities maintains the respectable and responsible reputation of Cyprus while allowing the activities to be conducted in an environment as free from onerous and bureaucratic restrictions as possible.

Its legal system, modelled on the English common law system since independence in 1960, is becoming fully harmonized with the acquis communautaire. Cyprus is a signatory to a large number of international conventions and treaties, including an extensive network of double taxation treaties.

TAX ASPECTS

1. Summary of the Cypriot tax regime effective from 1 January 2003

Before Cyprus’ entry into the EU there was a major overhaul of the Cypriot taxation system so that it could be brought into line with EU law.

In particular, the Income Tax Law, which came into force on 1 January 2003 (the Law), effected some major changes to the Cypriot tax system as it affects companies.

Any distinction between local companies and international business companies (IBCs) has been abolished. From 1 January 2003 there is:

  • A single corporation tax rate of 10% for all companies registered in Cyprus.
  • No geographical limitation on the exercise of any company’s activities. Its income may be derived from any source, including a Cypriot-based source.
  • No restriction on the ownership of a company’s shares.

Active IBCs may retain the 4.25 % tax rate until 2005 provided that they qualify under the transitional provisions allowed by the EU.

Cypriot tax residence

Under the new system, the taxation of company profits is based on the income of a company whose management and control is exercised in Cyprus. In other words, the old remittance-based concept has been changed to a system of taxation of worldwide income for residents of Cyprus and of Cypriot-source income for non-residents.

With respect to the residence rules for companies, the Law adopts management and control as the key test. Registration in Cyprus alone will not be sufficient to subject companies to tax in Cyprus.

The Law does not contain a definition of management and control but in general, to ensure that a company satisfies the residence test, its decision-making processes should take place in Cyprus as far as possible. This means that:

  1. All decisions affecting a company should be made, and be shown to have been made, by its board of directors in Cyprus.
  2. Decisions must in fact be made by the board, which must exercise its powers independently of any particular director or shareholder.
  3. The board should have a majority of Cypriot-resident directors.
  4. Detailed minutes should be prepared of all board meetings, including documentation of matters discussed and decisions reached. It must be clear from the minutes that board meetings are the decision-making forum for a company and that they do not simply ‘rubber stamp’ decisions already taken.
  5. The decisions taken by the board whilst in Cyprus must include the majority (and preferably all) of the decisions regarding company’s business, including:
    • Acquisitions and disposals;
    • Corporate strategy from a group-wide perspective;
    • Fund raising;
    • Appointment of professional advisers;
    • Appointment of directors to the boards of subsidiaries;
    • Review and approval of financial results;
    • Dividend policy.

It should be noted that the Law has introduced general anti-avoidance clause and there is a growing tendency by the Cypriot tax authorities to screen and assess commercial transactions to ensure that there will be no abuse of tax laws and regulations. This is a point of much relevance to the issue as to whether the management and control of a company is exercised in Cyprus.

It is vital that all key management and commercial decisions that are necessary for the conduct of a company’s business are actually made in Cyprus. To that end, the majority of the board meetings should be held in Cyprus and the directors must be adequately informed about the matters on which they are making decisions.

Resident companies

The taxable income of companies, whether incorporated in Cyprus or not, which have their management and control exercised in Cyprus, is liable to corporation tax at the rate of 10%, irrespective of whether the shareholders are residents of Cyprus or not. Corporation tax is charged on the following types of income:

  • business profits
  • interest
  • rents from immovable property
  • royalties
  • profit from the sale of goodwill.

The profits of a resident Cypriot company, which are derived directly or indirectly from a permanent establishment outside Cyprus, are exempt from Cypriot tax. This exemption, however, is not granted if the Controlled Foreign Company (CFC) provision applies, namely if:

  • More than 50 per cent of the paying permanent establishment’s activities results in investment income, and
  • the foreign tax is significantly lower than the tax payable in Cyprus.

2. Main features of the Cypriot holding company regime

A. Tax treatment of incoming dividends

Like most European countries, Cypriot tax rules, subject to certain conditions, provide full exemption from local taxation in respect of dividends received by a holding company from its local and foreign subsidiaries.

B. Tax treatment of capital gains on the sale of shares

The exemption from tax of trading and capital gains made by a Cypriot holding company from the sale of shares in foreign subsidiaries creates a level playing field with the traditional European holding company regimes such as the Netherlands, Denmark, Luxembourg and Switzerland.

C. Withholding tax on outgoing dividends

Outgoing dividends remitted by a Cypriot holding company to the ultimate parent company do not suffer any withholding taxes in Cyprus.

D. Double taxation treaties

By virtue of the fact that Cyprus has a large number of double tax treaties, incoming dividends received by a Cypriot holding company from its foreign subsidiary are either exempt from or subject to low withholding taxes in the subsidiary’s jurisdiction.

E. Withholding tax on interest

The EU Interest/Royalty Directive has been transposed into Cypriot domestic legislation and therefore the tax laws provide for exemption at source of interest where the beneficial owner is a non-resident.

F. Interest deduction for borrowing costs

It is important for an investor to obtain a tax deduction in respect of borrowing costs incurred in relation to investments in subsidiaries. In general, interest expenses payable by a Cypriot company are fully deductible.

G. Thin capitalization

Thin capitalization may be a critical issue. If a company is thinly capitalized under the rules of the country in which the company is tax resident, part of the interest deduction may be disallowed and treated as a dividend distribution. Cypriot tax legislation does not contain specific rules concerning thin capitalization of companies. Therefore a Cypriot holding company may be capitalized with loans without any risk that interest paid at arm’s length to the parent company will not be deductible.

H. Controlled Foreign Companies

Cypriot CFC legislation targets low tax and/or tax haven countries, and then narrows its scope further by targeting only certain types of income which are not derived from genuine business activities.

I. Additional tax and non-tax rules:

  • The Cypriot corporate tax rate for business profits is 10%;
  • Cyprus does not have any rules stating that holding companies cannot perform operating activities;
  • Group relief;
  • The Cypriot tax regime permits losses to be carried forward indefinitely;
  • Attractive permanent establishment rules;
  • Treatment of foreign taxes as expenses;
  • Modern reorganization and merger rules;
  • Unilateral tax relief may be available;
  • UK company law heritage/common law tradition.

For more information, please refer to our attached article published by BNA International under the title ‘International tax aspects of the Cypriot holding company’.

3. Debt and equity financing/thin capitalization rules/transfer pricing

A. Interest

Cypriot-resident companies are liable to the 10 per cent special defence contribution tax on interest income from any source, whether in Cyprus or abroad. The deduction is made at source if received from Cyprus, otherwise by assessment on the basis of returns.

However, the special defence contribution tax does not apply to interest earned by a company in the ordinary course of its business or to interest closely related to that ordinary carrying on of the business, both of which are subject to income tax with no exemption available.

Any interest received by a Cypriot-resident company which is deemed not to be from or closely related to its ordinary business activities will be subject to 10% income tax on 50% of the interest received and to a special defence contribution tax at 10% on the whole amount of the interest received, thus giving an effective total tax burden of 15%.

The term ‘ordinary course of business’ has been clarified by the tax authorities as activities including banking and finance, hire-purchase and leasing. Interest closely related to the ordinary course of business includes:

  • Interest received from trade debtors by companies engaged in the trading and/or development of land, and by traders of new or old cars or of any other vehicles or machines;
  • Interest earned by insurance companies;
  • Interest earned by banks on current accounts; and
  • Interest earned by a company acting as a vehicle to finance other group companies.

Interest earned from loans by a company to third parties and interest from savings and deposits are taxed under the special defence contribution provisions, unless these fall within one of the above categories.

B. Deduction of costs /thin capitalization rules

Expenses wholly and exclusively incurred in the production of the income are deductible.

Cypriot tax legislation does not contain any thin capitalization rules, i.e. a debt:equity ratio requirement. However, there are certain indirect debt:equity restrictions.

Under the Law, any interest paid in the course of a company’s normal trading activities is an allowable deduction, including any amount in relation to the acquisition of assets used in the business.

However, if a Cypriot resident company that pays interest makes advances at a zero rate of interest or at a rate lower than the one paid to related parties, interest equal to 9 per cent p.a. on those advances, or the difference between the actual interest paid and received, will have to be added back, because such advances are not considered as expenses incurred for the purpose of the production of income.

C. Transfer pricing

As from 1 January 2003 new transfer pricing regulations have been introduced, based on the arm’s length principle. This is the only provision the Law provides in this respect. It is expected that new guidelines will be issued in this area by the Inland Revenue authorities.

4. Extraction of dividends/international participation exemption/double taxation relief

A. Dividends

Cyprus applies a classic participation exemption privilege to incoming dividends, i.e. if dividends are paid out of profits which have suffered tax elsewhere, they are not taxed again in the hands of the corporate recipient. The participation exemption applies not only to dividends from shares in another resident company but also to dividends received from non-resident companies (subject to certain conditions, see below) and capital gains arising on the disposal of the shares.

The international participation exemption is applicable to foreign dividends, provided that the Cypriot resident company receiving the dividends owns at least 1 per cent of the share capital of the foreign subsidiary. This 1 per cent requirement was introduced to create a distinction between participating and investing. It should be noted that the applicability of the participation exemption is not dependent on the shareholding period in a foreign subsidiary.

Under the domestic participation exemption, dividends payable by a Cypriot resident subsidiary to its Cypriot resident parent are exempt from taxation and are not included in the taxable income of the parent company, regardless of the extent and the holding period of the shareholding in the subsidiary company. No further requirements need to be met in order for the exemption to apply

B. CFC rules

With regard to the taxation of dividends receivable by a Cypriot-resident company from its foreign subsidiaries, the Cypriot tax laws provide special anti-abuse provisions, known as the Controlled Foreign Company (CFC) provisions. These are aimed at preventing non-resident companies over which domestic taxpayers have a controlling or substantial influence from converting essentially passive income (tainted income) into exempt dividend income receivable by a Cypriot-resident company.

However, the general principle behind the Cypriot CFC rules is that anti-avoidance measures should be used only to maintain the equity and neutrality of national tax laws in the international environment. Therefore, the Cypriot CFC rules only target income that is genuinely passive and do not extend to active income such as income from production, normal rendering of services or trading by companies engaged in real industrial or commercial activity. Further, the CFC rules are aimed at companies benefiting from low tax régimes and are not applicable to countries whose taxation is comparable to that of Cyprus. Finally, Cypriot counteracting measures do not (unlike the US Subpart F rules) treat the source company as non-existent.

The CFC provisions will only be triggered if more than 50 per cent of the non-resident company’s activities result directly or indirectly in investment income, and the foreign tax burden on the income of the non-resident company paying the dividend is substantially lower than the tax burden of the company which is tax-resident in Cyprus. Both conditions must apply for the CFC provisions to be triggered; if not, the exemption is available.

C. Capital gains

Any profits from the disposal of securities (shares, bonds, debentures, founder’s shares and other company securities) are exempt from taxation. Gains from the sale of shares of companies owning immovable property in Cyprus will continue to be subject to capital gains tax.

Many of the Cypriot double taxation treaties provide for taxation of capital gains only in the country of residence of the person (company or individual) disposing of a capital asset. The above-mentioned provision could therefore lead to double non-taxation, as a capital gain made by a Cypriot-resident company from a sale of its foreign subsidiary’s shares will be exempt from taxation both in Cyprus and in the country where the subsidiary is located.

D. Withholding taxes

Under Cypriot legislation there is no withholding tax on dividends, interests and royalties (provided the intellectual property rights are not used in Cyprus) paid to non-residents of Cyprus.

E. Deemed dividend distributions

As mentioned above, inter-company dividends paid by Cypriot-resident companies do not attract any withholding taxes. However, a Cypriot-resident company which has not declared a dividend is deemed to have distributed 70 per cent of its profits arising or accruing in the year of assessment, after their reduction by transfers to reserves as legally required and by corporation tax paid or payable on such profits, in the form of dividends to its shareholders, as at the end of a 2 year period from the end of the year of assessment to which the profits relate. Where a dividend has been paid within the 2 year period in relation to the particular year of assessment, the deemed distribution is reduced by the actual dividend paid. Resident corporate shareholders which at a later stage receive dividends from a company which has been subject to a deemed distribution are entitled to reclaim the underlying defence contribution tax.

Foreign corporate, as well as foreign individual, shareholders will receive a refund upon a subsequent actual distribution by the company assessed under the deemed distribution rules.

The actual distribution of dividends to a Cypriot-resident corporate shareholder will not attract any form of taxation in Cyprus, either in the hands of the payer or in the hands of the recipient, and will not trigger the imposition of the special defence contribution on the dividend distribution.

F. Double taxation relief

The Income Tax Law provides relief from double taxation in relation to income tax and any tax of a similar character imposed by the laws of another country. The Law distinguishes between situations where there is a double taxation treaty in force between Cyprus and another country and where there is not. All the Cypriot double taxation treaties provide relief from double taxation by applying the credit method regarding the taxation of dividends and interest. It should, of course ,be noted that EU Law prevails over tax treaties which cannot be used to justify its violation.

The relief is provided by allowing tax payable in respect of any income in the other treaty country as a credit against tax payable in Cyprus in respect of that income; the tax charge will be reduced by the amount of the credit. The Special Contribution for the Defence of the Republic Law (which, as mentioned above, imposes the payment of a special defence contribution on dividends, interest and rents) specifically states that the provisions relating to the application of double taxation treaties and the granting of credits will also apply to any contribution payable under it.

As a practical example, the following tax situation will arise when dividends from a Russian subsidiary are paid to a Cypriot holding company. Dividend income from the Russian subsidiary is neither subject to Cypriot income tax nor to the special defence contribution, provided that the Cypriot holding company receiving the dividend owns at least 1% of its Russian subsidiary. However, the exemption from the special defence contribution will not be granted if the CFC provisions apply, i.e. if more than 50% of the paying subsidiary’s activities result in investment income and the foreign tax burden is significantly lower than the tax payable in Cyprus.

5. Implementation of EU Directives

The new tax regime extends the EU Merger Directive to a reorganization involving a Cypriot tax-resident company, with favourable tax treatment to facilitate the transfer of assets and tax losses.

The EU Interest/Royalty Directive has been transposed into Cypriot domestic legislation and therefore the tax laws provide for exemption at source of interest where the beneficial owner is a non-resident.

The EU Parent/Subsidiary Directive (with its recent amendments) was transposed into Cypriot law in the form of the Income Tax Law and the Special Contribution for the Defence of the Republic Law. These laws establish a liberal system of double taxation avoidance. Moreover, the application of the new tax régime extends to non-EU countries, as the tax laws provide merely for a distinction between residents and non-residents of Cyprus.

6. Stamp duty issues

The Stamp Duty Laws 1963 to 2002 provide (free translation) that stamp duty is payable on a document which concerns any fixed asset located in Cyprus or any matter or thing to be performed or that will take place in Cyprus, irrespective of where such document is created or executed. Non-payment of stamp duty does not invalidate the agreement or the transactions, but the agreement may not be adduced as evidence before a Court without payment of stamp duty and any applicable penalty for late payment.

The rate of stamp duty payable depends upon the nature of the instrument. The agreement would need to be submitted to the Commissioner of Stamp Duties for assessment of the stamp duty. Non-payment of stamp duty will result in the payment of a penalty. The penalty may range from CYP 1 to 10 per cent of the amount of the stamp duty, if paid after 2 months from the date of execution of the instrument. After 6 months the duty may be doubled.

CORPORATE ASPECTS

1. Cypriot companies and the law

The primary statute governing the company as a separate legal entity is the Companies Law, Chapter 113 of the laws of Cyprus (the Companies Law). Under it, apart from companies limited by guarantee (most of which are non-profit making organizations), companies limited by shares may be classified as private, public or exempt. Nevertheless, for the purposes of harmonization with the relevant EU Directives, new provisions were introduced into the Companies Law through various amendments enacted during 2003. Law 70 (I) of 2003 introduced sections 201 A–H, which adopt in their entirety Directives 77/91 on the formation of public limited liability companies and the maintenance and alteration of their capital, 78/855 on the merger of public limited liability companies, 82/891 on the division of public limited liability companies, 89/666 on the disclosure requirements in respect of branches opened in member state by certain types of company governed by the law of another state, 68/151 on the coordination of guarantees and 89/667 on single-member private limited liability companies. This Law also defined the merger and division procedures in Cyprus and is therefore rightfully considered to be a major development in the area of mergers and takeovers. Another modifying law was 167 (1) of 2003 which amended the auditing and reporting requirements of companies incorporated in Cyprus. It is clear that more amendments will follow.

Private companies

A private company is a company which by its Articles of Association specifically:

    1. restricts the right to transfer its shares;
    2. limits the number of its members to 50, excluding persons who are employed by the company and persons who, having been employed by the company, were while in that employment and after its determination have continued to be members of the company;
    3. prohibits any invitation to the public to subscribe for its shares or debentures;
    4. prohibits the issue of bearer shares.

Under an amendment to the Companies Law enacted in 2000, it is now possible for a private company to have only one shareholder.

Public companies

A public company is a company which does not qualify as a private company and to which the following provisions also apply:

    1. it must have at least seven members;
    2. it must have at least two directors;
    3. if directors are appointed by the Articles of Association, their consent must be filed on incorporation;
    4. it must obtain a trading certificate from the Registrar of Companies before it commences business. To obtain such a certificate, and before it issues any of its shares or debentures to the public, the company must issue a prospectus or a statement in lieu of prospectus;
    5. it must have a statutory meeting and its directors must make a statutory report to its members;
    6. it alone has the power to issue share warrants.

Exempt companies

An exempt company must fulfil all the requirements of a private company, as well as the following conditions:

    1. no corporate body holds any of its shares or debentures unless it is itself an exempt private company registered in Cyprus;
    2. the number of debenture holders does not exceed 50;
    3. no corporate body is a director of the company;
    4. nobody other than the holder has any interest in any of its shares or debentures;
    5. neither the company nor its directors are privy to any agreement whereby the policy of the company is determined by persons other than its shareholders and directors.

As its name implies, an exempt company is not subject to certain provisions of the Companies Law, as follows:

  • it need not file financial statements with the annual return which it submits to the Registrar of Companies;
  • its auditors need not be qualified under section 155 of the Companies Law;
  • it need not print special resolutions to be filed with the Registrar of Companies;
  • it may give loans and guarantees to its directors.

2. Arrangements, amalgamations and takeover bids

The Companies Law provides two distinct means by which the capital structure of a company may be reorganized, one in section 198 and the other in section 270. In addition, section 201 provides the means whereby the shares of a minority of shareholders dissenting from a scheme or contract approved by the majority may be acquired. Finally, the above-mentioned new section 201 A-H sets out in detail the merger and division procedure in Cyprus.

Arrangements under section 198

This section provides a method whereby a compromise or arrangement may be made between a company and either:

    1. its creditors or any class of them; or
    2. its members or any class of them; or
    3. any combination of the above.

A scheme under this section requires the sanction of the court. It is applicable to both a going concern and a company in the process of winding up.

A ‘compromise’ presupposes the existence of a dispute, whereas the meaning of an ‘arrangement’ is not to be limited to something analogous to a compromise.

The usefulness of the section may be seen principally in two instances. First, it enables a company to agree a compromise with a majority of its creditors which may then be imposed on all of them. Secondly, it enables class rights to be varied where no provision otherwise exists to vary them, for example where such rights are contained in a memorandum of association which provides no procedure for their alteration.

The section offers no assistance where the compromise or arrangement may be ultra vires the company. Clearly, a scheme cannot be sanctioned where it may usurp on Cypriot law or be contrary to it, for example to convert issued ordinary shares into preference shares.

As indicated above, a scheme under section 198 must be sanctioned by a court. Application to the court is made by summons, providing the information set out in section 199 of the Companies Law. In deciding whether to exercise its jurisdiction and sanction a scheme, the court will normally need to be satisfied on three matters, as follows:

    1. the provisions of the statute must have been complied with;
    2. the class must have been fairly represented;
    3. the arrangement must be such as a man of business would reasonably approve.

Mergers and divisions of public companies under section 201 A-H.

This new section supplements sections 198-201 with respect to company reorganizations. Specifically it provides for:

    1. a merger by absorption of one or more public companies by another public company;
    2. the merger of private companies by creating a new company;
    3. the division of public companies.

Furthermore, it is not an exaggeration to say that this new section is a map of the merger and division procedure as follows:

    1. It is stated in these sections that in cases of mergers the assets and liabilities are transferred from the absorbed company to the absorbing company.
    2. This section specifies the steps that are necessary for mergers and divisions, namely:
  • The directors of the participating companies need to prepare a merger or division reorganization plan, which should include the name, the form and the registered office of the company, the relationship of the transfer and exchange of the shares and the total of the merged amount in cash, how the shares will be distributed, the date after which the shares provide the right of participation in profits, the date after which the acts of the absorbed or divided company are considered to have been done on behalf of the absorbing or the benefited company, the rights that are guaranteed by the absorbed or the benefiting company and all the special privileges that are provided to the experts.
  • If the absorbing company already possesses less than 90% of the shares of the absorbed company, this plan should be accompanied by a detailed written report by the directors, which explains and justifies the plan financially, and this plan should be examined by independent experts who are appointed by the court.
  • The company should provide sufficient protection to its creditors.

Amalgamations or reconstructions under section 270

This section relates only to a members’ voluntary winding up. It enables a company to be reconstructed by the liquidator selling or transferring the whole or part of the business or assets of the transferor company to a transferee company in exchange for shares or other securities of the transferee company. In turn, the acquired shares or securities are distributed amongst the shareholders of the transferor company so that they become holders in the transferee company. The authority conferred upon the liquidator is by special resolution of the shareholders of the transferor company.

In effect, the assets and property of the transferor company have been absorbed by the transferee company; an amalgamation has taken place. The same principle applies where two or more companies are absorbed by a third company incorporated for that purpose.

It should be noted that the transferee company need not be a company incorporated under the Companies Law. It may therefore be a foreign entity, provided that it is defined as a company under the law of its place of origin.

Any sale or transfer pursuant to section 270 is binding on all the members of the transferor company. However, members who do not vote in favour of the special resolution may within seven days of the resolution express their dissent by written notice addressed to the liquidator, requiring the liquidator either to abstain from carrying the special resolution into effect or to purchase their interests. If the liquidator proceeds with the scheme or proposes to do so, the shares of dissenting shareholders must be purchased before the company is dissolved. Accordingly, the liquidator will need to retain sufficient liquid reserves to discharge payment. The value of the shares of dissentients should be based on their value prior to the company’s reconstruction.

Creditors of the transferor company remain its creditors. It is usually part of the amalgamation process under section 270 for the transferee company to agree to meet the debts due to the creditors or for the transferor company to retain sufficient assets to satisfy them. However, some statutory protection is afforded to creditors, providing, inter alia, that if within a year of the passing of the special resolution a winding up order is made by or subject to the supervision of the court, the special resolution will not be valid unless sanctioned by the court.

Takeover bids under section 201

In simple terms this section enables a company, which has made what is commonly called a takeover bid for all the shares or class of shares of a company which has been accepted by 90 per cent or more of the holders of the target shares, to acquire the shares of dissenting members on the same terms, unless the latter can persuade the court not to permit such acquisition.

This compulsory acquisition of shares must follow strictly the mechanism provided by section 201.

Investment controls

The legal regime governing securities in Cyprus has been largely codified and harmonized with the relevant EU Directives. The principal pieces of legislation are:

      1. the Companies Law;
      2. the Cypriot Securities and Stock Exchange Law, 14(I) of 1993 (the CSSE Law) as amended;
      3. the Cypriot Securities and Stock Exchange Regulations of 1995, as amended (the CSSE Regulations);
      4. various regulations passed under the CSSE Law, including the Public Bids for Mergers and Acquisitions of Titles of Companies listed in the Cyprus Stock Exchange Regulations of 1997 (the Mergers and Acquisitions Regulations);
      5. the Possession, Use and Announcement of Privileged Confidential Information Law, 36(I) of 1999, which essentially prohibits insider trading.
      6. The Cyprus Securities and Exchange Commission Law of 2001 which introduced, in section 5, the Cyprus Securities and Exchange Commission.

Transfer of shares

General

The Articles of Association of a company normally regulate the way in which its shares may be transferred. The Companies Law provides that, unless excluded or modified by its Articles, the regulations contained in Table A in the First Schedule to the Companies Law will control the transfer of the shares of a Cypriot company.

Table A does not include a right of pre-emption or a right of first refusal on a transfer of shares but it is the normal practice for Cypriot companies to include such rights in their Articles.

Part II of Table A empowers the directors of a company, in their absolute discretion and without giving any reason, to decline to register any transfer of shares.

Private companies

The procedural requirements for the transfer of the shares of a private company are governed by law and by the company’s Articles of Association.

3. Company law and the EU harmonization programme

The Government’s company harmonization bill was enacted as Law 70(1) of 2003 and published in the Government Gazette No. 3736 of 11 July 2003.

The purpose of the amending Law is the harmonization of company law with the following EU Directives, inter alia:

    1. Directive 77/91 on the coordination of safeguards which, for the protection of the interests of members and others, are required by member states of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent.
    2. Directive 78/855 based on Article 54 (3) (g) of the Treaty, concerning mergers of public limited liability companies.
    3. Directive 82/891 based on Article 54 ( 3) (g) of the Treaty, concerning the division of public limited liability companies.
    4. Directive 89/666 concerning disclosure requirements in respect of branches opened in a member state by certain types of company governed by the law of another state.
    5. Directive 89/667 on single member private limited liability companies.

This Law introduces new terms into EU law concerning public limited companies. In particular:

    1. Greater protection of shareholders and third parties is afforded before incorporation.
    2. The registration of a public limited company now requires a minimum share capital of £15.000. Existing companies have a period of 2 years to comply.
    3. Where shares of a public limited company are allotted only for a consideration consisting of assets, such assets must be capable of valuation and be valued.
    4. Equal treatment of shareholders of the same class is provided, with separate voting for every class.
    5. New provisions for mergers and divisions of companies are provided.
    6. New regulations are introduced for the administration of one-shareholder companies.

4. Societas Europeae (SE)

The EU legislation that creates and regulates the use and formation of the new SE in Cyprus is -

  • Regulation 2157/2001 on the statute for a European Company (the Statute) that was adopted on 8 October 2001 and came into direct effect on 8 October 2004; and
  • Directive 2001/86 (Employee Involvement Directive) supplementing the Statute with regard to the involvement of employees that was also adopted on 8 October 2001 and incorporated in Cypriot law on 31 December 2004 by Law 277(I) of 2004.

The Statute generally provides that both public and private limited companies can establish and register an SE in any of the member states of the EU.

For more information, please refer to our attached article published by BNA International under the title ‘European company (SE) taxation: the Cypriot perspective’.

5. Recent developments in Cypriot corporate finance legislation

As a full member of the EU, important reforms are continuously in progress in Cyprus to modernize and liberalize its economy and provide a foundation for its participation in the euro zone in the near future.

To this end, the legal framework of banking and finance in Cyprus has already been largely codified and harmonized with the relevant EU Directives. The following is a synopsis of the various important changes which have taken place in the last year in the areas of banking and finance in Cyprus; they will further enhance the position of Cyprus in the EU as an international business and financial centre.

Banking and financial services

The Banking Laws of 1997 to 2004 constitute the set of laws which regulate the exercise of banking activities in Cyprus. They are guided by recommendations of the Basle Committee on Banking Supervision and EU Directives on banking regulation. There have been several significant amendments to these laws in the last two years.

The Investment Services (Amendment No. 2) Law, 238(I) of 2004, was enacted in November 2004 to implement Directive 2002/87 on financial conglomerates. This Law requires the Central Bank of Cyprus to consult the competent supervisory authorities of other member states in cases where the supervised bank is a subsidiary of a bank, investment firm or insurance undertaking regulated by such other member state. Moreover, the Central Bank is enabled to consolidate supervision covering specific cases of groups where the parent bank is incorporated in a third country or member state. Finally, the Law states that all banks are subject to the same supervision, whether they are part of a financial conglomerate or not.

In accordance with the Financial Services Action Plan (FSAP), the House of Representatives enacted the Banking (Amendment) Law, 151(I) of 2004, which implements Directive 2001/24 on the reorganization and winding up of credit institutions. According to this Law, the reorganization measures and winding up proceedings in respect of a bank authorized to operate in Cyprus, including its branches in another member state, will be governed by the laws of Cyprus. Conversely, the reorganization measures and winding up proceedings adopted by the authorities of another member state in respect of a bank incorporated in that state will be recognised by Cypriot law and implemented with regard to its branches operating in Cyprus.

In relation to cooperative credit and savings societies, the amending Law 145(I) of 2004 came into force on 30 April 2004, harmonizing the relevant legislation with Directives 2000/46 on the business of electronic money institutions, 2000/28 on the definition of a credit institution and 2001/24 on the reorganization and winding up of credit institutions.

Last but not least, Law 200(I) of 2004 implements Directives 85/611 and 88/220 on collective investment undertakings as amended to date. This Law regulates the structure, organization and operation of open-ended collective investment schemes in moveable securities and other liquid financial instruments (UCITS), their investment and borrowing policy, their tax status, the supervisory authority of the Securities and Exchange Commission and other relevant matters.

Securities

In accordance with the FSAP, a law on insider dealing and market manipulation has been drafted in order to transpose market abuse Directive 2003/6 and related Directives into the national legislation, replacing existing legislation on this issue. The principal aim of the law is to ensure prompt and fair disclosure of information to the public to enhance market integrity. Under this law, the Cypriot Securities and Exchange Commission will be the single competent authority to ensure that the provisions are applied and to impose administrative sanctions.

In September 2004 another draft law, concerning the admission of securities, the obligations of issuers and the information to be published in compliance with Directive 2001/34 on the admission of securities to official stock exchange listing, was submitted for legal vetting.

A draft law to amend the Invitation to the Public for Investment Law of 2002 in accordance with the prospectus Directive 2003/71 has also been submitted for legal vetting.

Directive 2004/39 on markets in financial instruments and Directive 2004/25 on takeover bids have not yet been implemented although they are the next in line.

6. Access to capital listing

It has become necessary for Cypriot companies, in order to expand their activities, to seek either loan or equity finance in established financial markets. Moreover, many of them have become takeover or merger targets of substantial Western concerns.

The widespread use of Cypriot companies as intermediary holding company vehicles for the routing or consolidation of cross-border investments has highlighted the importance of having in place an internationally accepted system of law. The fact that Cyprus’ legal system has a substantial common law element and that corporate financial legislation is constantly being amended or replaced in order to implement EU legislation are significant factors contributing to the attraction of Cyprus as an international business centre. This will also facilitate Cypriot entities in accessing foreign markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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