21.1 General
Cyprus is one of the best examples of a "treaty haven" since it combines a low tax regime for international entities with an extensive network of double taxation treaties and few anti-treaty shopping provisions. The primary purpose of these treaties is the avoidance of double taxation of income earned in any of the treaty countries. This is usually achieved, either through the allowance of a tax credit against the tax levied on the taxpayer by his country of residence or through tax exemption in one contracting state of the income taxed in the other contracting state. Normally, the result is that the taxpayer pays no more than the higher of the two rates.
By utilising the provisions of these treaties in conjunction with the low and sometimes total tax exemption situation in Cyprus, one may often achieve total avoidance of any tax in either country. It should be noted that tax haven countries do not participate in the network of double taxation treaties and are therefore unsuitable locations for intermediary companies since any payments to them would normally be subject to high withholding taxes at source. Cyprus has concluded double taxation treaties with the following countries:
Austria, Greece, Romania, Bulgaria, Hungary, Russia and CIS Republics, Canada, India, Slovak Republic, China, Ireland, South Africa, Czech Republic, Italy, Syria, Egypt, Malta, Sweden, Denmark, Kuwait, United Kingdom, France, Norway, United States of America, Germany, Poland, Yugoslavia
The taxation treaty with Belgium awaits ratification while the treaty with Finland awaits signature. Further treaties with the Baltic States, Algeria and Sri Lanka are presently under negotiation.
All the double taxation treaties that Cyprus has entered into are drafted on the basis of the OECD treaty model. By careful utilisation of the provisions of these treaties, Cyprus international companies may be beneficially used as conduit vehicles where a treaty partner does not have a treaty with the country in which an investment is proposed or where such a treaty exists but is not as beneficial as Cyprus' own treaty with that country; for example, Cyprus has treaties with Bulgaria and Kuwait with whom the UK has no corresponding treaty.
Financing group structures may also be beneficially arranged through a Cyprus intermediary finance company in respect of countries with which the island has negotiated more beneficial tax treaties than the ultimate lender. The use of a Cyprus finance company may allow a reduction in foreign withholding tax on interest received and the accumulation of interest in Cyprus may be tax free or subject to a low rate of tax if this is desirable for treaty purposes. No debt/equity rules exist in Cyprus. Significant tax deferrals may also be achieved though the use of Cyprus international companies as any overseas dividends received by them may be trapped and further utilised for reinvestment within a group structure without the ultimate parent incurring domestic tax liabilities, subject to applying an acceptable distribution policy.
In addition, the reputation that Cyprus enjoys with foreign tax jurisdictions means that tax screening requirements normally relevant to tax havens and low tax countries, may not be relevant to payments to Cyprus entities, while the anti-avoidance legislation of high tax countries aimed at clawing back benefits derived through tax havens and low tax centres may be less significant with regard to Cyprus.
21.2 Cyprus' Double Taxation Treaties with Central and Eastern European Countries
These treaties give Cyprus-incorporated international companies a considerable advantage over other countries in entering into joint venture activities in Eastern Europe, primarily because of the reduction in the impact of withholding taxes on the distribution of joint venture profits to the respective parties. The table below shows the rates of withholding taxes on dividends, interest and royalties on payments from companies resident in Central and Eastern European treaty countries to Cypriot residents. Since Cypriot companies are subject to tax on their profits but dividends or other types of payments payable out of such profits are not subject to further taxation, there is no need to table the withholding tax position on payments from Cypriot companies to non-residents.
|
WITHHOLDING TAX RATES |
|||
|
Received in Cyprus |
|||
|
Dividend- % |
Interest-% |
Royalties- % |
|
|
Bulgaria |
Nil |
Nil |
Nil |
|
Czech Republic |
10 |
10 |
5 |
|
Hungary |
Nil |
10 |
Nil |
|
Poland |
Nil |
10 |
5 |
|
Romania |
10 |
10 |
5 |
|
Russia |
5 |
Nil |
Nil |
|
Slovak Republic |
10 |
10 |
5 |
|
Yugoslavia |
10 |
10 |
10 |
21.3 Cyprus/ Russia Double Taxation Treaty
The traditional investment route into Russia is via Cyprus and this is largely due to the fact that a favourable tax treaty exists between the two countries. The current treaty provides for a Russian withholding tax on dividend payments of 5% and on interest and royalty payments of nil for Cyprus residents. Cyprus does not levy a withholding tax on dividends and a Cypriot company is entitled to declare income received from dividends, interest and royalties as a dividend for the benefit of shareholders (whether in Cyprus or in any international jurisdiction) without suffering any withholding tax in Cyprus.
Profits derived in Russia by a resident of Cyprus, will be liable to taxation in Russia only if the profits are derived from a permanent establishment located in Russia and only to the extent which is attributable to the activity of such permanent establishment. In the determination of profits of a permanent establishment, expenses which are incurred for the purposes of the permanent establishment are deductible, including executive and general administrative expenses, whether incurred in the country of residence or abroad. The treaty provides that construction or assembly works lasting for a period not exceeding twelve months, would not be considered as a permanent establishment and would therefore not be taxable in Russia.
The treaty contains increased emphasis on anti-avoidance and Cypriot international entities are entitled to normal treaty relief.
21.4 Cyprus / U.S.A. Double Taxation Treaty
This treaty came into force on 1st January 1986 and contains an exchange of information provision which imposes upon each contracting state an obligation to provide information to the other in the form of depositions of witnesses and authenticated copies of original documents. This applies to the same extent as such information can be obtained under the laws and administrative practices of the other country in respect of its own taxes.
US companies in particular would benefit from using a Cyprus company for investment in certain Central and Eastern European countries with which the US has no double taxation treaties. Moreover, although the new US/ Russia double taxation treaty signed on the 17th June 1992 might have significantly reduced the tax benefits of Cyprus as a useful intermediary jurisdiction for US corporations, it is still advantageous to use Cyprus for investments in the Russian Federation because the permanent establishment article in the new US/ Russia double taxation treaty is a very broad one whereas the respective article in the Cyprus/ Russia double taxation treaty gives a much narrower definition of permanent establishment, thus restricting potential tax liabilities in certain circumstances and creating tax planning opportunities.
21.5 Cyprus / Austria route
Cyprus has also entered into a double taxation treaty with Austria; in view of the tax-free receipt of dividends and other income by Austrian holding companies, which is similar to the Dutch participation exemption, the Austrian/ Cyprus route could provide a suitable alternative to the present Netherlands/ Netherlands Antilles holding structure. Under the Austria/ Cyprus treaty the Austrian dividend withholding tax is reduced to 10% and there is no further taxation in Cyprus for international companies holding the Austrian company's shares.
21.6 Cyprus/ China Double Taxation Treaty
Under the Cyprus/ China double taxation treaty, the maximum withholding tax rate on royalties and interest is 10%. Of particular importance is the fact that the treaty contains no limitation of benefits provisions so that a Cyprus international company paying tax at just 4.25% on its income will nevertheless be able to benefit from the treaty provisions. Such Cyprus companies may therefore not only be useful as intermediary companies but indeed as the ultimate financing or licensing entities used for investment in China.
21.7 Cyprus/ India Double Taxation Treaty
Under the Cyprus/ India double taxation treaty, the Indian dividend withholding tax is reduced to 15% with respect to shareholdings of less than 10%. Cyprus can therefore be a suitable location for a portfolio investment company owning both shares and bonds. The treaty provides for a reduced 10% Indian withholding tax on outgoing interest.
The purpose of this publication is to assist clients and associates in clarifying and appreciating the range of opportunities which are available in or through Cyprus. Although every effort has been made to provide the reader with a clear and comprehensive picture of the island's beneficial regime, it should be appreciated that is not possible to cover all aspects comprehensively in a publication of this size.
Individuals or companies who are seriously considering using Cyprus for any of their international business activities are advised to obtain expert professional advice before taking positive action.
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