Cyprus: The Offshore Regime And Cyprus' Accession To The European Union

By Andreas Neocleous, Managing Partner

Mr Chairman

I will try during the next 15 minutes, to lay down certain legal aspects and problems of the present and future of the offshore regime of Cyprus, in conjunction with its prospect of becoming a member of the European Union.

There are two myths about this story:

Myth number one: the Cyprus accession to the European Union is a must. It will be a great victory and will act as a panacea automatically resolving most of the problems and misfortunes of Cyprus.

Myth number two: the Cyprus accession to the European Union will not affect its "offshore regime". There is much confidence that Cyprus will be successful in negotiating and securing preferential treatment like Ireland, Luxembourg etc. so that this regime will be preserved and safeguarded.

The answer to the first myth may be left to the politicians. Accession is desirable to gain leverage on Turkey and to provide a wider framework for the solution of the Cyprus problem. Accession is also desirable to bring challenges and opportunities, flow of capital in the form of loans and grants as well as in the form of technology and know-how. There is however certain scepticism amongst professionals and businessmen about the overall benefits, especially the economic ones of the EU membership. Some fear that the EU membership will not solve problems but on the contrary will create more.

The answer to the second myth is, that under no circumstances, would the existence and operation of an "offshore centre" be accepted as a full member of the European Union as it is not compatible with the Acquis Communautaire.

The examples of Ireland and Madeira are only exceptional cases for a limited period of time and in a limited geographical area - the International Financial Services Centre in Dublin.

Under no circumstances, I believe, the European Union will accept Cyprus or indeed any other member new or old, to operate as an "offshore centre", to shelter wealth or money, to assist in the tax avoidance of other member states, or unfairly compete with other established business or financial centres in Europe such as London, Frankfurt, Amsterdam etc.

Under no circumstances would the European Union accept the conception of the "offshore company" as it appears today and particularly:

  • with the discriminatory distinction between Cypriots and non-Cypriots (Aliens)
  • with the restrictions imposed on the offshore companies not to do business within Cyprus or with Cypriots.
  • and to some extent with the different tax treatment of the "offshore company".

Before proceeding any further, lets examine together what the Cyprus "offshore regime" really is.

First of all, I have not been able to find any definition of the offshore centre, although in many books and articles it is described as a country which has special legislation for offshore companies, offshore banks and offshore insurance companies all of which are usually taxed at nil or very low rate. The offshore centres have no double tax treaties, in fact they have not entered into any treaty with other countries and they are not signatories to international conventions. Moreover they are used by wealthy individuals or international corporations for "brass plate" structures and for sheltering their wealth without tax liabilities. For these reasons they are known as tax havens and they are combined with activities of dubious character or questionable legality.

The international business centres in contrast with the offshore centres, are countries which have suitable infrastructures and expertise to accommodate and service the international entrepreneurial community in conducting their international dealings and transactions.

These countries have a network of double tax and other treaties and they are signatories to many international conventions. They have strict laws and regulations regarding international crimes, money laundering and even tax evasion. Their banking and financial system is highly regulated and supervised and their tax system is uniform and contains no discrimination or favouritism whatsoever.

In these international business centres, we could find some "brass plate" companies, but we can also see the real thing - the fever of the real business life, of the dealings and of the transactions, we can see multi-storey company premises, meetings, financial dealings, investments and cross-border transactions. Such international business centres can be found around the world and also in Europe i.e. London, Frankfurt, Moscow, Brussels. Amsterdam, Athens.

In which of these two categories could one place Cyprus? In the offshore centres category or in the category of the international business centres?

Even the most prejudiced and biased person against Cyprus cannot do otherwise but to place Cyprus in the category of the international business centres, and indeed Cyprus is an international business centre.

  • It has an amazing network of double tax treaties with more than 40 countries
  • It has entered into many other treaties for the promotion and protection of foreign investments and developments, tourism, shipping etc.
  • It is a signatory to almost all the international treaties and conventions
  • It's financial system is strictly regulated and supervised, and
  • finally, here in Cyprus, one can see and touch the real international business life.

International companies, banks, shipping companies, insurance companies and generally many businessmen as well as international corporations have established a real presence and a base here in Cyprus from where they are conducting and administering their international activities and businesses.

I have gone through the legislation of Cyprus to find out whether there is something to substantiate the description of Cyprus as an "offshore centre" and I have found nothing.

Our laws do not distinguish between offshore and onshore companies - there is no definition in our laws for the offshore company. Our Income Tax Laws simply refer to companies which are taxed at the rate of 4.25% if they are owned exclusively by non-residents and if they generate their income from activities outside Cyprus.

If these two conditions co-exist then there is a legal presumption that a company is entitled to enjoy the concession of the lower tax rate of 4.25% instead of 20%.

A similar tax concession is also available to the residents of Cyprus who generate their income from sources outside Cyprus, however in this case the legal presumption does not exist and the Cypriots who are claiming the lower tax rate have the onus to prove that their income is emanated from sources outside Cyprus.

It is therefore about time to stop using terms and phrases which are not recognised by our laws and which can only create confusion and harm to the image and respectability of our country.

  • Cyprus is not an offshore centre - it is an international business centre.
  • Cyprus is not a tax haven - it offers certain tax incentives and concessions like all the other countries of the world.
  • Cyprus has no offshore and onshore companies
  • It has only one type of companies which may carry out their activities either in or out of Cyprus and can be owned exclusively by residents or by non-residents or jointly by residents and non-residents.

It is about time for all of us, the appropriate authorities, lawyers, accountants, bankers and all other professionals and professional organisations to put things into the right perspective and remove the obstacles which we ourselves have placed in our way to the European Union. We should stop promoting Cyprus as an "offshore centre" because it is not. It is much better than this. It is an international business centre.

Let us now examine in brief the policy of the European Union towards the international business centres.

The EU has not enacted any specific legislation regarding international business centres. However, it has enacted a number of regulations and directives which must be implemented by all member states of the EU including international or regional business centres, unless specifically exempted. More importantly, certain provisions of the Treaty of Rome have the same effect.

Reference in these provisions is made to:-

  • The prohibition of discrimination on the basis of nationality. National laws and regulations shall not impede the freedom of cross-border movement of goods, services, labour or capital.
  • Indirect taxation which demands that foreign products are not taxed more heavily than similar domestic products.
  • The common customs code and the freedom of movement of persons, services and capital as well as the co-operation in the field of social policy including all measures relating to working conditions, employment, training, social security etc.

There are certain international or regional business centres in the EU which, although are not exempted from the directives on financial services and money laundering, enjoy certain privileges and have special features which are outside the scope of the acquis communautaire. These centres are dealt with briefly below and can be cited as useful precedents for Cyprus.

Ireland

Manufacturing companies in Ireland are taxed at the rate of 10%. This rate is guaranteed until the year 2010 and is expressly permitted by the EU. Financial service companies which are established in the International Financial Services Centre IFSC in Dublin also pay tax at the rate of 10% which is guaranteed until the year 2005 with the blessing of the EU.

Additional benefits such as no withholding tax on dividends paid and interest, exemption from municipal tax, no capital gain, no exchange control etc. are also enjoyed by these companies. Ireland is known for its IFSC and its fund management business largely because of its favourable Irish tax regime.

Holland

Holland is a low-tax holding company jurisdiction with a large number of double tax treaties and with an advantageous system of advanced binding tax rulings. Holland offers considerable tax concessions to companies owning shares on intellectual property rights and to financing companies.

Like Cyprus, Holland has double tax treaties with all the Eastern European countries. In some respects, these treaties are more beneficial than those of Cyprus and they offer more opportunities in international tax planning set-ups in Eastern Europe.

We know of many cases of non-residents who established a business base in Cyprus and who consequently moved to Holland transferring their business base thereto because of the more favourable concessions and treatment they were offered there.

Luxembourg

Luxembourg is one of the oldest members of the EU and has double tax treaties with more than 25 countries.

The well known tax free "1929 Luxembourg Holding Company", as well as the undertakings for Collective Investment in Transferable Securities "UCITS", are excluded from the benefits of the treaties. The Societe de Participation Financiere "SOPARFI" which was introduced in 1990, is considered to be a tax-privileged company which is not excluded from enjoying the benefits of Luxembourg's treaties.

Madeira

Madeira is a small island in the Atlantic and an autonomous region of Portugal.

Non-residents may establish tax free offshore companies there with the guarantee of Portugal and the acceptance of the EU until the year 2011.

Portugal has a network of double tax treaties (which apply to Madeira as well) with more than 14 countries. However, recently certain countries are either terminating their treaties with Portugal or unilaterally exclude Madeira's zero-tax companies from the benefits of their treaties.

The Channel Islands

Jersey and Guernsey are two small islands between France and the U.K. They are known as low tax international financial centres for the status of their "exempt company", the trust, the captive insurance company and the "limited liability partnership".

Special provisions were negotiated for the Channel Islands in terms of which their rights were unaffected by the accession of the U.K. in 1973. Although they are treated as forming one territory with the U.K. in some areas relating to fiscal harmonisation, the Channel Islands are considered to be third countries and are maintaining their status as offshore centres.

Other zero tax or low tax regimes in the EU.

Whilst on the subject, special reference ought to be made to the so many incentives, offered by the United Kingdom for the promotion of the international business and financial centre of London.

It is also worth mentioning the tax free companies of the Law 89 of Greece, the Co-ordination Centres legislation in Belgium, the new holding companies legislation in Germany and the beneficial holding company regime in Austria.

Mr Chairman

There is no doubt that Cyprus' way to the European Union would be a lengthy one full of difficulties and tough negotiations.

The position of Cyprus as an international business centre could be either jeopardised or further enhanced and strengthened.

In the very limited time which was designated to me, I would dare to make some general suggestions:

1. First of all, we have to prepare and carefully design a strategic plan setting out short-term and long-term goals in respect of each important sector of the Cyprus economy likely to be affected by the accession - the agricultural sector, the industrial sector and the services sector.

2. In our preparation, we have to secure the full and active participation of not only the various Governmental Departments and bodies, but also of all of those who contribute towards the island's economy, through and in conjunction with the relevant professional bodies, trade unions and associations.

3. We have to carry out a scientific study of all the developments which are taking place currently in Europe, with a view to formulating a strong and effective stance during the accession negotiations.

4. Most importantly, we have to re-engineer our status as an international business centre and not only bring it in line with the acquis communautaire but also to make it even more effective and attractive to the multi-national companies and generally to the international entrepreneurial community.

5. Such a re-engineering could provide for certain corrections to our so-called "offshore company" which would make it accessible to both Cypriots and non-Cypriots. There should be only one type of company which can carry out activities in Cyprus or outside Cyprus and which will be treated tax-wise with uniformity, when generating income from abroad, for instance, it could be taxed at a lower rate.

6. Such a re-engineering should also design and promote certain new products or certain areas where Cyprus could be useful to its future European partners, for instance its unique ties with Russia and other Eastern European countries and its increasing role in the financial sector.

Cyprus has no other resources. It has no raw material, no agriculture, no industry, no water, no oil, but only human resources.

The human resources of Cyprus combined with its key geographical position made Cyprus an effective international business centre throughout its long history.

Cyprus is nothing but an international business centre.

It offers its services to its neighbours and generally to the international entrepreneurial community. Cyprus is ready and willing to offer its services to its future European partners. After all this will be its only contribution as it has nothing else to offer.

It is up to the European Union to accept this contribution or reject it.

Thank you.


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