Cyprus: Cyprus - Russia's Business Gateway To The World

Last Updated: 30 November 1999

1. INTRODUCTION

CYPRUS AND THE DRAMATIC CHANGES IN EASTERN EUROPE

Dabro pajalovat na Kipr!

"Welcome to Cyprus", in Russian. Ten years ago, a phrase, hardly ever heard in Cyprus, now known and frequently used by almost everybody on the island. A small but symbolic change in the lifestyle of the Cypriots, but even more so, of the Russians.

The earth- shaking changes in Eastern Europe brought about far reaching new requirements and new opportunities. Yes, the doors in and out of this vast territory, for decades previously hermetically closed, were suddenly opened.

Millions of people in the ex Soviet republics were looking for ways to explore the outside world, to mingle with other peoples and to have a taste of what was, for them, forbidden fruit.

Similarly, people of the western countries and multinational business empires, found at last the opportunity to enter this formerly out of bounds territory. Investing in such volatile and dynamic new markets involved a high element of risk, but the returns could also be very high. What was needed was to find the optimum way in which to enter the new markets.

2. CYPRUS AS A REGIONAL FINANCIAL SERVICES CENTRE

2.1. Background information

Cyprus is an island situated in the Eastern Mediterranean , at the meeting point of 3 continents: Europe, Asia and Africa. It has a long and remarkable history of seven thousand years. It became an independent Republic in 1960 after 82 years of British administration which left a strong mark on its way of life. The English language is widely used and the legal and financial system is strongly based on the British model. It has an open free market economy which has performed consistently well for more than 20 years, leading to a high standard of living for its people. Tourism has been and still is the backbone of the economy while the agricultural and manufacturing sectors make up a progressively smaller proportion. Cyprus has developed into a commercial, financial and maritime centre and this has led to the growth of related service industries. It has been the policy of all the governments in Cyprus in the last two decades to develop Cyprus as a centre for international business. The inherent advantages of the island, together with the legal and regulatory incentives introduced by its Government have attracted a large number of foreign investors, (including some of the best known giants), to use Cyprus as a base for their business. A series of political, military and other events which took place in the countries around Cyprus has strongly contributed to its development, since it has rightly been viewed as a safe base for businessmen fleeing the warring Middle Eastern countries, the destruction of Lebanon, the disintegration of Yugoslavia and finally the break up of the communist block in Eastern Europe. Cyprus, although politically and economically very much a part of the Western world, has always had remarkably friendly relations with the Soviet Union and other Eastern European countries, and this continues to date.

2.2 The advantages of Cyprus

The advantages of Cyprus as an offshore business financial centre can be divided into two main categories. Those which are inherent in the nature of the island and its population (the Inherent Advantages) and those which are the result of specifically designed legal and regulatory measures taken by the Government of Cyprus (The Legal Advantages).

2.2.1. Inherent Advantages of Cyprus

These can be summarised as follows:

(i) Geographic location

Cyprus, lying as it does at the hub of three older continents, has a strategic location. This has been known for thousands of years and has been one of the reasons why so many different empires considered it important to use Cyprus as a regional base (Alexander the Great, The Roman, Byzantine, Ottoman and British Empires). Today, Cyprus may well be the easternmost bastion of the European Union and its base for the Middle East, North Africa and Eastern Europe. The island state, although certainly small, occupying 9.251 square kilometres, is a great deal larger than other well known offshore business centres. Its time zone is 7 hours ahead of New York and 7 hours behind Tokyo, allowing executives to work with the world's most important financial centres in the same working day.

(ii) Good air connections

The island's main international airport, Larnaca Airport, situated 50 kilometres from the capital, Nicosia, is served by a wide network of air-routes connecting Cyprus with Europe, Africa and Asia. There are frequent flights connecting with London, Athens, Moscow and other cities.

(iii) Excellent telecommunications

Cyprus, recognising the importance of telecommunications, has invested heavily in this sector. As a result, the island may claim to be amongst the most advanced countries in the world in this respect.

(iv) Educated and well trained population

Cyprus has a well-educated work force, ranking very highly in terms of the proportion of university degree holders in relation to the population. Qualified technical, clerical and professional staff with fluency in English and other languages, including Russian, are available for employment at reasonable cost, considerably lower than that of other European offshore centres.

There are also good quality private schools which cater for the foreign speaking pupils. They offer tuition in English, French, Russian, Italian, Arabic, Armenian and other languages.

(v) High standard of professional services

Legal, accounting, consultancy, computer and other professional firms, providing services to offshore enterprises, are of an internationally high standard.

Many of the island's lawyers are British educated, as are almost all the qualified accountants who are also members of the prestigious British Institutes of Chartered Accountants or other similar associations.

In recent years, multidisciplinary firms have been formed, grouping together all the disciplines (such as lawyers, accountants and economists) needed to provide a complete service to offshore business entities. This has greatly upgraded the quality of services available and compares favourably with other established centres.

In this respect, it is emphasised that prospective investors should be careful when selecting their consultants, to ensure that they engage a firm which can provide them with the correct advice and guidance.

(vi) Excellent residential and office accommodation

There is an abundant supply of luxurious residential accommodation of all types, at remarkably low cost.

Foreign businessmen, their families and their employees, coming to live on the island will have no difficulty in selecting the accommodation which most suits their preference and needs.

(vii) Low cost of living

Cost is obviously an important factor in business. A survey conducted by the Union Bank of Switzerland (UBS) to provide a number of rankings for some of the world's main business centres, including the best known offshore financial centres, showed that Nicosia (the capital of Cyprus) is one of the least expensive.

(viii) Crime free society and high quality of life

Cyprus has a remarkably peaceful and crime-free society. This may come as a surprise to those who tend to associate Cyprus with bad news concerning surrounding countries. Any foreigner who visits Cyprus will testify how safe it is to walk the streets, to leave cars unlocked and even windows open.

Quality of life is something which cannot easily be measured - it has to be "felt".

This combination of the characteristic features of Cyprus life gives inhabitants and foreigners alike a high quality of life. The numerous European, North American, Arab and Russian residents on the island verify this.

2.2.2 Legal Advantages of Cyprus

(i) Taxation benefits

(a) Low taxation of income at the rate of 4.25% on the profits of an offshore company. No further taxation on the recipients of dividends.

Zero taxation on the profits of branches of foreign companies operating from Cyprus on an offshore basis if they are managed from abroad.

(b) No withholding taxes on dividends paid to shareholders of offshore companies irrespective of the place of remittance.

(c) All revenue expenses incurred in the business, as well as annual allowances on fixed assets, are allowed as deductions from the taxable profit.

(d) There is no estate duty on the inheritance of shares in an offshore company.

(e) Full exemption from capital gains tax except on the sale of immovable property situated in Cyprus (in which case there is a 20% capital gains tax on the net profit).

(f) Full exemption from the local Social Insurance contributions for foreign employees of offshore companies.

(g) Full stamp duty exemption on contracts entered into by offshore companies.

(h) Low income tax for expatriate employees of offshore companies. (Maximum of 20% if they live in Cyprus. No taxation for periods out of Cyprus).

(i) Exemption from import duties and value added tax for:

- most business assets purchased by offshore companies with an office in Cyprus

- most household equipment purchased by foreign employees of offshore companies living in Cyprus

(j) The large number of Double Taxation Treaties signed by Cyprus provides opportunities for advantageous tax planning. The treaty with Russia and the way that it interacts with the treaties of Cyprus with other countries, such as USA and Canada, is explained later in this article.

(ii) No exchange controls

The liquid funds of offshore companies can be held in Cyprus or anywhere in the world and are freely convertible and transferable.

(iii) Confidentiality

The owners of offshore companies may, if they wish, keep their identity confidential. This is achieved by the use of nominee shareholders (trustees) and directors. Cyprus, being a country which implements the English system of law, fully recognises the concept of the "trust". It is worth mentioning that the Cyprus International Trust should be considered by all those who may find the use of a trust beneficial, as it achieves complete confidentiality and is very inexpensive.

(iv) Residence and work permits

Unlike many of the other successful offshore centres, Cyprus grants residence and work permits to foreign employees of offshore companies and their families readily.

(v) Acquisition of property

Offshore companies, their owners and non-Cypriot employees may easily acquire property in Cyprus. It should be emphasised that sound professional advice should be sought prior to signing the relevant contracts in order to minimise the risk of facing unexpected legal and administrative problems later.

3. RUSSIA: THE NEW MARKET

3.1 Using Cyprus as Russia's market place

The events which took place in Russia and other Eastern European countries in the last 10 years and which were undreamed of fifteen years ago are well known to everybody. A new type of Russian businessmen began to emerge from the chaotic situation that prevailed in the transitional stages. They were eager to take the opportunities being presented and were looking for ways to proceed. They needed consultancy, legal and financial "tools" and a safe base from which to conduct business and to deal with the outside world. Cyprus was the perfect location:

  • Situated only 3 hours by air from Moscow, with flights on a daily basis. There is no visa requirements for Russians visiting the island.
  • Already a seasoned offshore financial business centre with all the expected incentives and a well developed business infrastructure.
  • An excellent location in which to spend some time as it is one of the established tourist attractions in the Mediterranean.
  • A peaceful and crime-free society, enabling the unhindered development of business.

As if the above was not enough to make Cyprus the perfect meeting place between Russian and Western businessmen, there was also the Treaty for the Avoidance of Double Taxation between Cyprus and the Soviet Union, signed in 1982 and re-confirmed by the Government of the Russian Federation after the disintegration of the USSR. This Treaty provided for zero withholding taxes on dividends, interest and royalties paid from Russia to Cyprus and vice versa. This provision, coupled with the offshore business incentives offered by the Government of Cyprus, made Cyprus a unique location for east-west business. North American and Western European multinationals used Cyprus as a gateway to enter into the vast new markets of Eastern Europe. Similarly, for Russians who wanted to invest abroad, Cyprus was the ideal springboard.

3.2 Cyprus - The Optimum way for Russians to enter the international markets

As seen above, Cyprus offered many advantages to Russian businessmen wishing to enter the international markets. We have touched upon some of them, e.g.

  • Proximity and accessibility
  • Offshore financial centre infrastructure
  • Enjoyable environment
  • Peaceful and crime-free society

These were the main initial reasons which brought the first Russians to Cyprus. Once they started coming, however, they discovered that Cyprus had a lot more to offer to them. From Cyprus, with the help of local professionals as well as already established international financial institutions and trading organisations, they could enter new worlds. At the same time they felt very welcome on the island at all levels; from the Government to the layman. Furthermore, a significant number of Cypriots, who are highly multilingual, could speak Russian. Inevitably, Russian businessmen were followed by some of their best known banks who established their Cyprus Offshore Banking Units. These aimed at securing some of the Russian business on the island, as well as being a window to the international market for the Russian banks back home.

In a short span of time, Cyprus was able to accommodate the Russian newcomers. This was not always seen with a favourable eye. Some hostile reports appeared, from time to time, in the international financial press, making reference to alleged money laundering activities by Russians through Cyprus. The Central Bank of Cyprus has stated repeatedly that such reports were completely unfounded as its own experience with Russian banks and offshore companies has been very satisfactory. Certainly Cyprus is not a place where money laundering can easily take place. Offshore companies and banks are subject to close supervision by the Central Bank of Cyprus and the controls are generally much tighter than those of many other places.

Similarly, the Russian press has reported on a few occasions that the confidentiality rules in Cyprus are not strictly adhered to. This again has been strongly denied by Cypriot authorities. The most likely explanations for such reports are:

(i) unfounded rumours spread by competing offshore business centres and others in their attempt to win a share of this business;

(ii) unfortunate experiences of Russian investors who, in the rush, did not structure their companies correctly in order to secure their requirements, through either a lack of knowledge or good professional guidance and proper planning.

In this respect it should be strongly emphasised that the setting up of offshore companies and similar business structures, anywhere in the world, requires careful planning in order to achieve optimum results and avoid pitfalls. The basic principle should be to obtain sound advice from qualified and experienced specialist professionals. Often this requirement is not fully observed by Russian investors.

The development of the newly formed Russian community of businessmen was as rapid as the events which led to the appearance of the need for this community. The Russian economy desperately needed the mechanisms to enable it to work. The role of the Central Government was drastically diminished and private businessmen had to fill in the gaps. They developed rapidly from confused and primitive beginnings in the early nineties to the composed and confident Russian executives of today, at ease with sophisticated structures and practices.

Their expectations are becoming more demanding; from the original simple trading company to complicated international tax planning schemes.

The Cypriot offshore financial services industry was able to meet these higher expectations and the Cyprus-Russian relationship has strengthened.

3.3 Cyprus - The Optimum way for Westerners to invest in Russia

Cyprus, as an established and successful offshore financial centre, compares favourably with any of the other locations offering similar facilities and incentives. However, the Treaty for the Avoidance of Double Taxation with the USSR, makes Cyprus unique in the world with regard to investing in Russia (and some of the other CIS states). The Treaty was signed in 1982 and has been re-confirmed by the Russian Federation after the disintegration of the USSR. It provides for zero withholding taxes on dividends, royalties or interest payments from Russia to Cyprus.

Cyprus, in addition to Russia, has tax treaties with 25 other countries, including the main Western European and North American countries and almost all Eastern European countries.

Table 1: Double Tax Treaties of Cyprus

 

Received in Cyprus from the treaty countries

 

Div.

Int.

Royalties

 

%

%

%

Non-treaty countries

 

 

 

Treaty countries:

 

 

 

Austria

10

nil

nil

Bulgaria

nil

nil

nil

Canada

15

15

10

China

10

10

10

Czech Republic

10

10

10

Denmark

10

10

nil

Egypt

15

15

10

France

10

10

nil

Germany

10

10

nil

Greece

25

10

nil

Hungary

5

10

nil

India

10

10

15

Ireland

nil

nil

nil

Italy

15

10

nil

Kuwait

10

10

5

Malta

nil

10

10

Norway

nil

nil

nil

Poland

10

10

5

Romania

10

10

5

Russia

nil

nil

nil

Slovaki

10

10

5

Sweden

5

10

nil

Syria

nil

10

10

United Kingdom

15

10

nil

United States

5

10

nil

Yugoslavia

10

10

10

Notes:

(i) Dividends, interest and royalties are paid by Cyprus offshore companies without withholding tax in all cases;

(ii) The rates shown may not be applicable in all cases as there are certain exceptions or variations.

The combinations (treaty shopping) which can be formed by Western investors in Russia via Cyprus may lead to significant tax savings. The Cyprus offshore company can enjoy all benefits of all treaties except for those with Canada, France, UK and USA which contain anti-avoidance clauses. Even under those four treaties the limitations are such that they affect only payments from these countries to Cyprus and not from Cyprus to the other countries. Thus, significant advantages can also be derived by residents of those countries investing in Russia via a Cyprus offshore company.

The advantages of using Cyprus as a base from which to invest in Russia are obvious, even in the cases of the four treaties with anti-avoidance provisions mentioned above.

The table below (Table 2) shows how a Canadian investing in Russia can save 7.3% of his profits, by using Cyprus, even without taking into consideration other methods of extracting profits from Russia to Cyprus without withholding taxes, which may even be tax deductible in Russia (management fees, royalties, professional services, interest, insurance premiums, etc).

Table 2: Canadian investing in Russia

 

Using Cyprus

Directly

Profits of Russian business

1.000

1.000

Russian profits tax

(320)

(320)

 

 

 

After tax profits

680

680

Russian withholding tax on dividends

--

(102)

 

 

 

Net dividend out of Russia

680

578

Cyprus tax @ 4,25%

(29)

--

 

 

 

Net dividend to Canada

651

578

(The dividend from Cyprus to Canada is exempt from tax in Canada).

Other possible examples:

(i) Many Western companies with modern technological means may transfer their technology into Russia and collect royalties. Using a Cyprus offshore company to collect such royalties eliminates Russian withholding taxes, while the royalties paid would normally be a deductible expense in the source country, Russia.

(ii) The Western investor may be able to finance investment in Russia in the form of a loan rather than equity. Such a debt structure would be beneficial since interest may be extracted from Russia without withholding tax and would also be a tax deductible expense against profit taxed in Russia.

(iii) Benefits may also arise in the case of investors into Russia from countries whose treaties with Cyprus provide for "tax sparing credits". These are: Canada, Czech Republic, Denmark, Germany, Greece, Ireland, Italy, Romania, Sweden, UK and Yugoslavia. Thus, for example, while a German investor will suffer only 4.25% taxation in Cyprus, he will have a tax credit of 15% against his tax payable in Germany.

(iv) With careful planning, benefits may also accrue to investors from the US and the UK: countries which are considered "tough" on their tax treatment of incomes from offshore jurisdictions.

US investors may benefit by mixing Cyprus low-tax dividend with other high-tax foreign source income, thus taking advantage of excess tax credits which would otherwise be wasted.

For UK investors there may be tax and cash flow advantages by applying an acceptable policy for distribution to the holding company. Profits accumulated in Cyprus prior to distribution can be utilised in financing group activities.

3.4 Recent Trends

Some recent characteristic developments:

  • The growing use of "Feeder Funds" set up in other locations and investing in the Russian stock market via fully owned Cyprus subsidiaries. This enables the funds to benefit from the unique advantages presented by the Cyprus Tax treaty with Russia.
  • The main Cypriot commercial banks have opened representative offices in Moscow. This will enable them to be even closer to their clients who have business in Russia.
  • The establishments in Cyprus of "Administrative Banking Units" (ABUs) by some prime international banks for the purpose of funding their banking operations in Russia and investing on behalf of their customers in Russian securities and other assets.

4. CONCLUSION

Undoubtedly , Cyprus is the ideal location from which to invest in Russia. Some thoughts by the Russian Government to amend its Double Tax Treaty with Cyprus are countered by the view that the Treaty is making an important contribution to Russia's own economic development, by attracting foreign investments into Russia. Why should Russia close the best gate for western investments into its territory?

Cyprus enjoys excellent political and economic relationships with both Russia and the West. It is expected to join the EU early in the new millennium. Furthermore, the Cyprus Government has repeatedly and clearly stated its policy of retaining its offshore financial services industry, now very important to its economy. The EU has already given signs that it will be prepared to accept this deviation from the "acquis communautaire" (normal community practice) as it has done in the case of other member states (Luxembourg, Ireland, Portugal). Surely, the EU prefers to have an economically strong Cyprus as a member rather than to support another weak economy within its ranks.

The rapport that exists between Cyprus and Russia, coupled with the many economic and common-sense reasons outlined in this article, strongly supports the view that Cyprus could be for Russia and the CIS what Hong Kong has been for China.

To all those entrepreneurs who are planning to do business between Russia and the rest of the world,

"Da svidania, da vstrechi na Kipre"

"Here's to meeting in Cyprus".

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 from a local lawyer or accountant.

For further information contact us.

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