There are many reasons that may motivate a company to change its place of residency and migrate from one country to another, a trend that is becoming more and more common. A corporate migration could possibly result in the reduction of the company's effective tax rate by taking advantage of available tax treaties in the new place of residency. Other companies may wish to break away from their homelands' burdensome tax system and replace a complex and strict tax regime with a more beneficial one. The prospect of having the right to use a wide treaty network as well as the European Union's directives is tempting, as these treaties and directives offer a variety of exemptions and in addition to the fact that some countries have no controlled foreign companies or thin capitalization rules, the combination is more than attractive.
In order to determine the residency of a company there are two well -established theories, the 'real seat' approach and the incorporation approach. The 'real seat' theory determines the residency of a company according to where the company's head office and principal business headquarters are situated. Conversely, the incorporation theory claims that a company is resident for tax purposes in the country which that company was incorporated and registered. Whether a company should migrate or not is subject to serious scrutinize of the tax regulations of both the home country and the new country of arrival and depends on the facts and circumstances of each case. Prior to a migration taking place, it is crucial to consider the possibility of generating a realization incident for the shareholders resulting in a direct tax loss. Furthermore, the possibility of exit charges must be examined, as well as the potential termination of the company's net operating losses.
How to migrate to Cyprus
The most straightforward method in order to change a company's place of residency is by winding up the company and re-registering the company in the country of arrival. Nonetheless, this is the most tax inefficient method as it results in the instant taxing of all profits realized and there may also be a triggering event for the shareholders as a deemed distribution of all profits will occur. It is also required that the company constructs new legal documents, such as a memorandum and articles of association which can be costly and time consuming.
Another method of company migration, the simpler and most frequently used method under double tax treaties, is the transfer of the place of effective management of the company. Such a transfer involves the move of the company's management and control from one jurisdiction to another. The place of effective management is usually deemed to be the place where all the important decisions are made, where the directors manage the company and where the general meetings are normally conducted. This type of migration is rather easy to perform and the transfer normally does not trigger a taxable event at the shareholder level. In addition, the company is not obliged to produce new legal documents but there is rather a continuance in the operation of the company. It must be noted however that this method is subject to substance requirements as an anti- tax avoidance technique which have to be met and which are frequently very rigid.
A company could also migrate by transferring its legal domicile, a method not universally acknowledged yet. Transferring the legal domicile entails the move of the legal seat of the company, while in using this method liquidation of the company is not commonly needed. The transfer of legal domicile must be approved by both the country of arrival and the country of departure. This type of transfer does not result in any real estate transfer tax and does not affect the company's loss carryforward as there is no interruption of the company's legal form and establishes a legal continuation. Nevertheless, in the majority of situations, such a transfer will demand that the company registers at the company registrar of the new jurisdiction and that the company corresponds to the new jurisdiction's company laws.
Law 124 (I) of 2006 implemented legislation enabling the transfer of companies in and out of Cyprus. Transferring the legal domicile entails the move of the legal seat of the company, while in using this method liquidation of the company is not commonly needed The company wishing to migrate should de-register from the country of incorporation and acquire a Certificate of Continuation in Cyprus, given that laws of the country of incorporation allow such a transfer. This type of transfer does not result in any real estate transfer tax and does not affect the company's loss carry forward as there is no interruption of the company's legal form and establishes a legal continuation.
A share-for-share exchange is a method that requires that the shareholders of two different companies in two different jurisdictions exchange their shares so that the shareholders of the company situated in the departure jurisdiction own shares in the new parent company in the arrival jurisdiction, and the new parent company owns the whole of the shares of the company situated in the departure jurisdiction. A benefit of the share-for-share method is that a new legal entity is formed lacking any legal history account, and a step- up in basis applies. Nonetheless, the exchange could possibly trigger a tax event for the shareholders.
A ' Societas Europea' is a new European corporate vehicle. It is a standardized public limited company which can effectively migrate from an EU jurisdiction to another as a result of the freedom of establishment principle as preserved by the EC treaty. The greatest advantage of the SE is the ability to easily transfer an SE to another EU country in the quest of finding a simpler, more beneficial tax regime and a less rigid, more flexible legal system. There is no need of winding up and re-registering as the company's seat can be moved freely inside the EU territory. In addition, the transfer does not trigger a taxable event either for the company, neither for the shareholders.
The EU Directive 2005/56/EC regarding cross-border mergers gives the opportunity to EU companies to form a merger with another EU company while reducing administrative, legislative and fiscal obstacles. These obstacles are mainly removed as a result of the general rule that underlines the directive which is that the national law of the company resulting from the cross-border merger governs. The Directive presents three ways of merger: merger by acquisition, merger by a way of a newly constructed company and merger as a specific case. These three types of merger have in common the important detail that no winding up and formation of a new company is needed. However, since a merger involves the transfer of assets of the disappearing company to the surviving company, this could trigger capital gains tax and in some cases real estate transfer tax. To avoid such a result, the national law of each EU member state, should be carefully examined.
What would your business gain in regards to tax?
Cyprus is considered to be one of the most promising business forums of the European Union and this is mainly because of its astonishingly beneficial tax regime. Cyprus is now regarded as a premium finance and trading jurisdiction.
- Cyprus has a standard corporate tax rate of 10%, the lowest in the European Union.
- No Capital Gains Tax with the exception of real estate located in Cyprus.
- Tax losses can be carried forward indefinitely and can also be surrendered as group relief. Mergers, takeovers and other re-organizations can take place within groups with no tax consequences.
- Added commercial value and monetary benefits due to the ability to register for EU VAT in Cyprus.
- Unilateral tax-relief for foreign tax suffered is given to all Cypriot companies.
- Interest deduction is provided for borrowing costs.
- A wide Double Tax Treaty Network as well as the EU Directives for advantageous tax planning.
- No withholding taxes, in most cases.
- No thin capitalization rules, in most cases.
- Absence of strict Controlled Foreign Company Legislation.
- Limited anti-avoidance provisions.
- Friendly Tax Authorities.
- Foreign dividends are tax exempt.
Do I also need to move my residency in Cyprus?
Moving an individual's residency in Cyprus is not necessary. If someone successfully manages to move his company to Cyprus, his company will be able to take advantage of all the beneficial tax regulations irrespective of where he is resident. As it was established in the case of Salomon v Salomon, a company has a separate legal personality from its shareholders and as a result a company resident in Cyprus can benefit from the Cypriot advantageous tax law, no matter where its shareholders are resident.
What would be your personal gain in regards to my annual salary?
Besides the low corporate tax rate, personal annual salary tax rates are considerably low depending on your income with the highest tax rate being 35% for income above €60, 000. Moreover, apart from the low individual taxation there are also many exemptions available. The key exemptions on income tax include:
- Interest ( the whole amount)
- Dividends ( the whole amount)
- Remuneration from any office or employment exercised in Cyprus by an individual who was not a resident of Cyprus before the commencement of his employment, for a period of 3 years commencing from 1st January following the year of commencement of the employment (tax exemption for 20% of their remuneration, or EUR8,000 (at the time of writing) whichever is the lower).
- Profits from the sale of securities (the whole amount.)
- Capital sums accruing to individuals from any payments to approved funds ( the whole amount)
Another issue to consider is the income tax deductions provided. There are a number of tax deductions on income including:
- Contributions to Trade Unions or professional bodies. (The whole amount)
- 20% deductions on Gross Rental Income
- Donations to approved charities but subject to conditions).
- Social Insurance, provided fund, medical fund, pension fund contributions and life insurance premiums. ( Up to 1/6 of the chargeable income)
What is more, in the pursue of promoting the transfer of company seats to Cyprus, 50% of the income of employees moving to Cyprus with income exceeding €100,000 , will be exempt from tax for the first five years following the transfer.
Would your company in your current country of residence need to remain active?
Once the company moves its seat to Cyprus, the company will no longer be considered a foreign company. The company will be considered as resident in Cyprus and although your company is not liquated, the company is deemed as liquated and re-registered in Cyprus. Therefore, your company will no longer be active once it establishes residency in Cyprus. The company will be subject to tax in the country of residence, in this case Cyprus, and it will be allowed to take advantage of all the tax benefits of its country of residency.
How easy is to work with the Cyprus tax Authorities?
Another aspect of being resident in Cyprus which should be taken into consideration is the investor- friendly tax authorities which have established themselves as always being keen in helping and serving foreign investors. The tax authorities provide for an uncomplicated and clear system as well as immediate and straightforward information on all the necessary topics. Government tax services are not only amongst the most investors' friendly but also amongst the most efficient and professional tax services.
What is your annual accounting and auditing cost going to be?
All companies resident in Cyprus are obliged by law to have an annual audit and they are also required to prepare a statutory audit of financial statements and submit it to the tax authorities. What is more, they have to prepare, submit, and maintain VAT records and returns. Auditing and accounting fees vary according to how many transactions the company has conducted each month or year. The auditing and accounting fees extent approximately from €1,200 to €3,000 per year for a fairly small company with a low level of activity. In Cyprus there are a number of exceptional auditing and accounting firms providing expert and specialized services.
Can all professions be exercised in Cyprus? In case of a special profession do you need a special clearance from the legal authorities?
The freedom of establishment and the freedom of free movement are two of the fundamental principles of the European Union. For this purpose Directives have been implemented, the Sectorals Directives and the three Directives of the General System, which cover all regulated professions. Under these Directives, the competent authority needs to examine whether a foreign professional corresponds to the Cypriot requirements and on the grounds of inadequate qualifications may refuse a national of a member state to pursue a specific profession. What is more, in relation to the recognition of academic qualifications the competent authority ( KY.S.A.T.S.) may grant recognition of equivalence once it is satisfied that the academic title is awarded by an accredited education establishment recognized in the country it operates.
Are there any supporting EU programs for new businesses that I could benefit from?
The European Union in cooperation with the Government of Cyprus, provide finance for a number of projects for a number of different sectors.
- Business and Industry: provision of grants to SMEs in certain sectors.
- Competition, Health, Fisheries, and Marine Affairs: provision of state aid for the implementation of HACCP for food and drinks.
- Education: provision of training to companies with 1-4 employees.
- Employment and Social Affairs: subsidization of companies for the creation of new working positions with more flexible working times.
- Environment: technical support for farmers.
- Regional policy: Agricultural areas development.
- Rural Development: subsidization for goats and sheep, training of farmers.
Are there any supporting EU programs for employing personnel?
The EU supports the advance of education by providing grants to companies employing trainees and young people. In general, the EU is aiming at overcoming the economic crisis by offering its Member States a variety of programs which focus on enterprises and their growth. There are programs relating to Science and Technology, Regions and local development, Business, Energy and Natural Resources as well as Agriculture, Fisheries and Food. The EU is determined more than ever to help businesses across the European Union.
Migration of companies, by tradition a drastic measure, is increasingly becoming a rather attractive option. Companies, in the era of the economic crisis, are more prepared to try new structures through migration if this going to result in residency in an advantageous tax regime. Nonetheless, even if migration is now a reachable alternative, all the tax implications of such a course of action should be cautiously analysed for both short –term as well as long-term consequences.
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.
Specific Questions relating to this article should be addressed directly to the author.