Corporate redomiciliation generally refers to a company transferring its registration and registered office address from one country (hence jurisdiction) to another. Redomiciliation in Cyprus is possible since 2006 and is provided for by sections 354 (Β)-(Θ) of the Cyprus Companies Law, Cap. 113 (‘the Law'). Moreover, it is certainly on an upward trend over the past few years, and this increase is only partially explained by Cyprus's favourable corporate tax rate of 12.5%. The question therefore emerges, what is this sudden increase fuelled by?
Why redomicile in the first place
Ask any lay person to cite one reason why a company should redomicile and you are bound to get ‘tax' as the most popular answer. A more favourable tax regime is one of the principal reasons to change a company's seat of incorporation, and even if it does not constitute the driving motivation, tax implications of redomiciling should ALWAYS be considered. Nonetheless, Cyprus which enjoys a 12.5% corporate tax is witnessing a surge in redomiciliation from (among other jurisdictions) the British Virgin Islands (BVI), which feature a 0% corporate tax.
This brings us to another reason to redomicile, namely an adverse change in the legislation of the country of the company's original seat. For example, in the BVI this was triggered by the coming into force of the Economic Substance (Companies and Limited Partnerships) Act, 2018. In practical terms this Act means any company registered in the BVI must pass an economic substance test in order to benefit from the 0% corporate tax rate. This translates into the relevant activity (e.g. banking, insurance, shipping) being directed and managed from the BVI, core income generating activities being conducted in the BVI, and meeting requirements in terms of physical presence of adequate employees, adequate expenditure, and physical offices in the BVI. This focus on more stringent regulation principally designed to root out tax avoidance (which according to the OECD is equivalent to 4-10% of the global corporate tax revenue) is not unique to the BVI, with similar legislation enacted in Bermuda, the Cayman Islands, and the Channel Islands. Meanwhile, Australia applies a 40% Diverted Profits Tax for Significant Global Entities since 2017.
Of course, there are numerous other reasons why a company may choose to redomicile, whether practical such as decreased maintenance costs, better management, geographical proximity, and less bureaucracy, or more strategic, such as taking advantage of a country's memberships and bilateral/multilateral treaties, departing from sanctioned/backlisted jurisdictions, as well as accessing new markets.
Alternatives to redomiciliation
The next question to ask is whether there are suitable alternatives to redomiciliation in taking advantage of the laws of more advantageous jurisdictions. One approach entails setting up a branch, or incorporating a subsidiary in the new jurisdiction. Setting up a branch may be good for business, but the company remains primarily regulated by the laws of its country of registration, therefore legal advantages are limited. Incorporating a subsidiary leads to a hybrid legal position, with the parent company regulated by the laws of the original jurisdiction, and the subsidiary governed by the laws of the new jurisdiction. There are certain legal/tax benefits that may be derived through this corporate structure; however this entails meticulous consideration of the laws of both jurisdictions, especially the parent company's, and globally there is an impetus to reduce these advantages in similar manner to the rooting out of tax avoidance discussed above.
Another approach would be to consider a cross-border merger, or the dissolution of the company in the original jurisdiction and incorporation in the new jurisdiction. Ultimately in both solutions the new entity could be incorporated in the new jurisdiction of choice. Additionally, a cross-border merger is a highly effective method of achieving economies of scale, and it is often used to bring about intra-group reorganisations. However, there is no continuation of the original legal entity, which could bear implications in terms of maintaining good will and track record, ensuring/maintaining credit, holding licences, and keeping the benefit of signed contracts, especially where change of control clauses feature, and/or third-party consent is necessary.
Corporate redomiciliation is therefore effective in maintaining all rights associated with the company (which of course are accompanied by the respective liabilities), while enjoying the associated legal and tax benefits of the new jurisdiction of incorporation. However, it is not always feasible, as demonstrated when one considers the position of the UK. Under UK company law, a company remains incorporated where it originally was until it is dissolved, and this applies to companies seeking to redomicile both in and out of the UK. This limitation has received renewed focus since Brexit, with companies seeking to maintain access to the EU. Some of the solutions that have been employed by UK companies seeking to redomicile out of the UK involve corporate inversions, i.e. incorporating a holding company abroad with the original company effectively becoming a subsidiary, or tax migration, which takes advantage of domestic legislation, bilateral/multilateral treaties, and a relocation of the place of effective management of the company, to achieve taxation solely in the new jurisdiction.
Advantages of redomiciling in Cyprus
Although it can be said there is no single most suitable jurisdiction for company registration, Cyprus offers numerous advantages, which when viewed together offer a highly attractive package:
- a competitive EU corporate tax rate of 12.5%. To compare, Greece features a corporate tax of 24%, France of 26.5%, and Germany of 30%;
- EU membership, and tax treaties with over 60 counties such as the US, the UK, Canada, Russia, Singapore, Japan, China, and India;
- full compliance with OECD requirements and EU Directives;
- a common law legal system, backed by extensive company law precedent;
- a wide selection of competitively priced associated accounting and legal services;
- reduced set-up and maintenance costs;
- an attractive holding company regime. Controlled Foreign Company (CFC) rules were only recently introduced, and exclude companies with annual profits of less than €750,000;
- zero tax on dividend income, interest income, and profits derived from a permanent establishment outside Cyprus;
- outward as well as inward redomiciliation; and
- redomiciliation for non-EU as well as EU companies.
Requirements for redomiciling in Cyprus
There are certain important prerequisites for a company to redomicile in Cyprus:
- the laws of the initial jurisdiction of incorporation must allow outward redomiciliation (section 354 A);
- the company's Memorandum and/or Articles of Association must allow continuation of the company under another approved jurisdiction (section 354 Β). If not, these need to be amended accordingly;
- there must be no commenced dissolution or insolvency proceedings, or any other ongoing court proceedings against the company in the outgoing jurisdiction, or any judgment or decree against the company which limit or postpone the rights of creditors (section 354 Θ);
- if the company carries out a regulated activity, outgoing licences must be provided and Cypriot licences must be applied for and obtained (section 354 Δ); and
- the company should apply to the Registrar for name approval. If the Registrar considers the name stated under section 354 Γ may lead to confusion and/or is misleading, the Registrar may order that the name be amended under section 354 Ε(2).
Procedure and documents
An application for redomiciliation of the registered office to the Republic (form ME1), along with an affidavit typically signed by a Cypriot lawyer (form MEA) and a form for the issuance of certificate of continuation to the Republic of Cyprus (form ME4) must be delivered to the Registrar. Under section 354 Γ these must be accompanied by a number of documents, which inter alia include the following:
- the resolution or document of the company which allows it to redomicile in Cyprus;
- a copy of the revised constitutional documents which allow the company to redomicile in Cyprus;
- a certificate of good standing;
- a statement from a director authorised by the Board which confirms the name the company and its new name in the Republic, the outgoing jurisdiction, the date of incorporation, the resolution or document under which it was decided the company shall continue in the Republic, that the company gave notice to the outgoing jurisdiction of its decision to continue in the Republic, and that no criminal or administrative proceedings have been issued against the company;
- a statement of solvency from a director authorised by the Board;
- a list containing the directors and secretary of the company;
- a list of current members of the company; and
- any documents confirming redomiciliation is allowed under the outgoing jurisdiction, and that any necessary consents have been provided.
Registration in Cyprus
Once the above procedure and document submission has been complied with, the Registrar issues a temporary certificate of continuation of the company under section 354 E. Under section 354 ΣΤ this certificate confirms the company has been incorporated under the Law and is temporarily registered in the Republic, and it is subject to all obligations and may exercise all powers of a registered company under the Law.
Under section 354 Z the company must provide within 6 months the Registrar with evidence that it is no longer registered under the outgoing jurisdiction, in which case the Registrar issues the certificate of continuation which confirms the company's registration in the Republic.
Cyprus provides a straightforward legal procedure for redomiciling in the Republic and presents one of the best all-around options for doing so. Its competitive corporate tax of 12.5% along with holding company friendly legislation, solid infrastructure, abundant company law precedent, EU and OECD membership, as well as a host of tax treaties, have recently supported a surge in applications even from tax havens such as the BVI. Moreover, Cyprus allows both inward and outward redomiciliation which maintains flexibility, and applications from both EU and non-EU countries, which enhances its offer.
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.