Cyprus: Choosing an International Jurisdiction

The choice of an International Business and Offshore Jurisdiction should be part of an overall International Tax Plan to be formulated with regards to the specific requirements of the private individual or corporation.

In order to ensure the viability of an international tax structure the choice of a jurisdiction has to focus mainly on two areas:

• Type of jurisdiction required to meet the objectives of an international tax strategy
• Evaluation criteria for a reputable jurisdiction

Based on our experience we have prepared a comparison table of the reputable jurisdictions we utilise in our International Tax planning consulting. To view the comparison table please visit our website.

Many international jurisdictions offer significant tax and other advantages as offshore centres. Some countries have no direct taxation, and others do not tax income from foreign sources or have relatively low tax levels. Some countries offer special tax privileges for particular activities, and some have signed double tax treaties with high-tax jurisdictions, including countries such as Canada, the United States, or the UK. Individuals and corporations, as part of an international tax structure, can legally enjoy these tax advantages

1. Tax Haven jurisdictions

Some countries do not impose any personal or corporate income taxes, capital gains or wealth taxes. Individuals or corporations can incorporate a company or form a trust in these jurisdictions. Governments in these countries earn revenue from the annual duty or franchise fee that is charged to an entity established in their jurisdiction. Widely used non-tax jurisdictions are the Bahamas, Bermuda, and the Cayman Islands.

Individuals or corporations looking for the highest possible level of privacy and confidentiality for their transactions prefer tax haven jurisdictions. Such jurisdictions are also attractive to investors with small to mid-sized portfolios primarily because setting up an offshore structure in a tax haven jurisdiction is relatively inexpensive. Tax haven jurisdictions generally have the lowest annual maintenance costs when compared with the any of the other types of jurisdictions.

To view our list of tax haven jurisdictions and a comparison between them please visit our website.

2. "No-tax-on-foreign-income" jurisdictions

Jurisdictions such as Hong Kong and the British Virgin Islands do not impose any form of income taxes on individuals or corporations if the income is obtained through foreign sources. This income cannot be derived from any local business activities

Other "no-tax-on-foreign-income" jurisdictions include Gibraltar, Guernsey, the Isle of Man, Panama, and Jersey.

"No-tax-on-foreign-income" jurisdictions fall into two classes:

• The first class allows a corporation or individual to conduct both foreign and domestic business but pay tax only on income obtained from domestic sources.
• The second class provides tax exemption to companies that engage exclusively in foreign business.

"No-tax-on-foreign-income" jurisdictions require a company to decide at the time of its incorporation whether it will engage in local business, with the consequent tax liabilities, or whether it will engage in foreign business only, which would make it exempt from taxation.

While individual investors are still attracted to non-tax-on-foreign-income jurisdictions, many find that the annual operating costs in these jurisdictions are higher than in other types of jurisdictions.

The "no-tax-on-foreign-income" jurisdictions are included in the list of tax havens on our website.

3. Tax-planning jurisdictions

Tax-planning jurisdictions are mainly low tax countries with extensive networks of double tax treaties. Such jurisdictions include Cyprus, Luxembourg, the Netherlands and others.

Individuals and corporations can effectively use tax-planning jurisdictions in both simple and complex tax structures. Although the incorporation and maintenance costs are higher than the tax haven jurisdictions, there are significant tax and other advantages to be gained from such jurisdictions. Such advantages may include minimisation of overall tax liability, asset protection, confidentiality, access to new sources of finance and others.

The extensive analysis of Cyprus on our website highlights the multifaceted issues and opportunities to be gained from a reputable tax-planning jurisdiction. A list of tax-planning jurisdictions and a comparison between them is included in this site.

4. Unique tax jurisdictions

Unique-tax jurisdictions impose a regular range of taxes but may provide special concessions on both inbound and outbound investments. Such concessions may include total exemption from tax for shipping companies, movie-production operations, and financial companies. Concessions might also be available for specific forms of corporate organisation, such as the uniquely flexible corporate arrangements offered in Liechtenstein. The Netherlands and Austria also offer similar kinds of specialised arrangements.

Unique-tax jurisdictions tend to attract high net-worth investors, individuals who have complicated asset protection or estate planning needs, as well as corporations.

There are many factors to be considered in choosing an international jurisdiction. The choice of the international jurisdiction should not only be based on the overall objective of the international tax-planning strategy but also on the preferences and risk tolerance of an individual or a corporation. Such factors may include:

1. Political Stability

Even though the funds or assets of an international structure may never be physically in the international jurisdiction, the political stability of the chosen location is a vital concern. A political instability even if caused by external factors can disrupt an effective tax structure. To minimise the risk of political instability one has to set up offshore corporations and trusts to be mobile and stable. A number of jurisdictions have structured their trust laws to provide this mobility and stability.

2. Economic Stability

Many international jurisdictions currently have some form of domestic exchange controls. This means they will allow exemptions from domestic economic laws and there may be different laws for foreign corporations, trusts, investors, and individuals.

Many jurisdictions have made a concerted effort to promote provisions that allow an individual or corporation to hold assets in any foreign currency. This is an effective way of hedging against the economic fluctuations of the jurisdiction. Similarly, in the case of liquid funds it is important that the banking system in the jurisdiction operates multi-currency accounts.

3. Protectorates

A number of international jurisdictions are protectorates of other countries and have adopted laws very similar to those of their protector. The protector/protectorate relationship is important to international tax planning because it often explains the political and legal structure of the country and can be a good indication of the country’s stability and security. A protectorate often has some clearly defined and limited political ties to the protector country.

Jersey, Guernsey, Bermuda, the Bahamas, and formerly Hong Kong are all protectorates of Britain. The United States, France, Holland Spain, and several other countries also have protectorates.

4. Currency

Offshore centres frequently use the domestic currency of the offshore jurisdiction. Many offshore domestic currencies are under exchange controls and their exchange rates are often linked to the U.S. dollar, British pound sterling, or similarly popular currency. However, for the purpose of offshore financial affairs and international businesses, most if not all banks, IBC's, and trusts operate free from exchange controls and in the currency of their choice. The U.S. dollar is probably the most popular currency for business and investments, but most institutions deal in up to 35 other major currencies, including:

Australian dollar	Hong Kong dollar
Austrian schilling	Indian rupee
Belgian franc	Irish punt
Bermudan dollar	Italian lira
Brazilian real	Japanese yen
British pound	Jordanian dinar
Canadian dollar	New Zealand dollar
Danish krone	Norwegian krone
Deutsche mark	Portuguese escudo
Dutch guilder	Saudi Arabian riyal
Euro	Singapore dollar
Finnish markka	Spanish peseta
French franc	Swedish krona
Greek drachma	Swiss franc

5. Location

The location of the international jurisdiction is seldom the place of conduct of the day-to-day business or operations of a set-up. It is vital that the international jurisdiction easily accessible from the region where the activities are located. Further to the time zone factor, it is important that the international jurisdiction must have good flight connections, good telecommunications network and appropriate shipping routes.

6. Language

The use of English as the business language is important as it ensures that instructions and requirements communicated are effected without communication errors.

7. Business Infrastructure

The international jurisdiction must have a well-developed business infrastructure. This should include proper and regulated banking facilities, services with professional personnel and a year-round accessible airport.

8. Exchange Controls

The international jurisdiction should not impose exchange controls on foreign companies and trusts. This is vital for repatriating or relocating funds from one jurisdiction to another.

9. Legal System

A legal system based on the English common law is the most preferred and will provide the best security for an international tax-planning structure. Britain, the United States, and Canada have legal systems based on common law.

10. Treaty Network

International jurisdictions that have extensive networks of double tax treaties are very important for international tax-planning structures. The correct utilisation of double tax treaty networks minimises the overall incidence of tax including withholding taxes, capital gains taxes, income tax and taxes on dividends and royalties.

The treaty network jurisdictions such as Cyprus or Luxembourg are generally considered more reputable than tax havens but are more regulated with disclosure and reporting requirements. The reputation of such jurisdictions allows mobility for different agendas. However if confidentiality is more important than mobility one may choose a jurisdiction such as the Bahamas, which refuses to sign treaties with other jurisdictions (except for treaties on criminal-related activities such as drug trafficking).

11. Legislation

More than 52 jurisdictions have legislation that encourages the formation of offshore companies and trusts in their jurisdiction. Some jurisdictions have introduced new, modern corporate legislation specifically designed for international business. Others have amended existing domestic legislation to cater to offshore requirements. The most essential criteria are that the legislation be flexible and offer:

• low capital requirements,
• minimal or optional statutory filing obligations,
• the ability to hold directors’ and/ or shareholders’ meetings anywhere in the world,
• the ability to appoint professional directors, officers, and nominee shareholders,
• provisions allowing bearer shares to be issued,
• the absence of, or the optional requirement for, an audit of accounting records, and
• confidentiality and complete privacy in offshore business dealings.

Most jurisdictions create basic offshore legislation that is advantageous for company, banking, and trust agendas. Many jurisdictions also create legislation for more specific agendas. This "niche" legislation can be particularly suitable for individuals or corporations that are interested in captive insurance, limited life companies, mutual funds, or investment objectives.

12. Communications

The international jurisdiction must have good communication facilities for conducting business efficiently and in confidence. These facilities should include reliable air travel, mail services, and telecommunications systems.

13. Time Zones

It is very convenient if the international jurisdiction has a time zone similar to that of the country of operations. Similar working hours will facilitate telephone communication between people both onshore and offshore during the business day. Alternatively an international jurisdiction can provide the link between two time zones that do not have matching business hours. Cyprus for example can service the Far East operations of a set-up in the morning and the North America operations in the afternoon.