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Issue: March 2011

Welcome

Traditionally, Russian and Cypriot relations were highly developed in every aspect.
Business relations are becoming even stronger and more concrete, especially after the announcement of the removal of Cyprus from the Russian Central Bank list of offshore zones Trade relation figures show an intensive relation between the two nations. More specifically, the trade between two countries reaches an extraordinary amount of several billion dollars per year whilst the ministry officials in Cyprus estimate Russian deposits in Cyprus banks to exceed 10 billion Euros. From a Russian perspective the Republic of Cyprus constitutes one of the major investors into the Russian economy. Cyprus has all predispositions to be considered as a hub of high international standards. Located at the crossroad of three continents, enjoying a geographical privilege and in combination with its favourable tax regime, Cyprus is undoubtedly one of the most popular destinations amongst Russian preferences in terms of business investments and leisure.

Contents
About Eurofast Taxand Cyprus Russia the new Protocol Cyprus & the OECD White List Capital gains exemptions under the Protocol Exchange of Informations ICIS and UCITS in Cyprus Outbound Dividends Intra group back-to- back loans through Cyprus An introduction of Cyprus International Trusts for use in investments into Russia The Ultimate experience of Cyprus Holding Companies Double Tax Treaties EU Directives in Cyprus EU Citizenship via Cyprus Residency About Taxand 02 03 04 05 06 07 08 10 11 12 14 15 16 17

About Eurofast Taxand


Eurofast Taxand provides a range of tax advisory services in Cyprus. The firm is also the Cypriot member firm of Taxand. As well as providing tax advisory services in Cyprus, Eurofast Taxand delivers a range of legal and financial services in South Eastern Europe, including trust & management and payroll & accounting services through fully fledged group companies throughout South East Europe and Eastern Mediterranean area. This geographic reach, coupled with the access to over 2,000 fellow tax experts worldwide through its Taxand membership, Eurofast Taxand has already accumulated a wealth of expertise that can be turned into an invaluable competitive advantage for its Cypriot and international clients alike. Eurofast in recent years has achieved worldwide market recognition for its exceptional tax advice, capabilities and innovation in the area of international tax planning. In 2010 Taxand has been voted European Indirect Tax Firm of the Year by International Tax Review (ITR) and Eurofast Taxand has been recognised as Best Tax Practice in Cyprus 2010 by the European CEO and ranked 2011 Tier One Tax Transactional Practice in Cyprus by ITR.

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Russia & Cyprus


Cyprus is undoubtedly one of the most popular destinations among Russian preferences in terms of business investments and leisure.

2 The new Protocol


Finally, on October 7, 2010 official state representatives from the Ministries of Cyprus and Russia signed in the presence of President Medvedev the Protocol to the Double Tax Treaty (April 16, 2009) that was signed back in year 1998. It is expected that this important document will come into force as of January 1, 2012. The Protocol is considered highly beneficial for international business and it is expected to further enhance the economic relationships between Cyprus and Russia by means of tax advantages and incentives now available. The main precondition to be achieved in establishing better economic cooperation is the removal of Cyprus from the Russian list of non-cooperative jurisdictions as soon as the protocol comes into force. Major changes were adopted with regards to the limitation of benefits, exchange of information and the taxation of capital gains deriving from the sale of shares in a real estate company provided in the protocol. It is worth mentioning that further changes were being brought forward, besides the three key areas mentioned above, with the initiated new Protocol. With respect to dividends, the reduced withholding tax rate on dividends for the minimum investment of USD 100.000 in the capital of the subsidiary company was revised to 100.000. Additionally the withholding tax rates on dividends remain unchanged whilst the actual definition of dividends has been revised in order to be compatible with the OECD model treaty. Nevertheless, payments for Mutual Investment Funds or similar collective investment vehicles have also been included in the definition of dividends. Furthermore, changes relating to the definition of residency and permanent establishment took place as well as changes to the article on International Traffic. A foremost consideration is the issue of substance. Substance refers to how legitimate looking is a company (holding or trading). Providing a registered office or a local director will not suffice anymore. Now what needs to be demonstrated is that the Company has employees, busy offices, assets, real job execution, decision making and even an economic value for its Cyprus operations. A solid structure with the appropriate substance can not be seen as an instrument for the avoidance of taxation.

You Must
Revisit your Russian - Cyprus structures immediately Critical restructuring may be required to sustain the Protocol changes, especially in relation to substance requirements. Our tax and legal experts can assist to minimise any possible tax exposure as well as enhancing the substance of your company.

Professional revision of current tax structures must be sought immediately in order to take actions on restructuring and being in line with the changes of the Protocol.

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3 Cyprus & the OECD White list


One of the main issues discussed at the G-20 meeting held in London on April 2, 2009 was the prevention and elimination of tax evasion. Stricter measures are expected to be implemented and nations have to put in much more essential effort in order to be classified in the white list of international organisations. Countries shall implement the International Standards of Transparency and Exchange of Banking Information, as well as, to release the names of the individuals that possess accounts in their territory. Extensively other countries would be able to identify those residents who do not supply the relevant information about their international income to the tax authorities in their country of residence. The G-20 threatened to take action against non-cooperative jurisdictions including sanctions and placement in the non co-operating list. Cyprus has amended its national legislation in respect of Exchange of Information by enacting the Law 72 (I) thus making it possible for the disclosure of information to take place. Cyprus is now in full compliance with the international standards and Exchange of Banking Information and therefore it effectively joined the OECD white list. The new developments have placed Cyprus one step ahead in the tax international arena due to the immediate adoption of the International Standards and Exchange of information. Many countries have committed themselves in order to comply; having an uneasy way to go through since demands for international tax compliance have substantially increased in order to combat tax evasion.

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4 Capital gains exemptions under the Protocol


One of the main changes of the protocol relates to the taxation of capital gains as a result of the alienation of shares in real estate companies. Additional paragraphs extended and brought about significant changes to Article 13 of the Treaty whose applicability doesnt correspond to the actual day of coming into force of the protocol itself. Instead this provision was given a four- year grace period after the protocol comes into effect, so it is expected to take effect as of January 1, 2016. The changes mirror the principles laid out in the OECD Model whereby gains realised from the disposal of immovable property shall be taxed where the property is located. Currently, Article 13 grants Cyprus the right to tax such disposal, which in its national legislation exempts all capital gains, realised from the sale of shares of the Russian subsidiary regardless of whether the Russian subsidiary owns immovable property in Russia or not. The new Article 7 provides that gains realised from the sale of shares by the resident of the contracting state e.g. a Cyprus Co. where those shares are representative of 50% in value of immovable property located in the other state i.e. Russia, shall be liable for tax in Russia. In turn any gain realised by the Cyprus Co. from the sale of shares in the Russian Co. may also be subject to capital gains tax in Russia.

The amended Article 13 will not apply in the following instances: 1. Where gains are realised from the sale of shares undertaken in the course of group reorganisation. Economic rationale may be required so as to prove the reorganisation of the group is not purely designed to evade tax. 2. Where the selling entity is a pension or provident fund or the government of Russia or Cyprus. 3. Where the sale of shares is in a listed company on a recognised stock exchange (The Cyprus Stock Exchange has recently been recognised by Russian Federation as such). Current Russian-Cypriot cross-border tax structures directly or indirectly owing shares of companies or collective investment funds shall seek professional consultation well in advance of the implementation date of this provision. Several solutions indeed exist to overcome the changes in the taxation of capital gains brought upon by the Protocol. The sophistication, extent and complexity of such solutions hugely depend on a case by case basis and can not really be generalised.

Our Tips for you


The changes in the tax treatment of capital gains under the Protocol probably represent the most important element of the Protocol. Investors are urged to seek professional tax advice well ahead of coming into force of the Protocol to overcome this and implement available solutions in their existing (or future) Russian Cypriot real estate structures. We are able to help you!

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5 Exchange of Information
The recent national legislation enacted in 2008 grants the right for Exchange of Information regarding Tax and banking information, with the aim of providing such information in accordance with the double tax treaties. The recently incorporated Article 26 of the protocol is now in line with the article 26 of the OECD Model 2005. Under this article, both contracting states can request for the exchange of information relating to tax issues. Furthermore this change classifies Cyprus within the jurisdictions fully compliant with the international arena providing for, the disclosure of information. This is seen as a measure to tackle tax evasion which enabled the removal of Cyprus from various blacklists of non-complying jurisdictions. Cyprus discloses information only regarding non tax residents of Cyprus and applies to financial institutions, banks, corporate service providers, civil servants, welfare funds, pension funds, trustees, representatives, nominees. Certain preliminary provisions have to be met in order to enable the Cyprus tax authorities to deal with the validity of the request. 1 | A link has to be established among non resident tax payer and a Cy Co; 2 | A non - Cypriot tax resident has to be involved; 3 | A Double Tax Treaty has to be in place among the two states involved under which both shall be obliged to disclose information; 4 | A tax offence or suspicion should exist; As a general rule, all requests must be specific and must not lead to fishing expeditions. In order to prevent this, the Cyprus legislators composed a procedure, which primarily discloses information after overcoming and satisfying the provisions required, currently in place. It is significant to note that the written consent of the Attorney General of the Republic is required in order for the research to be conducted and obtain the information found under the possession of the Republic of Cyprus. The relevant information has to be provided to the Cyprus tax authorities: The full name of the person under investigation The nature of the information requested Reasons as in why it is believed that such information is in existence in the Cyprus jurisdiction. The name of the person that possesses such information Declaration of obtaining such information and evidence that all national means have been exhausted by the tax authorities of the requesting state. Provided that the Attorney General is satisfied with the amount of evidence provided by the requesting state, the research shall be approved to be executed. Once the research is in place, nothing can constitute a valid reason or appear as obstacle to the completion of information collection. The request shall be addressed by the relevant authorities in a precisely clear way, corresponding to the initial question as brought forward and not any further beyond. It is important to note that the person under investigation shall be informed about this request from the very beginning.

Our Tips for you


Foreign investors no longer need approval from the Central Bank of Cyprus to invest and do business in Cyprus. This means that foreign investors are on equal terms with local investors. One of the practical aspects of the liberalisation is that foreigners register companies in Cyprus automatically enter the EU market of over 500 million consumers.

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6 ICIS and UCITS in Cyprus


ICIS Private Funds are registered by the Central Bank of Cyprus and governed by the International Collective Schemes Law which allows various forms of funds as follows: 1.) International Variable Capital Company 2.) International Fixed Capital Company 3.) International Unit Trust Scheme 4.) International Investment Limited Partnership Schemes. Quickly and easily incorporated with minimum expenses, the private funds are entitled to be granted all benefits in place from the extensive Double Tax Treaty network of Cyprus. UCITS The Undertakings for Collective Investment in Transferable Securities (UCITS) are governed by the Cyprus Securities Exchange Commission (CySEC). A UCITS is an undertaking having as its sole object the collective investment in transferable securities or any other liquid financial assets. The procedure for registering UCITS is more complicated than that of private funds. Regulated Private Funds like the ICIS can ultimately benefit funds for property investments in other countries with which Cyprus maintains a Double Tax Treaty. Setting up these Funds in Cyprus accrue attractive tax savings for the Unit Holders. According to the Cypriot Income Tax Law all gains derived from the sale of ICISs and UCITSs are exempt from taxation. Dividends received by ICIS and UCITS are also tax free irrespective of the participation. In most of the cases gains from the redemption of units as well as any capital gains that are derived from the sale of securities are equally exempt from tax. Furthermore, these were reinforced with additional benefits as far as interest is concerned with recent legislation changes in Cyprus. Interest received by an ICIS or UCITS is solely subject to a 10% CIT and is outside the scope of Special Defence Contribution Law (SDC). The recent Protocol brings some changes in the area of mutual investments funds taxation. More specifically, the signed Protocol introduces a wider definition on dividends and according to this amendment every payment on shares of the mutual investments funds or similar collective investment vehicles will be considered as a dividend and extensively such distributions would be taxed at 5% or 10% as dividends Under different circumstances and under Russian national law, such distributions would have been subjected to 20% withholding tax. The significance of this development is the elimination of doubt whether such relevant distributions could be classified as other income as it was the case under the current treaty.

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7 Outbound dividends
Cyprus as a vehicle for outbound investments The New Protocol will lead to the removal of Cyprus from the Blacklist
Despite the changes brought forward by the new Protocol, it should be noted that its entry into force will lead to the effective removal from the Russian list of non-cooperative jurisdictions. As such, the exclusion of Cyprus from the Blacklist will allow for the qualification for the dividend participation exemption in cases of distribution of dividends by Cypriot subsidiary companies to Russian parent companies.

Fig. 1
Distribution of dividends to the RuParentCo: no withholding taxes at the level of Cy. Distribution of dividends to the CypHoldCo: subject to low or no withholding taxes

Russian Parent Company


At the level of Cyprus: No corporation tax on dividends received; In most cases no defence tax either.

Cyprus Holding Company

Investments* / Investment Company

* Cyprus serves as an ideal holding company destination especially with regard to investments in:
China CIS countries European Union
(all 27 countries - application of EU Directives)

India Montenegro

Serbia South Africa

Ukraine USA

Cyprus is widely known as one of the most beneficial holding company destinations. The exclusion from the Russian blacklist would extend the application of benefits of the Cyprus Holding Companies to Russian Companies seeking to invest abroad.

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Cyprus has concluded a wide network of double tax treaties providing for reduced or even no withholding taxes on income distributed in the form of dividends, interest, or royalties between the contracting states. Cyprus, through its domestic legislation, allows in most cases the tax free treatment of interest income. More specifically, and in line with the aforementioned, incoming dividends are exempt from Corporate Income Tax as well as from defence tax, without the need of a minimum of 1% participation as in the past. (However, the defence tax exemption may not be granted where both the income of the paying company has been taxed at source at a rate substantially lower than the Cyprus taxes (<5%) and at least 50% of the income of the subsidiary derives from investments, i.e. passive income.) Further to the above, under the domestic legislation of Cyprus, gains from the sale of securities are tax free

both from corporation tax as well as from capital gains tax. (The capital gains tax exemption may not be allowed where the assets of the company the shares of which are under sale mainly consist of immovable property situated in Cyprus.) Accordingly, Cyprus does not impose any withholding taxes on the outbound payments of dividends, interest and royalties (The exemption relating to royalty payments is allowed on the precondition that the rights are exercised outside Cyprus). An additional advantage of Cyprus is its accession to the European Union. As a member of the European Union, Cyprus has revised its legislation accordingly as to comply with the provisions of the various EU directives, thus enabling added tax efficiency. More specifically, Cyprus has implemented in its legislation, among others, the provisions of the EU Parent Subsidiary Directive, the EU Interest & Royalties Directive and the EU Merger Directive.

Fig. 2

The provisions of the EU Parent Subsidiary Directive, the Interest & Royalty Directives and their applicability in Cyprus

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8 Intra group back- to- back loans through Cyprus


Cyprus Financing Companies (CFCs) are commonly used in international tax structuring mainly due to the wide range of tax related benefits they have to offer. The advantages that have made Cyprus a favourable Financing Company jurisdiction for Russian investors are based on two main reasons: Firstly, due to the countrys flexible tax system; Secondly, the existence of the DDT between Cyprus and Russia which limits withholding taxes;

Fig. 3

Offshore Jurisdiction Loan with interest 0% withholding tax on interest paid CFC Minimum margin for taxable interest 0.125% - 0.35% Loan with interest

Russian Co

In line with the above, the use of Cyprus for a Financing Company minimises the tax implications which are further reinforced by the recent clarifications on the definition of minimum / maximum interest margin. Following the amendment introduced by Laws 110(I)/2009 and 111 (I)/2009, interest income will be subjected to either a 10% Corporation Tax or 10% Special Defence Contribution, depending on the companys activities in relation to the interest income. Thus, no matter of the nature of the interest, the interest will be taxed at a 10% rate*. Recently, further clarifications were given by the Director of the Cyprus Inland Revenue Department with regards to the minimum acceptable margin on back-to back intra group loans. The minimum interest margin has been determined between 0,125% - 0,35% and it is based on the loan amount as follows:

These deemed margin is used in identifying the basis of the interest subjected to tax. The above mentioned deemed interest margin provisions shall apply irrespective of the loan amount. Intra - group interest free loans shall be subjected in this respect under the arms length principle. Using an intermediary Cyprus Financing company for Intra group loans minimizes the tax luggage carried forward due to minimum margin frames and no withholding taxes on interest paid are imposed. It is also extremely important to note that Cyprus has been removed from the black list of the Central Bank of Russia. The removal effectively enables Russian banks operating in Cyprus to deposit funds with Cyprus based banks without being subjected to them to those negative terms, conditions and restrictions. At times of economic downturn several groups are thinking of ways to utilise funds that are left sitting idle offshore without having to repatriate them fully. The above really presents a viable way.

It should also be noted though that interest free loan agreements would in turn be subject to a deemed interest margin of 0.35%.
* DTT between Cyprus and Russia clarifies that no withholding tax is imposed on interest paid from a Russian Co to a Cyprus Co. Relevant stamp duty legislation must also be looked at.

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9 An introduction of Cyprus International Trusts for use in investments into Russia

A trust is a vehicle introduced in countries with a common law tradition which is often used in international tax structures as a wealth management tool. Cyprus legal system has been greatly influenced by English law and in turn by the application of common law and equitable principles, mainly due to the fact that it used to be a British colony up until 1960. Trusts create a relationship between the settlor, the trustee, and the beneficiaries whereby the settlor transfers the trust property under the name of the trustees, who are in turn liable to manage the trust property to the benefit of the beneficiaries.

In the suggested structure in Fig 4, a double layer of Cyprus Companies may be used as this may prove to be beneficial in cases of disposal of shares especially further to the recently signed Protocol. Alternatively, the trustee, in its capacity as a Cyprus tax resident, may sell the Cyprus Holding Company directly, thus not requiring the use and incorporation of the Cyprus Investment Company to act as an intermediary. CITs are entitled to various benefits, among which the fact that any transfers of assets from the settlor to the trust fund would be tax exempt in Cyprus, and also the fact that all trust income derived would be tax exempt in Cyprus (given that trust property would be located outside Cyprus). The advantageous provisions under the extensive network of double tax treaties concluded by Cyprus may have application to trusts in many cases. Arguably, the suggested structure from a Russian perspective is not anticipated to give rise to any inheritance tax or gift tax at the time of the transfer of the property from the settlor to the trust. Equally, no income tax or capital gains tax on a deemed disposal basis at the level of the settlor on the disposal of property by the trustees may be triggered. The transfer of the assets by the settlor is not anticipated to trigger VAT given that the settlor would be a private individual and thus not a VAT payer. Any tax would only be imposed at the level of the beneficiaries on a remittance basis. The tax rates to be imposed would depend on the type and nature of the income received.

Fig. 4

A Cyprus Trust may obtain the status of a Cyprus International Trust (CIT) where: The settlor is a non-resident of Cyprus; At least one, or as the case may be, the majority of trustees are Cyprus residents; The beneficiaries are non-residents of Cyprus; The trust property is situated outside Cyprus. Among others, a trust may be useful in cases where anonymity is a key requirement as well as for succession and inheritance purposes.

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10 The Ultimate Experience of Cyprus Holding Companies


INTRODUCTION
Being a trying time for the world economy and the world corporate finance market, the need for tax efficient structures as well as restructuring options for existing structures is growing rapidly. As such, in order to derive the optimum results in such transactions, including mitigation of risk and taxes, the jurisdiction to be used for the implementation of such structures would need to be carefully selected. The use of the Cypriot jurisdiction may indeed turn such vision into practice. Cyprus reputation in the international business world as a leading international business center, rests, among others, to its geographical position, its most favourable tax infrastructure and modernised legal system, its stable economy, its well established banking sector and equally its Membership to the European Union. The EU Membership of Cyprus back in 2004 required the harmonisation of its legislation with the acquis communautaire and hence led to a revision of the legislation, among others via the adoption and implementation of a number of EU Directives, providing for a harmonised and tax efficient regime within the Union. In line with the above, Cyprus has long developed into a key venue for the worldwide operations of multinational companies, primarily via the use of Cyprus holding companies (CHC), being a major vehicle for international tax planning. Conventionally and subsequently as a result of its EU membership, Cyprus has been established as the main connection of investors to Russia, Central and Eastern Europe as well as to the European Union.

Dividends paid to overseas beneficial owners No withholding taxes (defence tax) based on domestic law provisions and irrespective of the possible application of EU Directives or Double Tax Treaties. Dividend income received at the level of the CHC No Corporate Income Tax; No Defence Tax (subject to some exceptions) No or low withholding taxes at source on dividends paid to the CHC EU and other non resident subsidiaries application of the provisions of the EU Parent-Subsidiary Directive or of the Double Tax Treaties concluded by Cyprus eliminate or reduce the withholding tax burden

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Holding companies, classified as tax residents of Cyprus, are, just like all Cyprus resident companies, subject to 10% Corporate Income Tax on their worldwide income. Management and Control In line with the above, residency is determined by whether management and control is exercised in Cyprus, and as such, the mere incorporation of a company in Cyprus is not adequate to that extent. Without management and control being formally defined under the Cypriot legislation, and based on the application of the English Common Law principles, management and control is said to be established where: The majority of the Directors of the Company are residents in Cyprus, and Important Company decisions are taken in Cyprus by the local directors, The Company maintains real offices in Cyprus, with distinct telephone/fax lines, domain names, etc. and the employment of professional staff; The Company has an economic substance, i.e. commercial and economic activities in Cyprus. Tax free dividends received Cyprus Holding Companies are widely used due to the favourable dividend income streams they have to offer. Most importantly, incoming dividends are exempt from Corporate Income Tax. However, a 15% defence tax may be imposed on incoming dividends, where BOTH of the following are valid: more than 50% of the activities of the subsidiary company result in investment / passive income; and the foreign tax imposed on the income of the subsidiary company is substantially lower than the Cyprus taxes, i.e. under 5%. Dividend payments between Cyprus resident Companies are exempt from defence tax. As evident from the above, specific anti-abuse provisions are arguably provided for in the form of controlled foreign corporation (CFC) provisions, which are intended to prevent the inflow of passive income from low taxed jurisdictions into Cypriot Holding Companies, which would in turn be converted into exempt dividend income. In addition, the substance-over-form test is applied, which is intended to trigger abusive and artificial transactions, while at the same time the right of a taxpayer to arrange his affairs in a tax efficient way is recognised. Capital Gains on disposal of Securities Another important advantage of Cyprus is the fact that capital gains tax is only triggered by gains deriving from the disposal of immovable property situated within Cyprus

or gains from the disposal of shares in companies in possession of immovable property situated in Cyprus. As such, capital gains deriving from the sale of immovable property situated outside Cyprus fall outside the scope of capital gains tax. In line with the above, the disposal of securities is exempt both under the Cyprus Income Tax Law, as well as under the Cyprus Capital Gains Tax Law. The extended list of instruments falling within the definition of securities increases the competitiveness of the Cypriot jurisdiction from a tax planning perspective given that the ability of investors to reduce or even eliminate their tax liability by the use of a Cyprus holding company in their structure is further enhanced. Dividend distribution The profit after tax of a Cyprus Holding Company is available for distribution to its shareholders. The distribution of dividends to Cyprus resident shareholders is subject to a 15% defence tax, which is withheld at the time of distribution. Deemed dividend distribution provisions apply in cases of profits not distributed within a 2-year period following the end of the tax year in which they arose. Accordingly, 70% of the non-distributed profits are taxed at the rate of 15%. Equally, an exemption from defence tax is granted to non resident shareholders, which is also extended to the deemed dividend distribution provisions. Double Tax Treaty and EU Directives Apart from the most favourable domestic law provisions, Cyprus Holding Companies may also benefit from the wide network of Double Tax Treaties Cyprus has concluded, and derive dividend payments from its subsidiaries with low or no withholding taxes. Equally, the provisions of the EU Parent - Subsidiary Directive have application where the Cyprus Company receives dividend income from an associated company established in another EU-Member State, thus providing for an elimination of withholding taxes over the dividend distributed.

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11 Double Tax Treaties


Cyprus is considered one of the most tax advantageous jurisdictions for establishing a holding company, mainly due to its extensive network of double Tax Treaties combined with its favourable tax regime. With the enactment of its New Tax Legislation effective from January 1, 2003, Cyprus has put a simplified, effective and transparent tax system in place that is fully EU and OECD (Organization of Economic Cooperation and Development) compliant. In addition, the wide number of Double Tax Agreement Network has rendered considerable advantages to businesses and individuals who have chosen to establish legal entities in Cyprus. Tax treaties legally supersede local tax legislation and for this reason they are a useful tax-planning tool to protect businesses and individuals against double taxation of income earned in other countries. All Double Tax Agreements that Cyprus has entered into include provisions that explain the right of a contracting state to tax dividends, interest and royalties, inbound and outbound. The table below provides for the extended network of Double Tax Treaties concluded, when Cyprus entities are involved. New treaties not yet entered into force: On February 18, 2011 Germany and Cyprus signed a new tax treaty, which upon entry into force will replace the existing treaty of 9 May 1974; On February 27, 2011 new treaty signed between United Arab Emirates and Cyprus waiting to be ratified. On June 4, 2009 Cyprus and Italy signed an amending protocol to the income tax treaty of 24 April 1974 as amended by the 1980 Protocol and Exchange of Notes. The protocol entered into force and applies from November 23 2010. Amending protocol to treaty between Russia and Cyprus was signed on October 7, 2010 but did not yet come into force. Important provision of the amending protocol is the introduction of a new article on the exchange of information. It is expected that Cyprus will be removed from the Russian black list as soon as the protocol becomes effective. On October 5, 2010 Cyprus and Kuwait signed a new Tax Treaty that waits ratification by both country to enter into force. On October 12, 2010 Cyprus and Denmark signed a new Tax Treaty that will enter into force after ratification by both countries. On October 13, 2010 Cyprus and Slovenia signed a new Tax Treaty and once again pending ratification.
Notes: *All the treaties refer to those,which have been ratified. Thereare 32 treaties covering 42 countries. The numbers in the brackets refer to the explanatory notes here below. **Under Cyprus tax law, dividends paid to non-resident companies are not subject to withholding tax. *** Application of the Treaty between the Republic of Cyprus and the USSR. **** Application of the protocol of 2009 to the treaty between the Republic of Cyprus and Czechoslovakia. ***** Application of the Treaty between the Republic of Cyprus and Yugoslavia. ****** The rates of the existing treaty of 1974 between Germany and Cyprus.
1. 5% of the gross amount if the beneficial owner has a holding in the share capital of the paying company of at least Euros 200.000; 10% if the beneficial owner holds directly at least 25% of the share capital of the paying company; 15% in all other cases. 2. 10% of the gross amount if recipient is a company with at least 25% direct (also indirect in the case of Belgium) share interest; 15% in all other cases. 3. Subject to certain exemptions. 4. 5% if beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividends; 10% in all other cases. 5. Nil if interest is paid or guaranteed by the government of the other state or a statutory body thereof or to the central bank of the other state. 6. These rates shall not apply if at least 25% of the capital of the Cypriot resident is owned directly or indirectly by the Bulgarian resident (either alone or with other relate d persons) that is paying the interest of royalties, except when the resident of Cyprus is not liable to tax which is lower than the usual tax rate. 7. Nil if royalties are copyright and other literary, dramatic, musical or artistic work not including film or videotape royalties. 8. Nil if royalties are on literary, artistic or scientific work including cinematography films and films or tapes for television or radio broadcasting. 9. 10% if recipient is a company with at least 10% if recipient is a company with at least 10% direct share interest; 15% in all other cases. 10. 5% on cinematography films including television films. 11. 10% if recipient is a company with at least 25% direct share interest; 27% if recipient is a company with more than 25% direct or indirect share interest as long as the German corporate tax on distributed profits is lower than that on undistributed profits and the difference between the t wo r ates i s 15% o r more; 15% i n all other cases. 12. 5% on cinematography films not including television films. 13. 5% if recipient is a company with at least 25% direct share interest; 15% in all other cases . 14. Nil if received by a company which controls, directly or indirectly, at least 50% of the voting power. 15. At the rate applicable in accordance with domestic law. 16. 5% if the beneficial owner has directly invested in the capital of the company more than the equivalent of US$100.000:10% in all other cases. 17. 7% if it is received by a bank or a similar financial institution; 10% in all other cases. Interest paid to the government of the other state, as defined, is exempt from tax. 18. Nil if shareholder is a company that holds directly at least 25% of the capital of the company paying the dividends; 15% in all other cases. 19. 15% for any patent trade mark, design or model, plan, secret formula or process or any industrial, commercial, or scientific equipment or for information concerning industrial, commercial or scientific experience. 20. 10% of the gross amount if it is received by any finical institution (including an insurance company) or in connection with the sale on credit of any industrial, commercial or scientific equipment, merchandise; 15% in all other cases. Interest paid to the

On January 17 2011 Armenia and Cyprus signed a new Tax Treaty which waits for ratification.

government of the other state is exempt from tax. 21. 5% of the gross amount of the royalties for the use of or the right to use any copyright of literary, dramatic, musical, artistic or scientific work, including software, cinematography films, or films or tapes used for television or radio broadcasting; 10% of the gross amoun t of the royalties received as consideration for the use of, or the right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience; 15% of the gross amount of the royalties received as consideration for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process. 22. A resident of Cyprus, other than a company which either alone or together with one or more associated companies controls directly or indirectly at least 10% of the voting power, is entitle to a tax credit in respect of the dividend. Where a resident of Cyprus is entitled to a tax credit, tax may also be charged on the aggregate of the cash dividend and the tax credit, tax may also be charged on the aggregate of the cash dividend and tax credit at a rate not exceeding 15%. In this case any excess tax credit is repayable. Where the recipient is not entitled to a tax credit, the cash d ividend is exempt from any tax. 23.5% if recipient is a company with at least 10% direct share interest; 15% in all other cases . 24. 5% on cinematography films 25. Interest withheld depending whether income is deriving in the ordinary course of business or not.10% or 15% are charged respectively. 26. Royalties charged should not exceed 5%,.

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12 EU Directives in Cyprus
Cyprus is an EU official member state since 2004, enjoying ever since full membership privileges. Extensively, Cyprus can benefit from the EU Directives enacted into the legislation of the country, permitting immediate implementation of the following Directives whose analysis is provided further below: Parent - Subsidiary directive Interest & Royalties Directive Mergers Directive Tax Savings Directive

Parent - Subsidiary Directive


The EU Parent - Subsidiary Directive aims towards the elimination of tax obstacles on profit distribution in the EU. It provides for an exemption on withholding taxes on dividends distributed by the subsidiary given that a holding of at least 10% exists. The pre - conditions for the Directive to apply is a minimum shareholding of 10% (as of 01/01/2009), and a minimum holding period of 2 years. Cyprus adopted and fully implemented the Directive. According to the national provisions, an exemption on withholding tax on dividends is granted irrespective of the holding in the subsidiary shares. Cyprus has not applied the minimum 2 years of holding period. Combining the EU Parent- Subsidiary Directive and the Cyprus Holding Company creates an unprecended combination, which is indeed the ultimate in Tax effectiveness.

Mergers Directive
The merger Directive is applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares between member states. Under this Directive, a capital gains exemption is granted in the difference between the real values of assets and liabilities transferred and their actual values for tax purposes. The significance of this directive lies upon the member states which shall guarantee application by all appropriate means that tax exemptions are carried over upon the transferring of the company.

Tax Savings Directive


The Tax Savings Directive guarantees that savings income in the form of interest payments on debt claims, as encompassed in the taxable income of individuals who are tax residents in a member state, are effectively taxed. The mean to achieve this is the automatic exchange of information. It is applicable to interest payments conducted through a paying agent throughout the EU irrespective of where the issuer of the debt-claim generating the interest is established.

Interest & Royalties Directive


The purpose of the Interest and Royalties Directive is the abolition of withholding taxes on Interest and Royalty payments in a member state. The provisions for the applicability of the Directive is the direct minimum holding of 25% and member states are given the option to opt out from applying the Directive in cases where this requirement has not been maintained for an uninterrupted period of at least 2 years. Cyprus has incorporated the Directive without imposing any minimum shareholding requirement and minimum holding period for the applicability of the Directive.

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13 EU Citizenship via Cyprus Residency


The Cypriot government revised its current policy with an ultimate aim to simplify the procedure of applying for a resident permit as well as work permit for non-EU citizens. The procedure in place was recently challenged for being too complicated, therefore the government has decided to take the appropriate action towards this matter. The newly adopted policy came into effect and ultimately aims at targeting the complexity of the application procedure, the excessive documentation required and the unreasonable time frames for the examination of such applications. Thus, multi-entity visas shall be granted, usually on the same day without a need to visit the Cyprus embassy to frequent flyers and visitors. Cases with high complexity shall be examined by a permanent committee established for such purposes. In order to obtain the EU Citizenship via Cyprus residency, the applicant must: Obtain a Category F visa (permanent residence permit) which is valid for at least 5 years. Purchase a property in Cyprus of at least 300,000 of value and the property must not be used for the production of income. The minimum annual income (non- CY sourced) of the applicant must be at least 9560 and 4613 for each of his/her dependants. These new arrangements are expected to eliminate obstacles for resident permit application procedure and establish tidier country relations among Cyprus and its partners.

Our Tips for you


You can travel easily within Europe via a Cypriot residency which will ultimately lead to a Cypriot (EU) citizenship.

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www.eurofast.eu

www.taxand.com

Eurofast is Taxand Cyprus. Taxand provides high quality, integrated tax advice worldwide. Our tax professionals, nearly 400 tax partners and over 2,000 tax advisors in nearly 50 countriesgrasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business. Were passionate about tax. We collaborate and share knowledge, capitalising on our collective expertise to provide you with high quality, tailored advice that helps relieve the pressures associated with making complex tax decisions. Were also independentensuring that you adhere both to best practice and to tax law and that we remain free from time-consuming audit-based conflict checks. The award recognises Taxands indirect tax advisory excellence across Europe including Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Russia, Spain, Sweden, Switzerland, Turkey, UK and Ukraine and it is the first time Taxand has received this accolade. European CEO with awardwinning journalists reporting to their headquarters in London and working with media partners Reuters, they provide the numbers, detailed analysis, strategy and guidance needed to make qualified business decisions in Europes diverse marketplace. Reaching the desks of more than 50,000 Chief Executive Officers and decision making executives who serve on the boards of Europes leading companies, the magazine reaches highly affluent executives.

Practice in Cyprus
International Tax Review

Ranked Tier One Tax Transactional

2011

European Indirect Tax Firm of the Year: TAXAND


ITR European Awards

2010

Practice in Cyprus
International Tax Review

Ranked Tier One Tax Transactional

2010

European CEO Tax & Accountancy Awards

2010 Best Tax Practice in Cyprus 2009

World Finance Magazine

Best International Tax Team in Cyprus

2009

Best Regional Business Partner South East Europe


Mass Media International

2009

2009 Cyprus Tax Firm of the year


International Tax Review

Practice in Cyprus
International Tax Review

Ranked Tier One Tax Transactional

Tier -1 Tax Transactional Firm Cyprus 2011. Readers of International Tax Review, which include tax executives from multinational companies, tax officials and advisers voted in an online poll for their top three tax planning and top three tax transactional firms in 51 jurisdictions with Eurofast being Ranked a Tier 1 Tax Transactional Practice in Cyprus.
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