Nicosia, June 27, 2008 – Cyprus is one of the most advantageous places of residence for Russian and Ukrainian companies. It offers a high level of banking, auditing, accounting and legal services, as well as its real estate, which has made Cyprus a successful international financial and commercial center.
Some of the main factors and advantages that ensure the attractiveness of Cyprus for international companies and investments are the following:
1. 10% corporate tax rate for business profits;
2. No withholding tax on dividends, interest and royalties for non-residents (either a company or an individual);
3. Dividend income is exempt from income or corporate tax;
4. The attractive platform and tax regime offered by Cyprus for a holding company (ie subject to certain conditions full exemption from local taxes in respect of dividends received by a holding company from its local and foreign subsidiaries);
5. The attractive platform and tax regime that Cyprus offers for international trusts;
6. The network of favorable double taxation treaties that Cyprus maintains with more than 40 countries, including Russia and most of the republics of the former Soviet Union;
7. Tax benefits available to non-residents, including non-EU residents;
8. The Cypriot tax regime allows losses to be carried forward indefinitely;
9. The geographical location of Cyprus, located at the crossroads of Europe, Asia and Africa;
One of the factors mentioned above is a double taxation treaty between Russia and Cyprus, which provides Russians with many tax advantages. An agreement was signed between Russia and Cyprus to avoid double taxation with respect to taxes on income and capital, on August 17, 1999. The treaty provides for the exemption of income in the country of origin or the provision of credit with respect to foreign tax paid by the country of tax residence.
Typically, Russian companies would pay a 35 percent tax on profits, plus a 20 percent VAT tax and a 40 percent tax for social security and employee benefits in Russia. However, when Russian companies are structured in such a way that they are owned by a Cyprus company (which does not require any physical presence in Russia), all their profits will be legally transferred to Cyprus and are only subject to 4.5% tax. percent on profits and a VAT of 15 percent. Consequently, Russian companies escape the 40 percent tax for social services. This tax advantage allows profits to be channeled in the form of dividends at a reduced rate.
As an example, a Cyprus holding company can be used for international investment purposes. Basically, it is the use of tax incentives and treaties to avoid double taxation. The most important advantage of a Cyprus holding company is that the dividends received by the foreign company can flow completely tax free in Cyprus through the holding company, thus avoiding the payment of any taxes on the dividends. In addition, payments made to non-Cyprus resident Shareholders have zero (0) withholding tax, so the Shareholder receives the dividends absolutely tax free.
Paying interest on loans is another advantageous method for Russian companies. Under Cyprus Law, the Russian company is partially owned by the Cypriot company and pays its interest on loans to the Cypriot company, effectively minimizing its taxation. However, interest payments will not necessarily be paid to the Cyprus Company. It is the most effective method that allows the Russian company to avoid almost all its tax payments.
Russian companies that were structured as Cypriot companies in order to maintain their business activities within the territory of Russia, can transfer the income earned in Russia abroad in the form of dividends and interest, with considerable tax savings. Companies registered in the Cyprus jurisdiction pay lower taxes than those paid in Russian jurisdictions.
All the structures mentioned above are based on “Cyprus economic zoneof reduced taxation and perfectly legal, in addition to the fact that its tax advantage may be further enhanced when, in certain circumstances, it is combined with other jurisdictions in appropriate legal structures.
Over the past 30 years, the Cyprus law firm has become a renowned international business and financial center due to the very favorable tax regime offered by the island. The admission of Cyprus to the European Union as a full member in May 2004 made Cyprus a prestigious, stable and attractive jurisdiction.
Although the offshore company status was abolished as of January 1, 2003, the favorable tax regime for international investors has been maintained. In addition, the liberalization of investments from non-EU countries and the abolition of the maximum and minimum percentages of participation in investments in all sectors of the economy in October 2004 (unless otherwise provided by law), has made Cyprus a important destination for the location of international holding companies and investments throughout the world.
Olga Kosareva, NCI Legal Group
Author: Ioannis John Neocleous