The future of international Tax planning and International Banking Christodoulos Damianou 2019
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The future of international Tax planning
and International Banking
Christodoulos Damianou
2019
CONTENTS ✓ The Multilateral Instrument ✓ The EU Anti Tax Avoidance Directive ✓ Exchange of Information Update ✓ Transfer pricing requirements in Cyprus-existing and new legislation ✓ Substance and tax residency for companies ✓ Beneficial Ownership of Income Issues
MULTI-LATERAL INSTRUMENT TREATY SHOPPING
TREATY ABUSE IMPLEMENTATION
MULTI-LATERAL INSTRUMENT TREATY SHOPPING TREATY
ABUSE IMPLEMENTATION
• In June 2017 under the OECD BEPS initiative, 68 countries (including Cyprus,
Russia and Ukraine but not the USA) signed the Multi-lateral instrument (MLI),
which will implement a series of tax treaty measures to update international tax
rules and lessen the opportunity for tax avoidance by multinational enterprises.
• Subsequently more countries signed the MLI bringing the total of signatories to
92 (November 2019).
• On 22 March 2018, the OCED announced that the MLI will enter into force on 1
July 2018, following the deposit of the ratification instrument by a fifth
jurisdiction.
• By the end of November 2019 37 countries deposited the ratification instruments
with the OECD.
• These countries include a number of Cyprus treaty partners (highlighted below).
• These countries include amongst others:
Australia, Austria, Curacao, Finland, France, Georgia, Guernsey, Ireland, the Isle of
Man, Israel, Japan, Jersey, Lithuania, Malta, Monaco, Netherlands, New Zealand,
Poland, Serbia, Singapore, Slovakia, Slovenia, Sweden and the UK
Multi-lateral instrument The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the BEPS project into their bilateral tax treaties by: • Modifying the application of thousands of bilateral tax treaties concluded to eliminate double taxation • Implementing agreed minimum standards to combat treaty abuse • Improving dispute resolution mechanisms • Providing flexibility to accommodate specific tax treaty policies
Multi-lateral instrument The MLI covers the following subjects: • Hybrid mismatches • Treaty abuse • Avoidance of permanent establishment status • Improving dispute resolution • Arbitration Most countries have elected to deal only with the Treaty Abuse provisions
Position of Cyprus on the MLI • Cyprus extended the application of the MLI to the 55 individual treaties signed by Cyprus, plus three treaties covered under the old treaty with the Republic of Yugoslavia (Bosnia and Herzegovina, Montenegro and Serbia) plus three treaties covered under the old treaty with the USSR (Azerbaijan, Kyrgyzstan and Uzbekistan) • No tax treaties of Cyprus have been excluded
MLI – The purpose of Double Tax Treaties The instrument is quite flexible. At their own discretion, signatories may define which treaties will be covered and which provisions will apply. The signatories to the MLI have three options on international tax treaty abuse: • Option 1: adopting only the principal purpose test (PPT) • Option 2: adopting the PPT test and the simplified limitation on benefits provision (Simplified LOB) • Option 3: adopting the detailed LOB in combination with the mechanism to address conduit financing
Limitation of benefits • The benefit under a double tax treaty (either by granting exemption from or deduction of withholding taxes) can be denied to a person, where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with such an arrangement or transaction, was to obtain those benefits. • This means that if in a structure there are only tax reasons for putting the structure in place in the first place and there are no business reason to support, then there will be no tax treaty benefit granted and normal taxes will be paid.
Next step on the MLI process in Cyprus
• Publication in the Official Gazette expected before the end of the year
• Exchange of notes with the respective countries which have completed the
ratification process under their laws
• Publication in the Official Gazette for the amendment of individual treaties
• The earliest that it can be implemented is as from January 2020 if the process is
completed by 30 September 2019 or January 2021 if the process is completed
between October 2019 and September 2020
• The question is whether there will be pressure on Cyprus to complete its internal
procedures and notify the OECD accordingly
• Already a number of the Cyprus treaty partners have completed the formalities
including Russia.
• It is understood that discussions are taking place at the OECD level on certain
aspects of the MLI
• Thus it could reasonably be expected that no pressure would be exerted until the
end of this year for the implementation of the MLI by CyprusKey information on MLI (1/2)
MLI Entry into force
• MLI - Multilateral Convention to • MLI entered into force on 1 July 2018.
implement Tax Treaty related measures
to prevent Base Erosion and Profit Signatories
Shifting (“BEPS”). Developed on the
basis of Action 15 of OECD BEPS Action • 92 signatories as of end of November
Plan. 2019. For Russian Federation, MLI
enters into force on 1 October 2019.
• BEPS Action Plan – 15 actions
developed by OECD and G20 to equip
governments to address tax Definition
avoidance, ensuring that profits are • Covered Tax Agreement (“CTA”) -
taxed where value is created. means an agreement for the avoidance of
double taxation (“DTT”) with respect to
Purpose tax on income (...):
• Swift implementation by governments (i) which is in force between two Parties; and
of measures strengthening double- (ii) with respect to which each Party has
tax treaties protecting governments made a notification listing the agreement
against tax avoidance strategies that as well as any amending or accompanying
inappropriately use tax treaties to instrument thereto (...) as an agreement
artificially shift profits to low or no-tax which it wishes to be covered by the
jurisdictions. Convention.Key information on MLI (2/2)
• The MLI provisions for a particular CTA enter into force: as of
MLI ENTERS INTO the latest date on which MLI enters into force for each
FORCE Contracting Jurisdictions AND with respect to taxes
withheld at source (from the 1st day of the next
calendar year) / with respect to all other taxes (as of
expiration of a period of 6 months).
TWO DTTS ARE CTA • For both Contracting Jurisdictions for which MLI has
entered into force (i.e. both parties to a CTA have deposited
their ratification instruments with the OECD Secretariat) AND
• For both Contracting Jurisdictions which listed the
respective DTT in their MLI position as Covered Tax
Agreement.
• CTA will be changed if there is a match between
PROVISIONS MATCH reservations and optional provisions selected by
both parties.MLI provisions
Neutralization of negative effect of hybrid mismatch
HYBRID arrangements (transparent and dual resident entities).
MISMATCHES
Preventing granting of treaty benefits in inappropriate
TREATY ABUSE circumstances.
Rethinking of commissionaire and similar arrangements to
ARTIFICIAL prevent the artificial avoidance of PE status.
AVOIDANCE OF
PE STATUS
Resolving disputes concerning application/interpretation of
IMPROVEMENTS CTA by mutual
TO DISPUTE agreement procedures.
RESOLUTIONMLI, PE arrangements (1/5)
ARTIFICIAL AVOIDANCE OF PE STATUS
AGENCY PE AND COMMISSIONAIRE
Source:
Change to address “commissionaire arrangements and similar strategies” (art. 12 MLI).
Key outcome:
Widening of dependent agent PE definition.
PREPARATORY OR AUXILIARY EXEMPTION
Source:
Change to address the artificial avoidance of PE status through the “specific activity
exemptions” (art. 13 MLI).
Key outcome:
Limitation of PE exception for exempt activities.
SPLITTING-UP OF CONTRACTS
Source:
Changes with respect to the artificial splitting up of contracts (art. 14 MLI).
Key outcome:
Adding of a new anti-fragmentation rule.MLI, PE arrangements (2/5)
Pre-BEPS, dependent agent PE
Pursuant to Art. 5(5) OECD MTC an
agency PE is created:
Commissionaire ➢ If a person is acting on behalf of
R-co arrangement the enterprise.
➢ Concludes contracts in the name
of the enterprise.
% commission fee
➢ And performs these activities
habitually.
Pursuant to Art. 5(6) OECD MTC an
S-co enterprise shall not be deemed to
Customer have a PE if it carries on business
Not a PE
➢ through a broker, general
commission agent or any other
Sale in its own name, but for the agent of independent status,
account of R-co ➢ provided that such persons are
acting in the ordinary course of
their business.MLI, PE arrangements (3/5)
Pre-BEPS Now
PE is created PE is created
Dependent agent PE Dependent agent PE
where a person acts on behalf of the where a person acts on behalf of the enterprise,
enterprise and “HAS AND HABITUALLY and, in doing so, such person habitually concludes
EXERCISES AN AUTHORITY TO contracts, OR “HABITUALLY PLAYS THE
CONCLUDE CONTRACTS ON BEHALF OF PRINCIPAL ROLE LEADING TO THE
THE ENTERPRISE” (i.e. a dependent agent). CONCLUSION OF CONTRACTS that are routinely
concluded without material modification by the
Construction PE enterprise.”
building, construction or installation activities
constitute a PE ONLY IF IT LASTS MORE Construction PE
THAN TWELVE MONTHS. building, construction or installation activities
constitute a PE only if it lasts more than twelve
months, provided that complementary
ACTIVITIES WHICH WERE PERFORMED BY A
COMPANY OR A GROUP OF RELATED
COMPANIES SHALL BE CONSIDERED AS ONE
UNIT OF ACTIVITIES in the case the activities
are connected to each other, i.e. the time periods
shall be combinedMLI, PE arrangements (4/5)
Pre-BEPS Now
PE is not created PE is not created
Auxiliary and supporting activities Overall preparatory or auxiliary character
WHERE A PLACE OF BUSINESS IS where a place of business is used solely for
USED SOLELY FOR ACTIVITIES LISTED activities listed in that paragraph (article 5(4) of the
IN THAT PARAGRAPH (article 5(4) of OECD`s MTC), and THE OVERALL ACTIVITY OF
the OECD`s MTC. I.e. use of facilities THE FIXED PLACE OF BUSINESS IS OF A
solely for the purpose of storage, display PREPARATORY OR AUXILIARY CHARACTER.
or delivery of goods or merchandise
belonging to the enterprise etc.).
Independent agent status Independent agent status
where a broker, general commission agent where a broker, general commission agent or any
or any other agent of an independent other agent of an independent status, acts on
status, ACTS ON BEHALF OF THE behalf of the enterprise in the ordinary course of
ENTERPRISE IN THE ORDINARY their business, UNLESS THAT PERSON “ACTS
COURSE OF THEIR BUSINESS, I.E. EXCLUSIVELY OR ALMOST EXCLUSIVELY ON
THEY ACT AS AN ‘INDEPENDENT BEHALF OF ONE OR MORE ENTERPRISES TO
AGENT’. WHICH IT IS CLOSELY RELATED”.MLI, PE arrangements (5/5)
MLI adds a new ANTI-FRAGMENTATION RULE, providing that complementary activities which
were performed by a company or a group of related companies shall be considered as one unit
of activities in the case the activities are connected to each other, i.e. the time periods
shall be combined.
Country A
Employees of Co A analyse the Due to the new anti-fragmentation
information given by Office B rule exceptions provided by pre-BEPS
and take relevant decisions MTC would no apply to the Office,
Co A because its activities constitute
complementary functions that are
part of a cohesive business
operation.
Country B
Employees of Office B perform
DD of clients for Co A and send
Office B of Co A this information to Co AMLI, treaty abuse (1/4)
PREAMBLE, TREATY ABUSE
PREAMBLE
Source:
Changes to the preamble to emphasize that DTTs are not intended to be used to generate
double non-taxation (art. 6 MLI).
Key outcome:
Elimination of double-taxation without giving opportunities for tax evasion or avoidance
(including through treaty-shopping arrangements).
“Intending to eliminate double taxation with respect to the taxes covered by this agreement
without creating opportunities for non-taxation or reduced taxation through tax evasion or
avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided
in this agreement for the indirect benefit of residents of third jurisdictions).”
TREATY ABUSE
Source:
Changes ensuring protection from treaty-shopping (art.7 MLI)
Key outcome:
• PPT: a GAAR denying the benefit of a DTT (clear ); or
• Detailed LOB and a mechanism to deal with conduit arrangements not already dealt with in
the LOB provision; or
• Combined approach with a simplified LOB or detailed LOB, and PPT.MLI, treaty abuse (2/4)
MEASURES TO COUNTER TREATY ABUSE
Principle Purpose Test (PPT) Limitation of Benefits (LOB)
“..a benefit under the Covered Tax
Agreement shall not be granted in respect of a resident of a Contracting Jurisdiction would
an item of income or capital if it is reasonable be entitled to the benefits only if they
to conclude, having regard to all relevant constitute a “qualified person” under article
facts and circumstances, that obtaining that 7(9) of the simplified LOB
benefit was one of the principal purposes of
any arrangement or transaction that resulted
directly or indirectly in that benefit”MLI, treaty abuse (3/4)
Example of anti treaty abuse clauses in the DTT between Australia and Germany
(art. 23)
“1. Where an item of income, profits or gains derived by an individual is exempt from tax in a
Contracting State by reason only of the status of that individual as a temporary resident under
any applicable taxation laws of that State, no relief shall be available under this Agreement in
the other Contracting State in respect of that item of income, profits or gains.
2. Notwithstanding the other provisions of this Agreement, a benefit under this Agreement shall
not be granted in respect of an item of income, or, in the case of the Federal Republic of
Germany, of capital, if it is reasonable to conclude, having regard to all relevant facts and
circumstances, that obtaining that benefit was one of the principal purposes of any
arrangement or transaction that resulted directly or indirectly in that benefit, unless it is
established that granting that benefit in these circumstances would be in accordance with the
object and purpose of the relevant provisions of this Agreement.
3. Nothing in this Agreement shall prevent the application of any provision of the laws of a
Contracting State which is designed to prevent the evasion or avoidance of taxes. Where double
taxation arises as a result of the application of any such provision, the competent authorities
shall consult for the elimination of such double taxation in accordance with paragraph 3 of
Article 25”.MLI, treaty abuse (4/4)
Dividends transfer transactions (art. Gains from alienation of shares in a
8 MLI) company, partnership, or trust
predominately holding real estate (art.
9 MLI)
A 365 day minimum holding period A 365 day minimum ownership period before
requirement before entities can benefit entities can benefit from exemption
from exemption
“Income, profits or gains derived by a resident of a
“Notwithstanding the provisions of paragraph Contracting State from the alienation of shares or
2, dividends shall not be taxed in the comparable interests may be taxed in the other
Contracting State of which the company Contracting State if, at any time during the 365 days
paying the dividends is a resident if the preceding the alienation, these shares or comparable
beneficial owner of the dividends is a interests derived more than 50 per cent of their value
company (other than a partnership) that is a directly or indirectly from immovable property, as
resident of the other Contracting State that defined in Article 6, situated in that other State” (art. 13
has held directly shares representing 80 per DTT between Australia and Germany)
cent or more of the voting power of the
company paying the dividends for a 12 month
period ending on the date the dividend is
declared” (art. 10 DTT between Australia and
Germany)MLI, Cyprus experience
• Entrance into force is expected in January 2021 if the process is completed
between October 2019 and September 2020.
• The question is whether there will be pressure on Cyprus to complete its internal procedures
and notify the OECD accordingly.
• It is understood that discussions are taking place at the OECD level on certain aspects of the
MLI.
• Thus it could reasonably be expected that no pressure would be exerted until the end of this
year for the implementation of the MLI by Cyprus.
• Already 17 of the Cyprus treaty partners have completed the formalities.
• Cyprus chose to apply “minimum standard” of MLI, covering only treaty-abuse
provisions and dispute resolution. PPT alone was opted by Cyprus to apply.THE EU ANTI-TAX AVOIDANCE DIRECTIVE IMPLEMENTATION IN CYPRUS
THE EU ANTI-TAX
AVOIDANCE DIRECTIVE
• The Cypriot Ministry of Finance has presented to the House of
Representatives legislation implementing the European Union (EU)
Anti-Tax Avoidance Directive (ATAD). The legislation introduces the
limitation to interest deductibility, the concept of the Controlled
Foreign Company (CFC) and the General Anti-Abuse Rule (GAAR).
• The House of Representatives approved the legislation on 5 April
2019
• The provisions of the new law apply to tax years starting 1 January
2019.
• The remaining 2 changes for implementing the full requirements of
the ATAD, ie introducing the exit taxation regime and the rules
countering hybrid mismatches within EU are expected to be
introduced and become effective after 2020.THE EU ATAD
IMPLEMENTATION IN CYPRUS
• Interest limitation: to discourage artificial debt
arrangements designed to minimise taxes.
• Controlled foreign company (CFC) rule: to deter
profit shifting to a low / no tax country.
• Exit taxation: to prevent companies from
avoiding tax when re-locating assets. NOT PART
OF THE LEGISLATION.
• General anti-abuse rule: to counteract
aggressive tax planning when other rules don’t
apply.
• Hybrid mismatches: to prevent companies from
exploiting national mismatches to avoid
taxation. NOT PART OF THE LEGISLATION.TRANSFER PRICING REQUIREMENTS IN CYPRUS – EXISTING AND NEW LEGISLATION
Transfer pricing requirements in Cyprus • The interpretative Circular refers to the tax treatment of intra group back- to-back financing arrangements • In addition it covers the granting of loans to related parties out of funds borrowed from banks or other third parties • It covers also back-to-back interest free loans • It does not cover loans granted to related parties out of the company’s own funds
Transfer pricing requirements in Cyprus Steps to be taken by taxpayers • Determine if the company has intercompany loans the funds which originate out of borrowed funds • Carry out functional analysis • Determine if it meets the minimum criteria for regulated financial institutions or criteria for simplification procedures • If yes, then no full transfer pricing study necessary • If yes, but want to apply lower margins/returns then the prescribed ones, then full transfer pricing study is necessary • If no, then full transfer pricing study is necessary
Expected Additional Measures in Cyprus on Transfer Pricing
• Additional guidelines for the application of the transfer pricing rules to the forms
of financing activities not covered by the circular
• Transfer pricing rules and documentation for other forms of intercompany
transactions, such as sales, licensing and provision of services
• The above are expected to be introduced and apply from the year 2020Expected Additional Measures in Cyprus on Transfer
Pricing
• Cyprus proposes to introduce legislation to require transfer
pricing studies for all transactions between related parties
• Related parties are considered those where there is more
than 25% shareholding, or the same persons own more than
25% in two or more companies
• The OECD Transfer Pricing Guidelines will apply
• The Transfer Pricing Documentation will include the Basic
File and the Cypriot File
• There will be no requirement to maintain a transfer pricing
file for companies whose value of transactions with related
parties is below EURO 750.000 per annum
• It is expected that the new legislation will apply as from
2020EXCHANGE OF INFORMATION UPDATE
EXCHANGE OF INFORMATION UPDATE FORMS OF EXCHANGE INFORMATION • Under a double tax treaty between the two countries • Under the Common Reporting Standard • Under the country by country reporting • EU Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation • EU Council Directive (EU) 2018/822 of 25 May 2018, amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (“DAC6”)
EXCHANGE OF INFORMATION UPDATE CRS – Reportable Persons • An individual resident in the other state • An entity (including funds and foundations)resident in the other state • There is a requirement to look through passive entities in order to find out and report on controlling persons who are resident in the other state • It excludes publicly listed companies and Financial Institutions
EXCHANGE OF INFORMATION UPDATE
CRS – Controlling persons
• For companies – the UBO who is the natural person who
ultimately owns or controls a legal entity through direct or
indirect ownership meaning:
i. 25% + of shares with voting rights
ii. Right to appoint board members, right to exercise significant
influence
• For trusts – the settlor, trustees, the protectors, the
beneficiaries and any other natural persons exercising
ultimate effective control over the trustCountry by Country reporting (“CbC”) • CbC reporting requires large multinational enterprises (“MNE”) to file a CbC report that will provide a breakdown of the amount of revenue, profits, taxes and other indicators of economic activities for each tax jurisdiction in which the MNE group does business. CbC reporting only applies to MNE groups with annual consolidated groups revenue of Euro 750 million or more in the preceding fiscal year (“MNE Groups”)
Country by Country reporting (“CbC”) • CbC reporting requirements apply in Cyprus for fiscal years beginning on or after 1 January 2016 • The tax authorities of all countries concerned will have for the first time the opportunity to see the whole allocation of profits between the various jurisdictions, the taxes paid in each jurisdiction and the substance available in each location
DAC 6
6th Directive of Administrative Cooperation
• Additional Measure against aggressive tax planning
• Imposes Mandatory disclosure requirement when certain arrangements between
EU MS or one EU MS and a non-EU MS fall within certain “hallmarks”
• To become effective as of 01 July 2020 – MS to adopt by 31 December 2019 BUT
Monitoring of transactions as of 25 June 2018.
• Compliance burden and risk of penalties for Tax IntermediariesDAC 6 “HALLMARKS”
Hallmarks: broad categories which underline characteristics of potentially aggressive tax
planning:
1. Commercial characteristics seen in marketed tax avoidance schemes
2. Structured arrangements seen in avoidance planning
3. Cross border transactions
4. Arrangements which challenge tax reporting and transparency
5. Transfer pricing arrangements which are not at arm’s length
1-3 above will apply only in the case when the “main benefit test” threshold is met.
Additional Compliance Burden to Intermediaries
Risk of PenaltiesSUBSTANCE AND TAX RESIDENCY
FOR COMPANIESStructures that are under scrutiny
• What was the purpose of these
kind of structures?
BVI CO • No withholding tax for interest
payments from RUS to CY and
LOAN INTEREST DIVIDEND from CY to BVI
• No withholding tax on
CY CO dividends paid from CY to BVI
and from BVI to UBOs
• No tax paid on dividends
INTEREST received at level of CY co
LOAN DIVIDEND
• Up to 2017 only a 0.35% margin
RUS CO
of interest was taxed in Cyprus
• Secrecy of UBOs in the BVIStructures that are under scrutiny
Tax considerations
What is the problem of these kind
of structures?
BVI CO
• Back to back loan arrangements
LOAN INTEREST no longer accepted
• Transfer pricing introduced in
CY CO Cyprus as of 2017
• Beneficial ownership issues –
who is the actual owner of the
INTEREST interest and dividends?
LOAN
• Signing of MLI and adaptation
RUS CO
of Articles 6 to 11 on treaty
abuse
• BVI registry of UBOsStructures that are under scrutiny
Other considerations
• Tax authorities around the world are getting more
sophisticated
– Increased transparency
– Exchange of information
• DAC 6 directive – mandatory disclosure for
intermediaries
• EU moves to tackle letter box firms' tax avoidance,
social dumping
– Relocation to other EU countries may be blocked in the case of
artificial arrangements to circumvent taxThe new banking reality in Cyprus
The NEW Banking reality in Cyprus
– Banks in Cyprus closing bank accounts of holding companies with no real
substance and transactions in Cyprus – Circular issued by Central Bank of Cyprus
in June 2018
– Credit institutions instructed “not to open new bank accounts or continue
existing accounts with companies that are regarded as "shell" or "letter box"
companies”.The new banking reality in Cyprus
The Central Bank of Cyprus Circular
What are ‘shell’ or ‘letter’ box companies?
– No physical presence in its country of incorporation apart
from a mailing address;
– No established economic activity, little to no independent
economic value, and no documentary evidence to the
contrary;
– It is registered in a jurisdiction where companies are not
required to file independently audited financial statements;
– It has a tax residence in a jurisdiction recognized as a tax
haven or no tax residence whatsoever.Demonstrating Substance
SUBSTANCE AND TAX RESIDENCY
FOR COMPANIES
Substance Requirements
• New rules on substance in the new EU Parent/Subsidiary Directive
• Rules under EU Commission’s anti-tax avoidance directive are to be
implemented as from 2019
• Substance rules under OECD’s Base Erosion and Profit Shifting (BEPS)
Action Plan and in particular in treaty shopping and use of tax treaties to
be implemented most likely in 2020
• Substance for transfer pricing considerations
• Substance in beneficial ownership of income issues
• Increased attention by the foreign tax authorities in the exchange of
informationSUBSTANCE AND TAX RESIDENCY
FOR COMPANIES
Substance would determine the company’s tax residency
• Statutory substance proves that the company is actually a
real company and not a conduit, by paying its taxes filing its
tax returns, preparing audited financial statements and
meeting all its statutory obligations;
• Physical substance is statutory substance, plus an office,
telephone facilities, employees, and PROPERLY QUALIFIED
directors;
• Economic substance refers to more on day to day activities,
which is a similar concept to the place of effective
management.
IT IS A MUST FROM NOW ON THAT ALL THE ABOVE MUST EXIST
FOR A COMPANYSUBSTANCE AND TAX RESIDENCY
FOR COMPANIES
Physical substance in Cyprus can be achieved by:
• Appointing QUALIFIED Directors that are CYPRUS residents, which will be involved in
the decision making of the company. Avoid setting up a structure in which the Directors
of the Cyprus company are coincidentally the same directors of the source company, or
appointing nominee Directors who have only cosmetic duties and are not involved in
the Management
• Maintaining fully fledged offices in Cyprus
• Employing full-time or part-time employees
• Relocating senior executives / decision makers to Cyprus
• Arid shadow Directors
• Carrying out the accounting and HR functions in Cyprus
• Maintaining bank accounts with local banks, where income is first received and
deposited. At least one of the signatories of the bank accounts should be a Director
located in Cyprus
• Owning a website that is operated from the employees in Cyprus
• Actively participating in the local business community / organizations (ie charities, CIBA,
CCCI)
• Publicly show ‘’a face ‘’ in the community.CYPRUS TAX RESIDENCY: BANKING A circular issued by the Central Bank of Cyprus in June 2018 affirms the need to have substance in Cyprus. ❖ Banks are permitted to close bank accounts of holding companies with no real substance or transactions in Cyprus. ❖ Credit institutions have been instructed not to open new bank accounts or to continue to maintain existing accounts with entities that are regarded as “shell” or “letterbox” companies.
SUBSTANCE AND TAX RESIDENCY
FOR COMPANIES
Definition of tax residency for companies
• The majority of the directors’ meetings take place in Cyprus,
• The board of directors exercise controls and make the key
management and commercial decisions
• Board of Directors meetings must ACTUALLY take place
• Board of directors minutes are prepared and kept in Cyprus
• The minutes must demonstrate the operation of the company is
exercised by these RESIDENT directors.
• PROPERLY QUALIFIED directors with appropriate knowledge and
expertise of the company’s business (i.e. : a doctor as a director
in a hospital or a medical company)
• Employment relevant to qualified personnel
• Having properly equipped offices relevant
to the size and operation of the company.BENEFICIAL OWNERSHIP OF INCOME ISSUES
BENEFICIAL OWNERSHIP
OF INCOME ISSUES
Income which is affected by the
beneficial ownership issues:
• Dividends
• Interests
• Royalties
• Capital gains / distribution of
dividendsBENEFICIAL OWNERSHIP
OF INCOME ISSUES
Documentation to support beneficial ownership – Russia MinFin
With respect to the confirmation of beneficial ownership of income, in its letter the
Russian Ministry of Finance sates that this may be confirmed by the following
documents (which may not be considered as an exhaustive list):
• Letters signed by the directors of the foreign company
• Documents confirming that the recipient of the income enjoys discretion on the
disposal and use of the income received (for example documents confirming the
absence of legal obligations that limit the right of the recipient of the income to
use of the income and confirming that the subsequent transfer of the income to
third parties was not predetermined)
• Documents confirming that the recipient of the income has tax obligations in its
country of residence and that there was no saving on Russian withholding tax
because of the subsequent transfer of the income to third party
• Documents confirming that the recipient of the income carries on actual business
in the state of which the recipient is a tax residentBENEFICIAL OWNERSHIP
OF INCOME ISSUES
How can you overcome beneficial ownership issues :
• Establish / improve real substance and move
decision making persons to Cyprus
• Replace back-to-back loans with loans out of
equity and claim notional interest deduction
• Replace back-to-back licensing arrangements with
owning the IP Box regime (patents/computer
software)
• Avoid transferring funds to NO tax or very LOW tax
jurisdictions
• Be prepared to pay more taxes in Cyprus, it is
cheaper than paying high withholding taxesPROFILE Eurofast is a regional business advisory organization employing local advisors in over 21 cities in South East Europe and Middle East (SEEME). We are uniquely positioned as one stop shop for investors and companies looking professional services in the SEEME region. Our team of advisors are capable of efficiently addressing all client needs in one single meeting, using one single language for all the countries in the Region. Eurofast has over 40 years of history, working with many global brands and leading Institutions, operating in the manufacturing, retail, airlines and professional services sector. Our clients are the vivid evidence that Eurofast is your trusted business advisor in EMEA.
WHAT YOU NEED TO DO More observations • EU Directive on intermediaries • Review: IP, B2B loans, Holding structures • Apply PPT in your structure • Convert B2B to NID instead • Beneficial Ownership issues • Does your structure have a CFC? • Substance. Revisit urgently. • Trends: Caribbean moving to Cyprus and Bulgaria • Substance in Lux /Netherlands = Onerous & highcost. Companies moving to Cyprus (MHP Myronivsky Hliboproduct example) • Where is your company actually resident???? • Substance will Re- Open your bank account !!!!
Why Cyprus? A brief look at the
Cyprus Tax System
• Low corporate tax of 12.5%
• No withholding tax on dividends paid to non-tax resident individuals
• 50% tax exemption for new tax residents who earn more than €100.000 per
year
• Cyprus tax residents who are not domiciled in Cyprus are exempt from
special defense contribution
• Profits on the disposal and revaluation of shares is not taxable
• Full compliance with EU and OECD
• Beneficial IP Regime
• Dividend income exempt from taxation (under certain conditions)
• Capital gains tax only on property situated in Cyprus
• Foreign exchange gains are not taxable (not applicable for Forex)Demonstrating Substance
WHERE CAN YOU FIND US?
LOCATIONS:
• Lefkosia • Zagreb
• Athens • Cairo/ Alexandria
• Thessaloniki • Podgorica
• Sofia • Kiev
• Bucharest • Moscow
• Belgrade • Tbilisi
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