Structures for international business in Cyprus

To date, no one is surprised by calling Cyprus the Finance Center with high-quality services. Simple tax system and a number of other advantages for business made this jurisdiction very attractive in the circles of foreign investors.

In this article we indicate which forms of business are most common in Cyprus. More specifically, we will talk about financial, holding and trading companies.

Financial companies

So, you decided to open a financial company in Cyprus. Among the actively used methods of obtaining financing there are loans. Let’s consider the possible types of loans.

"Mirror" (compensatory) loans

The Institute of Certified Public Accountants of Cyprus and local tax authorities have come to an agreement determining the amount of spreads between loans granted and received:

These spreads are relevant only to "mirror" loans. That is, a company in Cyprus, receiving a loan from an associated person and issuing a loan to another person, is an intermediary. In order for the validity of small spreads, loans should not be subject to additional risks.

At the same time, the taxable base at the expense of loans not compensated by the borrower(s) can not be reduced.

It should not take more than 6 months between the receipt and the grant of a loan.

When calculating spreads, all expenses incurred are taken into account. Foreign exchange differences arising from the revaluation or payment of "mirror" loans are not taxed or deductible from the taxable base.

To apply the above points, a Cypriot company must be provided with evidence that the funds designated as a loan to a related/associated company were issued to other related/associated company. To do this, it is sufficient to analyze the flow due to the bank accounts of the company or to provide the relevant loan agreements.

Other loans

When granting funds to any person that are not "mirror" loans, market interest rate is used. There are no instructions in the tax legislation or decisions of the tax authorities about what is the rate that can be called the market rate.

But in practice, the rate of 5-6% per annum is applied as a market one. At the same time, one should pay attention to the fact that in such cases it is necessary to take into account the type of currency, the economic risks of the jurisdiction to which the borrower relates and other additional factors.

Holding companies

The tax laws of Cyprus determines that profits from the sale of "rights" can not be taxed, same as a loss in this case is not deductible from the taxable base. A list of instruments that relate to similar "rights" is provided by corresponding circular:

• ordinary and preferred shares;
• founder's shares/stakes of enterprises;
• options for "rights";
• bonds;
• debentures;
• short positions on "rights";
• swaps for "rights";
• futures and forwards to "rights";
• depository receipts for "rights";
• receivables to bonds and debentures;
• participation in indices related to "rights";
• participation in companies;
• units in collective investment schemes (public and private).

Taxes on dividends from participation in companies

In case of receiving dividends from abroad, they are taxed only in the following cases:

1. 1. Activities of a company that pays dividends, directly or indirectly, is not more than 50% investment.
2. 2. A company that pays dividends does not enjoy more favorable tax benefits in its country than in Cyprus. It is considered that minimum acceptable rate is 5%, although there is no written confirmation from the tax authorities of Cyprus.

Starting from 2014, the dividend income (in the two cases indicated) is subject to defence tax, at a rate of 17%.

Trading companies

The principles of tax policy of Cyprus are based on the assumption that when selling goods or services, a Cypriot resident company will receive "sufficient" gross profit so that administrative expenses are not too burdensome financially.

The rate of income tax for trading companies in Cyprus is 12.5%. Expenditures incurred to increase the amount of taxable income are deducted from the taxable base.

Legislatively, the size of "sufficient" profit is not determined. But in practice, the tax authorities of Cyprus recognize the margin of 5-10% as "normal", taking into account administrative expenses incurred.

At the same time, the more annual trading turnover, the smaller the margin value is considered acceptable. Financial and operational risks that relate to the company are also taken into account.

Cypriot legislation also requires the “arm’s length” principle to be used when entering into transactions between related/associated persons.

So, what does the “arm’s length” principle mean?

This principle is provided for in Article 33 of the Cyprus Income Tax Act. It means that the aforementioned transactions are concluded under the same conditions that are used in transactions between unrelated persons.

And if the tax authorities of Cyprus recognize that the deal is concluded according to different principle, the tax base of the company can be adjusted.

How the costs that are subject to deduction from the tax base are restricted or limited?

If the costs were incurred not for the purpose of trading, they can not be deducted from the taxable base.

An example of such costs may be payment of loan servicing, which was taken to acquire assets that fall under the definition of "rights".

The following are also not subject to deduction from the taxable base:

• - interest expenses that are related to the cost of acquisition of assets, if these assets do not bring taxable income;
• - expenses that are directly or indirectly related to non-taxable income, and part of the overhead costs.

How are foreign exchange differences presented in the profit and loss accounting report being interpreted:

1. Realized (sold)/unrealized (unsold) exchange rate differences of a capital nature are not taxed/deducted from the taxable base.
2. Realized (sold) differences of income-expenditure nature are subject to deduction from the base and are taxable.
3. If there are unrealized (unsold) exchange rate differences of income-expenditure nature, the company can choose between:

• accounting for exchange rate differences for taxation/deduction from the taxable base at the time these differences arise;
• accounting for exchange differences as non-taxable or non-deductible from the taxable base until the moment of their sale (until a payment is made).

When choosing method 1) or 2) the company must adhere to it in the future.

Non-resident (offshore) companies in Cyprus with a local representation.

Offshore in Cyprus pays taxes only on profits received in the territory of this jurisdiction.

Use of losses

Circular 2013/08 specifies that losses that can be deducted from the tax base can be used for 5 years after their occurrence. After expiration of the above period, unused losses will be canceled.

To get more information and advice from professionals regarding all the features of the firm in Cyprus, as well as registering companies abroad, contact Law&Trust International.