The future of international Tax planning and International Banking - - PowerPoint PPT Presentation

Christodoulos Damianou 2019 The future of international Tax planning and International Banking

✓ 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 CONTENTS

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
• f the MLI to the 55 individual

treaties signed by Cyprus, plus three treaties covered under the

• ld 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
• n 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

• r

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 Cyprus

Key information on MLI (1/2)

MLI

• MLI
• Multilateral

Convention to implement Tax Treaty related measures to prevent Base Erosion and Profit Shifting (“BEPS”). Developed

• n

the basis of Action 15 of OECD BEPS Action Plan.

• BEPS

Action Plan – 15 actions developed by OECD and G20 to equip governments to address tax avoidance, ensuring that profits are taxed where value is created. Purpose

• Swift implementation by governments
• f

measures strengthening double- tax treaties protecting governments against tax avoidance strategies that inappropriately use tax treaties to artificially shift profits to low or no-tax jurisdictions. Entry into force

• MLI entered into force on 1 July 2018.

Signatories

• 92 signatories as of end of November

2019. For Russian Federation, MLI enters into force on 1 October 2019. Definition

• Covered

Tax Agreement (“CTA”)

• means an agreement for the avoidance of

double taxation (“DTT”) with respect to tax on income (...): (i) which is in force between two Parties; and (ii) with respect to which each Party has made a notification listing the agreement as well as any amending or accompanying instrument thereto (...) as an agreement which it wishes to be covered by the Convention.

TWO DTTS ARE CTA

Key information on MLI (2/2)

PROVISIONS MATCH MLI ENTERS INTO FORCE

• The MLI provisions for a particular CTA enter into force: as of

the latest date on which MLI enters into force for each Contracting Jurisdictions AND with respect to taxes withheld at source (from the 1st day

• f

the next calendar year) / with respect to all other taxes (as of expiration of a period of 6 months).

• 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 reservations and

• ptional

provisions selected by both parties.

TREATY ABUSE

MLI provisions

ARTIFICIAL AVOIDANCE OF PE STATUS HYBRID MISMATCHES IMPROVEMENTS TO DISPUTE RESOLUTION Neutralization of negative effect of hybrid mismatch arrangements (transparent and dual resident entities). Preventing granting of treaty benefits in inappropriate circumstances. Rethinking of commissionaire and similar arrangements to prevent the artificial avoidance of PE status. Resolving disputes concerning application/interpretation of CTA by mutual agreement procedures.

MLI, 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.

Pre-BEPS, dependent agent PE

R-co S-co Not a PE Commissionaire arrangement Customer % commission fee Sale in its own name, but for the account of R-co

Pursuant to Art. 5(5) OECD MTC an agency PE is created: ➢ If a person is acting on behalf of the enterprise. ➢ Concludes contracts in the name

• f the enterprise.

➢ And performs these activities habitually. Pursuant to Art. 5(6) OECD MTC an enterprise shall not be deemed to have a PE if it carries on business ➢ through a broker, general commission agent

• r

any

• ther

agent of independent status, ➢ provided that such persons are acting in the ordinary course of their business.

MLI, PE arrangements (2/5)

Pre-BEPS

PE is created

Dependent agent PE where a person acts

• n

behalf

• f

the enterprise and “HAS AND HABITUALLY EXERCISES AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE ENTERPRISE” (i.e. a dependent agent). Construction PE building, construction or installation activities constitute a PE ONLY IF IT LASTS MORE THAN TWELVE MONTHS.

Now

PE is created Dependent agent PE where a person acts on behalf of the enterprise, and, in doing so, such person habitually concludes contracts, OR “HABITUALLY PLAYS THE PRINCIPAL ROLE LEADING TO THE CONCLUSION OF CONTRACTS that are routinely concluded without material modification by the enterprise.” Construction PE building, construction

• r

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 combined

MLI, PE arrangements (3/5)

Pre-BEPS PE is not created

Auxiliary and supporting activities WHERE A PLACE OF BUSINESS IS USED SOLELY FOR ACTIVITIES LISTED IN THAT PARAGRAPH (article 5(4) of the OECD`s MTC. I.e. use

• f

facilities solely for the purpose of storage, display

• r

delivery

• f

goods

• r

merchandise belonging to the enterprise etc.). Independent agent status where a broker, general commission agent

• r

any

• ther

agent

• f

an independent status, ACTS ON BEHALF OF THE ENTERPRISE IN THE ORDINARY COURSE OF THEIR BUSINESS, I.E. THEY ACT AS AN ‘INDEPENDENT AGENT’.

Now PE is not created

Overall preparatory or auxiliary character where a place

• f

business is used solely for activities listed in that paragraph (article 5(4) of the OECD`s MTC), and THE OVERALL ACTIVITY OF THE FIXED PLACE OF BUSINESS IS OF A PREPARATORY OR AUXILIARY CHARACTER. Independent agent status where a broker, general commission agent or any

• ther

agent

• f

an independent status, acts

• n

behalf of the enterprise in the ordinary course of their business, UNLESS THAT PERSON “ACTS EXCLUSIVELY OR ALMOST EXCLUSIVELY ON BEHALF OF ONE OR MORE ENTERPRISES TO WHICH IT IS CLOSELY RELATED”.

MLI, PE arrangements (4/5)

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

• f activities in the case the activities are connected to each other, i.e. the time periods

shall be combined.

Co A Office B of Co A

Country A Country B

Employees of Office B perform DD of clients for Co A and send this information to Co A Employees of Co A analyse the information given by Office B and take relevant decisions Due to the new anti-fragmentation rule exceptions provided by pre-BEPS MTC would no apply to the Office, because its activities constitute complementary functions that are part

• f

a cohesive business

• peration.

MLI, PE arrangements (5/5)

MLI, 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

• f

double-taxation without giving

• pportunities

for tax evasion

• r 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.

Principle Purpose Test (PPT)

“..a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or 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”

Limitation of Benefits (LOB)

a resident of a Contracting Jurisdiction would be entitled to the benefits

• nly

if they constitute a “qualified person” under article 7(9) of the simplified LOB

MEASURES TO COUNTER TREATY ABUSE

MLI, treaty abuse (2/4)

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

• btaining

that benefit was

• ne
• f

the principal purposes

• f

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

• bject 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 (3/4)

Dividends transfer transactions (art. 8 MLI)

A 365 day minimum holding period requirement before entities can benefit from exemption “Notwithstanding the provisions of paragraph 2, dividends shall not be taxed in the Contracting State

• f

which the company paying the dividends is a resident if the beneficial

• wner
• f

the dividends is a company (other than a partnership) that is a resident of the other Contracting State that has held directly shares representing 80 per 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)

Gains from alienation of shares in a company, partnership, or trust predominately holding real estate (art. 9 MLI)

A 365 day minimum

• wnership

period before entities can benefit from exemption “Income, profits or gains derived by a resident of a Contracting State from the alienation of shares or comparable interests may be taxed in the

• ther

Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property, as defined in Article 6, situated in that other State” (art. 13 DTT between Australia and Germany)

MLI, treaty abuse (4/4)

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
• ut 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
• f 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 2020

Expected 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

2020

EXCHANGE 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

• f

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

• ther

natural persons exercising ultimate effective control over the trust

Country 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
• r 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 Intermediaries

DAC 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 Penalties

SUBSTANCE AND TAX RESIDENCY FOR COMPANIES

BVI CO CY CO RUS CO LOAN INTEREST INTEREST LOAN

Structures that are under scrutiny

• What was the purpose of these

kind of structures?

• No withholding tax for interest

payments from RUS to CY and from CY to BVI

• No withholding tax on

dividends paid from CY to BVI and from BVI to UBOs

• No tax paid on dividends

received at level of CY co

• Up to 2017 only a 0.35% margin
• f interest was taxed in Cyprus
• Secrecy of UBOs in the BVI

DIVIDEND DIVIDEND

BVI CO CY CO RUS CO LOAN INTEREST INTEREST LOAN

Structures that are under scrutiny Tax considerations

What is the problem of these kind

• f structures?
• Back to back loan arrangements

no longer accepted

• Transfer pricing introduced in

Cyprus as of 2017

• Beneficial ownership issues –

who is the actual owner of the interest and dividends?

• Signing of MLI and adaptation
• f Articles 6 to 11 on treaty

abuse

• BVI registry of UBOs

• 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 tax

Structures that are under scrutiny Other considerations

The 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 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.

The new banking reality in Cyprus

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

information

SUBSTANCE 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 COMPANY

SUBSTANCE 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

• f 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

dividends

BENEFICIAL 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 resident

BENEFICIAL 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
• wning 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 taxes

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PROFILE

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
• Athens
• Thessaloniki
• Sofia
• Bucharest
• Belgrade
• Tirana
• Skopje
• Pristina
• Banja Luka/

Sarajevo

• Zagreb
• Cairo/ Alexandria
• Podgorica
• Kiev
• Moscow
• Tbilisi
• Beirut
• Erbil

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