Cyprus Incorporation by vkv75576


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     Practical application
of the new developments
        and its impact on
           tax structuring

          Moscow, 25th June 2009
New Protocol
 New Protocol to the Double Tax Treaty between
  Cyprus and Russia:
    Initialed on 16th April 2009, in Nicosia, Cyprus;
    Expected to be signed and ratified by the end of the year
     and enter into force by 01/01/2010.

 The Protocol brings significant changes via the
  incorporation of provisions relating to:
    the Limitation of Benefits;
    Exchange of Information; and
    Capital Gains.

 Leads to the effective removal from the Russian
  Blacklist of non-cooperative jurisdictions.
Limitation of Benefits
 Intended to prevent treaty abuse.

 Treaty benefits to be renounced if:
    BOTH authorities conclude that the main purpose of the
     presence of a resident in a contracting state is to take
     advantage of the treaty benefits

 Only applies to companies which are not registered
  either in Russia or in Cyprus. (Treaty text & Official
  interpretation of the Cypriot Ministry of Finance).
    Companies registered in either one of the contracting
     states are excluded from the application of the LoB
Exchange of Information
   The Exchange of Information is not merely limited to taxes
    covered by the Double Tax Treaty; it is also extended to
    indirect taxes.

   Banking secrecy is not anymore a valid argument for refusal to
    exchange information.
       Exchange of information between the two contracting states can
        be achieved. The legislation of Cyprus was amended to that
        extent as to enable such information exchange.

   Assistance in the collection of “revenue claims” by both tax
       The fact that the required information is not necessary or
        valuable for the purposes of collecting taxes for a competent
        authority (e.g. due to tax exemption to corresponding income in
        the given country) can not serve as grounds for refusal to
        exchange the information with a competent authority of the other
Capital Gains
 Alienation of shares deriving more than 50% of their
  value from property situated in a contracting state
  may be taxed by the state where the immovable
  property is situated;

 Exclusion from Capital Gains provisions:
    Alienation of shares listed in a recognised stock
     exchange; or
    Alienation of shares in the context of a reorganisation.

 Grace period of 4 years following the entry into
  force of the Protocol
Effect of the New Protocol

 Removal of Cyprus from the Russian
  blacklist upon its entry into force, thus:
   Eligibility to qualify for the dividend
     participation exemption in case of
     distribution of dividends by Cypriot
     subsidiaries to Russian parents.
    Structure 1
   Double layer of Cypriot
    companies.                         Fig. 1 Cyprus Holding Co
     Application of the favorable
       domestic legislation of
                                        Capital gains                  Dividends
       Cyprus as opposed to the
       provisions of the double tax
       treaty between Russia and                Cyprus Subsidiary Co
   Cyprus Law
     Capital gains are tax exempt
                                                        Russian Co
        provided that they relate to
        immovable property located
        outside Cyprus;
     Gains on the sale of
        securities are exempt from
        Corporate Income Tax.
Analysis of Structure 1
                                        Cyp Subsidiary Company:
   Cyp Holding Company:
                                            Dividends received from Ru
                                             Subsidiary Co:
       Dividends received from
                                              Exemption from CIT;
        Cyp Subsidiary Co:
                                              Exemption from Defence
           Exemption from CIT;                   Tax.
           Exemption from Defence
                                            Dividends paid to
       Gains on the sale of                  No WHT (defence tax)
        shares of the Cyp
        Subsidiary Co:                  Ru Subsidiary Company:
           No Capital Gains Tax;
           No Corporate Income
                                            Dividends paid to the Cyp
                                             Subsidiary Co:
                                              5% WHT at source
Cyprus International Trust

 Often used in international tax structures as
  a wealth management tool;

 Advantages of CITs:
   All income derived would be tax exempt in
    Cyprus given that trust property is located
    outside Cyprus;

   The advantageous provisions under the
    extensive network of double tax treaties may
    have application in certain cases.
The use of a CIT
   From a Russian perspective:
     No inheritance tax or gift tax      Fig. 1         Trust
        on the transfer of the property
        of the settlor to the trust;
     No income tax or capital
        gains tax on a deemed                       Cyprus Holding Co
        disposal basis at the level of
        the settlor;
     No VAT on the transfer of the
        assets by the settlor (private
        individual & not a VAT payer);             Cyprus Subsidiary Co
     Tax imposed at the level of
        the beneficiaries on a
        remittance basis (depending
        on the type of income).
                                                       Russian Co
   Alternative trust jurisdictions to
    Cyprus may be used
Structure 2
 Cyprus Royalties
  Company                      Fig. 1
                                        Non-resident UBO
   Ownership of royalties
    and licensing rights for                                 Royalties
    intellectual property
                                    Cyprus Royalty Company
 Cyprus Law
   Net royalty profits are                                  Royalties
    subject to 10% CIT;
   Gains on the sale of                Licensee Company
    intellectual property
    may be exempt from
   Royalty payments are
    exempt from WHTs
    (rights must be
    exercised outside
Structure 3
   Cyprus Financing Company              Fig. 1
       Financing of group                          Non-resident UBO
        companies by way of debt or
        working capital;
       Efficient accumulation of
        interest income.
                                                   Cyprus Financing Co
   Cyprus Law
       Interest income received from                                    Interest
        intra-group lending 10% CIT;
       No thin cap rules / no debt-to-
        equity restrictions;                           Russian Co
       No specific TP legislation, the
        arm’s length principle applies;
       Interest paid to creditors is
        not subject to WHTs.

   Minimum interest margin /
    spread of 0.125 – 0.35%
Int’l Org. black + grey lists
NOT in any BLACK lists
NOT in any GREY lists

Organisation   white list   grey list black
   G20              √
   OECD             √
   FATF             √
Old/New Cyprus Regime
BEFORE                     AFTER
No Exchange of Info        Increased

In black/grey lists        Only in white lists

No substance needed        Substance important

LOW cost to operate        Still LOW

HIGH Quality of services   Still HIGH

Friendly to Russians       Even friendlier !!
Thank you!

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