international tax planning

The Role Of Cyprus On International Tax Planning

INTRODUCTION

Cyprus' strategic geographic location, excellent commercial infrastructure political stability, favourable tax incentives and high European life-style are among the factors which have contributed to the development of the island as an important financial and business centre in the Middle East.

Foreign participation in the Island's economy has always been encouraged and endorsed by all official bodies and authorities as well as by the Cypriot people themselves. This generous and liberal approach is already paying dividends and has successfully generated a growing awareness amongst foreign corporations and individuals of the unique advantages of using Cyprus as a business base.

Today the authorities are demonstrating more clearly than ever before that they are seriously committed to refining and expanding the legislation and regulations in terms of which foreign involvement in the island's economy is secured. Therefore, an extremely favourable environment for all forms of offshore business activities and onshore foreign investment has been specifically structured to ensure that they enjoy an infrastructure which has the maximum potential for success and growth. Cyprus is considered to be a low tax jurisdiction and not a zero tax jurisdiction or a tax haven.

In contrast to many countries commonly used for offshore structures, Cyprus has concluded a number of double tax treaties with many developed countries as well as with Russia, the CIS and all the other Eastern European countries.

THE DOUBLE TAX TREATIES OF CYPRUS

The impressive number of the double tax treaties of Cyprus, combined with the very low taxation of offshore entities, and the nil withholding tax rates on dividends, interest and royalties paid by such entities make the Republic a tax incentive country, offering real possibilities for international tax planning. The primary purpose of these treaties is the avoidance of double taxation of income earned in any of the treaty countries. This is usually achieved, either through the allowance of a tax credit against the tax levied on the taxpayer by his country of residence or through tax exemption in one contracting state of the income taxed in the other contracting state. Normally, the result is that the taxpayer pays no more than the higher of the two rates.

Cyprus has double tax treaties with the following countries:

- Austria - Ireland

- Bulgaria - Italy

- Canada - Kuwait

- China - Malta

- Czech Republic - Norway

- Slovak Republic - Poland

- Denmark - Romania

- Egypt - Russia and CIS Republics

- France - Syria (as from 1/1/1996)

- Germany - Sweden

- Greece - UK

- Hungary - USA

- India - former Yugoslavia.

The tax treaties with Belgium and South Africa are signed and await ratification while the treaty with Finland awaits signature. New treaties with Thailand and Singapore are currently being negotiated.

All the double tax treaties of Cyprus are drafted on the basis of the OECD treaty model. As with all double tax treaties, their primary objectives are firstly, to clarify and determine the taxing rights of each contracting state, secondly, to reduce or avoid the impact of international juridical double taxation, and thirdly, to introduce anti-avoidance provisions and mechanisms to prevent tax evasion.

Cyprus is perhaps the best example of a "low tax jurisdiction" country or as it is better defined a "treaty haven" since it combines a low tax regime with an extensive network of double tax treaties and only a few anti-treaty shopping provisions. Out of all the treaties now in force, only the treaties with Canada, Denmark, Germany, France, UK and USA have some anti-avoidance provisions. Even so, these countries, with the exception of Canada and the USA provide tax sparing credits to Cypriot offshore entities.

Cyprus has a clear advantage when compared with other low or no-tax jurisdictions because of the extensive double tax treaty network. Cyprus is relatively unusual in the extent of its treaty network in that, although there are limitation provisions in some of its treaties its double tax treaties in combination with the low tax concessions given by Cyprus to offshore entities offer many possibilities for tax planning services . Moreover, the high esteem and reputation enjoyed by Cyprus with foreign tax jurisdictions means that tax screening requirements normally relevant to tax havens and low tax countries may not be relevant to payments to Cyprus legal entities, whilst the anti-avoidance legislation of high tax countries aimed at clawing back benefits derived through tax havens and low tax countries may be less significant with regard to Cyprus. At this point it should be noted, by way of illustration, that the most recent and perhaps the most appropriate example of the use of the "limitation of benefits" article is the new USA/Netherlands double tax treaty whose 27 pages long limitation of benefits article literally reduces to the minimum the tax potentials of Dutch companies as investment vehicles in and out of the USA.

In conclusion it can be stated that the wide network of Cyprus double tax treaties, combined with the tax and other incentives afforded to Cyprus offshore companies, renders Cyprus a particularly attractive place for the establishment and operation of an offshore entity. For a foreign corporation, whose activities and investments are situated on an international level, Cyprus is amongst the very few locations that combine benefits in the country where the investment is made, by eliminating or substantially reducing withholding taxes, in Cyprus itself, by avoiding or paying tax at a low rate of 4.25% and in the home country of the organisation by avoiding or reducing tax and in some cases even enjoying tax sparing credits.