Doing Business in Cyprus: Russia, BEPS, ATAD, PEs, Banking & More
Taxlinked (TL): What are some of the main advantages of using Cyprus for a company’s head office operations?
George Savvides (GS): I would like to start by mentioning that I am really glad that we are finally getting to the stage that we have always been promoting as Seamark—that of using Cyprus for actual operations with substance and not just as another dot on a document depicting the structure of an international group.
Although substance seems to be the only way forward, this should not be construed in a mechanical way. If you ask someone to explain what substance means in international business structuring, he will most probably start talking about premises, employees and a telephone line. Although these are indeed factors commonly associated with companies with substance, it is imperative to first start with the principle of linking economic activity with taxable profits. This entails a very good understanding, first of all, of the clients’ affairs, not only in Cyprus but at a group level, as well as a good comprehension of how the industry in which the client is operating functions.
Cyprus offers an ideal location for the establishment of head office operations for various reasons, including its strategic geographical position, the convenient time zone, its highly qualified and multilingual workforce, its advantageous legal and tax regimes, the plethora of skilled and supportive advisors and, of course, a range of factors related to the quality of life, including the sunny weather, the low crime and pollution rates, and the presence of a respectable number of top quality schools and other educational and recreational institutions.
TL: What do you foresee for Russian investments in Cyprus? Will these continue to grow?
GS: A lot has been said and written recently about the abandonment of Cyprus by Russians, mainly because of the closure of many bank accounts of Russian individuals or companies of Russian interests, as well as due to the EU sanctions imposed on many Russians and the de-offshorisation initiative in Russia, including the creation of offshore zones within the country. While these had an impact for what concerns the closure of a significant number of companies of Russian interests, which were mainly engaged in holding or other passive operations, at the same time, a respectable number of groups are setting up real presence in the country, as head office establishments and/or intra-group financing vehicles, as regional offices or even for commercial reasons.
There are very strong ties between the two countries, and Russian businessmen and investors are not establishing presence or investing in Cyprus for a single reason, such as tax, but for a variety of motives, many of which are not even financial in nature. They rather have to do with cultural and religious connections, with the fact that Russian language is widely spoken in Cyprus, as well as with the safe and pleasant environment offered for these people and their families to invest, do business, work, get educated and live in.
TL: What are some of the current challenges faced by international businesses when it comes to setting up and managing their banking operations? Do you see any solutions ahead?
GS: Banking is becoming one of the greatest challenges in international business operations. The volume of information needed and, as a result, the time required for opening a bank account and carrying out transactions seems to be growing by the day. As a result other solutions are being introduced, many of which are based on technology, including blockchain and artificial intelligence.
TL: Since the last time we interviewed you, what are some of the updates in terms of what Cyprus is doing with regards to the OECD’s BEPS project?
GS: I think the most important change relates to the Transfer Pricing provisions in relation to related party financing, as per the provisions of BEPS Actions Points 8 – 10. All relevant information is covered in our related newsfeed, which can be found by clicking here.
In summary, under the new rules, which apply from 1 July 2017, intra-group financing transactions need to be assessed to ensure that their remuneration complies with the arm's length principle, i.e., to what would have been agreed by independent entities in comparable circumstances. To this respect, a Transfer Pricing Study must be carried out in order to determine the remuneration, which would apply to a particular transaction or series of transactions had these taken place between independent entities.
There is a simplified regime, which provides for a set interest margin, but this applies only to group financing companies that fulfill a purely intermediary and very restricted role in the whole operation and under very strict conditions and circumstances.
This change has totally reshaped the landscape related to financing operations and, at the same time, it has created the need for Cyprus companies that are involved in such operations to resort to qualified professionals for conducting a Transfer Pricing Study. At Seamark we have overseen the production of such studies for several of our clients, and we are glad that in many cases the end result was more beneficial than even the one under the previous regime for such transactions.
Another BEPS-related measure, which has been implemented by Cyprus in the meantime, is the Country-by-Country Reporting as per Action Point 13.
The signing of the Multilateral Convention to implement tax treaty-related measures to prevent BEPS, otherwise known as the Multilateral Instrument (MLI), on 7 June 2017, was also another important step in relation to the alignment of Cyprus with the provisions of the BEPS project. At the time of signature, Cyprus submitted a list of Double Tax Treaties that it would like to designate as Covered Tax Agreements (CTAs), i.e., tax treaties to be amended through the MLI.
TL: How far along is Cyprus with the implementation of the European Commission’s Anti-Tax Avoidance Directive (ATAD)?
GS: Draft legislation was published last year for implementing ATAD. It has not been enacted yet but it is expected that when this happens most provisions will be applied retrospectively from the beginning of 2019. The most important points of the draft legislation are outlined below.
The draft legislation introduces a limit on deductible exceeding borrowing costs, defined in the same way as in ATAD, of 30 percent of taxable EBITDA (earnings before interest, tax, depreciation and amortization) or 3 million euros, whichever is higher. The limit will be applied at the company level unless the company is a member of a group for Cyprus tax purposes, in which case it will be applied at the level of the Cyprus group.
The restriction will not apply to wholly independent companies or financial institutions. Financial arrangements entered into before June 17, 2016 and not subsequently amended will be outside the scope of this provision.
Furthermore, there is an equity escape clause following the relevant provisions of ATAD, which permits full deduction of borrowing costs if the taxpayer's ratio of equity to total assets is not more than two percentage points lower than the equivalent ratio of the group to which it belongs.
Interest costs disallowed because of the restriction may be carried forward for up to five years.
The definition of a Controlled Foreign Corporation (CFC) is the same as in ATAD, that is, an overseas permanent establishment or company directly or indirectly controlled by a Cyprus tax resident company, the tax burden of which is less than half of what it would be under the Cyprus tax system.
The draft law provides for certain categories of income including interest, royalties and dividends receivable by the CFC, which should be considered as income of the Cyprus parent company and taxed under the Cyprus tax regime. An exemption to this rule is when the CFC is resident in a EU or European Economic Area (EEA) country and engages in substantive economic activities.
Under this provision the taxpayer should be liable for tax at an amount equal to the difference between the market value and the value for tax purposes of assets transferred outside the scope of Cyprus taxation, while remaining under the same ownership. The taxpayer may pay the exit tax by installments over five years.
The effective date for this provision is 1 January 2020.
General Anti-Abuse Rule
A new clause is to be added to Article 33 of the Income Tax Law, which is the article governing the arm’s length principle in the Cypriot tax legislation. Through this, the tax authorities have the power to disregard artificial arrangements, which have among their main purposes the acquisition of a tax advantage that defeats the object or purpose of the tax laws.
The draft law includes provisions on hybrid mismatches, which supplement similar provisions introduced in 2015 for the implementation of the amended EU Parent-Subsidiary Directive.
If a hybrid mismatch results in a double deduction, any Cyprus-resident recipient will be denied the deduction, if a deduction is given to an overseas resident. To the extent that a hybrid mismatch results in a deduction without inclusion, if the Cyprus resident party is the payer, the deduction will be denied, and if the Cyprus-resident party is the recipient and a deduction is given to the overseas payer, the recipient will be taxed.
The provisions regarding mismatches of hybrid instruments and tax residence will come in to effect on 1 January 2020, while those relating to reverse hybrid mismatches on 1 January 2022.
TL: Is there anything else you would like to share with your fellow members?
GS: Taking into account all the advantages outlined in the first question that Cyprus presents, in combination with the adaptability of Cypriot professionals, who are also highly qualified and experienced, as well as the guidance and support received through the country’s EU Membership, I think one can confidently say that local businesses are standing in good stead with regards to responding to the new challenges stemming from international developments.
At Seamark, we are specialising for almost 15 years now in the provision of a comprehensive range of international business services related to Cyprus, including setting up and operating a business in Cyprus, becoming a resident, citizen or tax resident of the country, family office, accounting and tax compliance, corporate and secretarial, trustee, professional consultation and much more.
Note: The interview was posted on TaxLinked.net on 2 April 2019.