Where the investment scenario involves the transfer of technology and the collection of royalties from a high tax country with which Cyprus has a double tax treaty, the use of a Cyprus international royalty company may save tax.
Royalty payments from Central and Eastern European countries would normally be a deductible expense in the source country and they will be subject to an effective tax rate of 2.5% per cent after deduction of expenses in Cyprus, and after deduction of any tax paid in the source country. This profit can either be accumulated in Cyprus to be reinvested within the group or be repatriated without any additional Cyprus tax.
The European Union Directive on Royalties and Interest may also be of use in an investment scenario as it restricts the rate of tax that may be levied on royalties paid from one European country to another provided the company to which the royalties are paid has a significant participation in the paying company.
In cases where it is possible to structure the investment in the target country as debt instead of equity a Cyprus finance company may save tax as described below.
Where it is allowed under local tax legislation, structures involving a high proportion of the investment to be made as debt, would be very beneficial for the investor because the interest accruing to this debt would be a charge against taxable profit in the country of the investment. Depending on the investment target country, the use of a Cyprus international finance company would entitle the investor to collect the interest at reduced withholding taxes as provided by the relevant double tax treaty. In addition, where the target country is within the EU the EU Royalties and Interest directive may be of use as in the case with Royalties companies as described above.
The use of double tax treaties will result in the receipt by the Cyprus company of dividend income from treaty countries at reduced withholding tax rates. Substantial reductions on the rate stipulated by the local tax legislation, accrue to distributions from investments in Russia, Czech Republic, Slovakia, Bulgaria and Hungary. These countries have a good network of double tax treaties. Few treaties have lower withholding tax rate for dividend than the Cyprus treaty.
In the case of Russia, none of its other treaties provide for lower rate. Austria, Finland and the UK have a withholding rate similar to the Cyprus treaty withholding rate but their local tax rates are higher than the Cyprus rate which may be nil in certain cases. Investors using the Cyprus international business company as a vehicle would tax benefit, depending on the country, as already explained under Royalty companies.
Other tax planning structures
Another popular structure involves the use of a Cyprus company for triangular trade. This scenario provides that the Cyprus company buys goods or services from a third country and sells, at a margin to the destination country. In this way the profit accruing to the Cyprus country is taxed at the lower rate of 12.5%. Care must be taken in this scenario to use arm's length terms with all trade partners.
Other structures, and there may be infinite scenarios, can be tailor-designed to suit the specific circumstances of each client.