Investing In Eastern Europe

CYPRUS – A UNIQUE OPPORTUNITY

The advantage Cyprus has over most other jurisdictions is that it has a uniquely favourable East European tax treaty network developed during the time when Europe was divided between West Europe and Soviet controlled East Europe – Known as the former COMECON countries. However, as a full member of the European Union, having a Flat-Rate Corporate Tax of only 10% plus numerous beneficial treaties with Western European countries such as the Republic of Ireland, France, Germany and Belgium, Cyprus is ideally placed to act as an investment conduit for companies and/or individuals wishing to invest in both the new EU Accession States and ‘old’ Soviet Union countries. Furthermore, it has an extensive treaty network with many “new” economies in developing markets such as India and China, as well the Middle East and Asia, making it an ideal gateway for trade in Emerging Markets.

THE BENEFITS THAT THE SCF GROUP CAN OFFER IN CYPRUS

 

The SCF Group provides full company registration, management and accounting services in Cyprus for many years through its local Managing Director, Andy Dalziel MA, FCA. For more detailed information please contact an SCF Consultant or Andy Dalziel directly at adalziel@scfgroup.com

 

 

TAX TREATIES & EASTERN EUROPE

Since the fall of the Berlin Wall, Cyprus has negotiated a wide ranging set of treaty networks with most member countries of the former Eastern bloc, whilst a number of former Republics of the Soviet Union have honoured all treaties signed by the former State. Similarly in the Balkans, although now constituting independent states, a number of Republics of the former Yugoslavia continue to honour the Yugoslav-Cypriot tax treaty. This extensive treaty network offers a wide range of opportunities for both companies and individuals to use Cyprus as an investment vehicle for the emerging economies of Central & Eastern Europe.

TREATMENT OF DIVIDENDS, INTEREST & ROYALTY PAYMENTS

DIVIDENDS: In the case of virtually all Eastern European countries, Cyprus has managed to negotiate low, and in the case of a number of member states of the old Soviet Union, zero withholding tax rates. Dividends received by a Cyprus company from abroad are exempted from both corporation tax, and providing it owns at least 1% of the company paying the dividends and meets certain conditions, the Cypriot Special Defence Contribution as well. Individuals who are tax resident in Cyprus are subject to the 15% Special Defence Contribution but, any tax withheld overseas can be deducted from the tax imposed in Cyprus, irrespective of whether any double taxation treaty exists or not.

JOINT-VENTURE PARTNERSHIPS

It is important to note that the treaties with Russia and all the former constituent states of the Soviet Union, allow for a zero withholding tax rate to apply to joint-venture partnerships. This is also the case with the Czech Republic, Slovakia and Romania.

INTEREST: Interest received by a Cypriot resident company is subject to income tax at 10% on 50% of the interest received, and to 10% Special Defence Contribution of 10% on the whole amount of interest received, making an effective and combined rate of 15%, although where foreign withholding tax has been levied, this may be credited against the tax payable in Cyprus. No withholding tax is imposed in Cyprus on interest payments made by a Cypriot resident debtor to a resident or non-resident creditor, irrespective of the jurisdiction to which the interest is paid.

ROYALTIES: Royalties received by a Cypriot resident company which grants licenses to overseas licences are taxed at the standard 10% corporation tax rate, after deducting the following expenses:

• Any royalties paid to overseas licensors; and
• The deduction of all expenses wholly and exclusively incurred for the production of income.

 The Cyprus Income Tax Law provides relief for any foreign source tax as a credit against corporation tax payable in Cyprus in respect of that income. In most cases, the extensive double tax treaty network ensures that royalties received by a Cypriot holding company from its licences are either exempt from, or subject to, reduced withholding taxes in the licensee’s jurisdiction.

BUILDING & CONSTRUCTION COMPANIES OPERATING IN EASTERN EUROPE

The treaties Cyprus has negotiated with its Eastern European partners provide many unique advantages for those involved in short-term building and construction enterprises. In effect, provided it can be shown that there is no 'permanent establishment' in the host country, there are no tax consequences of any nature, save the obligation to pay Cypriot tax at 10% which, as has been already indicated, can often be mitigated. In most cases, the specific time limit is 12 months (Russia, together with all other former members of the Soviet Union except the Republic of Georgia, Romania, Hungary and Serbia). However, in the case of Bulgaria, the period is 18 months, whilst in the Czech Republic and Slovakia all work must be carried out within 6 months.

ESTABLISHING A CYPRIOT BRANCH OF A FOREIGN COMPANY

In certain cases there can be significant advantages to establishing a 'branch' of a foreign company in Cyprus, rather than directly registering an offshore company. For example, in the case of France there exist specific anti-avoidance provisions, which negate all tax treaty benefits. However, this is not the case where a French company establishes a legitimate branch operation with independent management and control functions, to deal with non-French transactions/income. The need to demonstrate local management and control is necessary if third party countries i.e. Eastern European countries are to honour their tax treaty with Cyprus. Obviously, if the Cypriot branch is controlled from another jurisdiction then the treaty provisions will not be applicable. Of course, for those branches with local management and control the 10% tax will apply. In other words, a French company wishing to make a joint-venture investment into Russia would be well advised to create a Cypriot 'branch', as described, in order to both avail of the Cypriot/Russian Treaty benefits and the 10% tax rate on profits. On the distribution of the said profits, by dividend payments, to France there would be no further tax obligation as a result of the French 'Affiliation Privilege' Principle. This privilege exempting French companies from paying any French corporation tax on net dividends received from a foreign 'branch' operation. Note, the Netherlands, Belgium and Austria all employ a similar concept.

CYPRIOT DOUBLE TAXATION TREATIES
MAJOR WESTERN COUNTRIES

COUNTRY	WITHOLDING TAXES (TO)	WITHOLDING TAXES (FROM)	INTEREST (FROM)	ROYALTIES (FROM)
AUSTRIA	10%	10%	0%	0%
BELGIUM	10% (6)	10% (6)	10% (4)(16)	0%
CANADA	15%	15%	15% (2)	10%(3)
DENMARK	10% (6)	10% (6)	10% (4)	0%
FRANCE	10% (7)	10% (7)	10% (8)	0% (1)
GERMANY	10% (6)	10% (6)	10% (4)	0% (1)
GREECE	25%	25% (9)	10%	0% (10)
IRELAND	0%	0%	0%	0%(10)
ITALY	0%	15%	10%	0%
MALTA	15%	0%	10%	10%
NORWAY	0%	0% (11)	0%	0%
SINGAPORE	0%	0%	10% (4)(22)	10%
SOUTH AFRICA	0%	0%	0%	0%
SWEDEN	5% (6)	5% (6)	10% (4)	0%
UK	0%	15% (12)	10%	0% (1)
USA	0%	5%	10% (8)	0%

CYPRUS DOUBLE TAXATION TREATIES
EMERGING MARKETS

COUNTRY	WITHOLDING TAXES (TO)	WITHOLDING TAXES (FROM)	INTEREST (FROM)	ROYALTIES (FROM)
BULGARIA	5% (20)	5% (20)	7% (4)(21)	10% (21)
RUSSIA	5% (14)	5% (14)	0%	0%
CZECH REP.	10%	10%	10% (4)	5% (5)
SLOVAKIA	10%	10%	10% (4)	5% (5)
HUNGARY	0%	5%	10% (4)	0%
ROMANIA	10%	10%	10% (4)	5% (5)
SERBIA	10%	10%	10%	10%
POLAND	10%	10%	10%(4)	5%
BELARUS	5% (15)	5% (15)	5%	5%
CHINA	10%	10%	10%	10%
EGYPT	15%	15%	15%	10%
LEBANON	5%	5%	5%	0%
SYRIA	0% (6)	0% (6)	10%	10%
INDIA	10% (7)	10%	10% (8)	15%(13)
MAURITIUS	0%	0%	0%	0%
SEYCHELLES	0%	0%	0%	5%
THAILAND	10%	10%	15% (18)	5%(19)
KUWAIT	10%	10%	10% (4)	5% (5)
USRR (17)	0%	0%	0%	0%
YUGOSLAVIA (23)	10%	10%	10%	10%