Investing In Eastern Europe

CYPRUS – A UNIQUE OPPORTUNITY

The advantage Cyprus has over most other jurisdictions is that it has a uniquely favorable 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 and the Netherlands 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

THE BENEFITS THAT THE SCF GROUP CAN OFFER IN CYPRUS

The SCF Group has provided banking and company management services in Cyprus for many years through the Offices of its associate Nicos Chrysanthou LL.B (Hons), Barrister-at-Law Middle Temple. For more detailed information please contact a SCF Consultant 

TAX TREATIES & THE CIS

Since the break-up of the Soviet Union, Russia has honoured all treaties signed by the former State, but perhaps more interestingly, the other former Republic's have also generally to 'inherit' such treaty obligations. Of course, as these new nations mature they will, no doubt, establish their own independent treaty networks, but at the time of writing only the Republic of Georgia has abrogated it's responsibilities. It should also be remembered that since the negotiation of the treaties with the Soviet Union, trading conditions throughout the region have altered beyond all recognition. In many cases, the gap between the then existing and current circumstances has led to many 'loopholes’, both for companies and individuals.

TREATMENT OF DIVIDENDS, INTEREST & ROYALTY PAYMENTS

DIVIDENDS: In the case of virtually all Eastern European countries, Cyprus has managed to negotiate a zero withholding tax rate. The only exceptions being the new Accession States of the Czech Republic, Slovakia and Romania which all impose a ten percent (10%) withholding tax. However, in respect to these countries, Cyprus will grant a tax credit of up to 10 % resulting in an effective zero tax rate in Cyprus. Therefore, dividends will only have been taxed once and at 10% with no further tax obligations or responsibilities.

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: The receipt of interest payments by a Cypriot company is treated in a very similar fashion to dividends. Once again, all distributions are zero rated save in respect of the Czech Republic, Slovakia and Romania, which impose a 10% withholding tax. As with dividends, no tax will be required in Cyprus because of the tax credit. However, unlike dividends, where the 10% tax rate must be paid before the distribution, this is not the case where the Cypriot company has received a loan from a third party institution. Therefore, if for example, a Cypriot company was established to invest in Eastern Europe, it would be advantageous that it's initial capital was provided by way of a loan by a third party entity since in such circumstances the tax credit scenario is not applicable (see Diagram below):

ROYALTIES: There are no withholding taxes on the payment of royalties from most Eastern European treaty partners. However, in the case of the 'new1 Yugoslavia or Serbia, there is a 10% withholding tax. It should be noted that at the time of writing, various United Nations sanctions against Serbia have severely effected the operation of this Treaty. In particular, Western European nationals should seek advice on this matter. The treaties with the Czech Republic, Slovakia and Romania impose a 5% withholding tax, unless royalties are on literary, artistic or scientific work, including cinematographic films and films or tapes for television or radio broadcasting. In the latter cases there is no withholding tax liability. As with dividends and interest, the Cypriot tax liability of 10 % will apply unless a tax credit situation exists. Finally, a note should be made of the fact that it is often advisable for western investors to nominate a substantial proportion of their interest in an Eastern European joint-venture as relating to the 'transfer of technology1. If this is done then the taxable base in the applicable Eastern European country will be mitigated by the exact proportion of royalty payments to be made to the western investor.

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, it seems that 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%
CANADA	0%	15%	15% (7)	10%(12)
DENMARK	10% (1)	10% (7)	10%	0%
FRANCE	0%	10% (2)	10% (7)	0% (10)
GERMANY	0%	15% (3)	10% (7)	0% (10)
GREECE	25%	25%	10%	0% (9)
IRELAND	0%	0%	0%	0%(9)
ITALY	0%	15%	10%	0%
NORWAY	0%	5% (8)	0% (15)	0%
SWEDEN	5% (4)	5% (4)	10% (7)	0%
U.K.	0%	15% (6)	10%	0% (io)
U.S.A.	0%	5% (13)	10% (7)	0%

CYPRIOT DOUBLE TAXATION TREATIES
MAJOR WESTERN COUNTRIES

COUNTRY	WITHOLDING TAXES (TO)	WITHOLDING TAXES (FROM)	INTEREST (FROM)	ROYALTIES (FROM)
BULGARIA	0%	0%	0%	0%
RUSSIA	0%	0%	0%	0%
CZECH REP.	0%	10%	10% (7)	5% (8)
SLOVAKIA	0%	0%	10% (7)	5% (8)
HUNGARY	0%	5% (4)	10% (7)	0%
ROMANIA	10%	10%	10%	5%
SERBIA	0%	10%	10%	10%
CHINA	10%	10%	10%	10%
KUWAIT	0%	10%	10% (7)	5% (8)

NOTES

(1) 10% IF THE RECIPIENT IS A COMPANY WITH AT LEAST 25% DIRECT SHARE INTEREST; 15% IN ALL OTHER CASES.

(2) 10% IF RECIPIENT IS A COMPANY WITH AT LEAST 10% DIRECT SHARE INTEREST; 15% IN ALL OTHER CASES.

(3) 10% IF RECIPIENT IS A COMPANY WITH AT LEAST 25% DIRECT SHARE INTEREST; 27% IF RECIPIENT IS A COMPANY WITH 25% DIRECT OR INDIRECT SHARE INTEREST AS LONG AS THE GERMAN   CORPORATE   TAX   ON   DISTRIBUTED   PROFITS   IS   LOWER   THAN   THAT   ON UNDISTRIBUTED PROFITS AND THE DIFFERENCE BETWEEN THE TWO RATES IS 15% OR MORE,
15% IN ALL OTHER CASES.

(4) 5% IF THE RECIPIENT IS A COMPANY WITH AT LEAST 25% DIRECT SHARE INTEREST; 15% IN ALL OTHER CASES.

(5) 0% IF RECEIVED BY A COMPANY WHICH CONTROLS, DIRECTLY OR INDIRECTLY, NOT LESS THAN 50% OF THE VOTING POWER.

(6) A RESIDENT OF CYPRUS, OTHER THAN A COMPANY WHICH EITHER ALONE OR TOGETHER WITH ONE OR MORE ASSOCIATED COMPANIES CONTROLS DIRECTLY OR INDIRECTLY AT LEAST 10% OF THE VOTING POWER, IS ENTITLED TO A TAX CREDIT IN RESPECT OF THE DIVIDEND. WHERE A RESIDENT OF CYPRUS IS ENTITLED TO A TAX CREDIT, TAX MAY ALSO BE CHARGED ON THE AGGREGATE OF THE CASH DIVIDEND AND THE CREDIT AT A RATE NOT EXCEEDING  15%. IN THIS CASE ANY EXCESS TAX CREDIT IS REPAYABLE. WHERE THE RECIPIENT IS NOT ENTITLED TO A TAX CREDIT, THE CASH DIVIDEND IS EXEMPT FROM ANY TAX.

(7) SUBJECT TO CERTAIN EXEMPTIONS.

(8) 0% IF ROYALTIES ARE ON LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPHIC FILMS AND FILMS OR TAPES FOR TELEVISION OR RADIO BROADCASTING.

(9) 5% ON CINEMATOGRAPHIC FILMS NOT INCLUDING TELEVISION FILMS.

(10) 5% ON CINEMATOGRAPHIC FILMS INCLUDING FILMS AND VIDEO TAPES FOR TELEVISION.

(11) 5% ON CINEMATOGRAPHIC FILMS.

(12) 0% IF ROYALTIES ARE COPYRIGHT AND OTHER LITERARY, DRAMATIC, MUSICAL OR ARTISTIC WORK NOT INCLUDING FILM OR VIDEOTAPE ROYALTIES.

(13) 5% IF RECIPIENT IS A COMPANY WITH AT LEAST 10% DIRECT SHARE INTEREST; 15% IN ALL OTHER CASES.

(14) THERE IS A WITHHOLDING TAX OF 30% ON DIVIDENDS AND 25% ON INTEREST. THE LIABILITY TO TAX OF RECIPIENTS OF DIVIDENDS OR INTEREST IS DETERMINED AS FOLLOWS:

(a) COMPANIES; ON APPLICATION IN ACCORDANCE WITH THE CORPORATE TAX RATES.
(b) INDIVIDUALS; ON OBJECTION, IN ACCORDANCE WITH PERSONAL TAX RATES STARTING AT 0% FOR CHARGEABLE INCOME UP TO CY£2,000.00 AND REACHING 40% FOR INCOME OVER CY£8,000.00. IN BOTH CASES ANY ACCESS TAX WITHHELD IS REFUNDED.

(15) AT THE RATE APPLICABLE IN ACCORDANCE WITH DOMESTIC LAW.

(16) IT SHOULD BE NOTED THAT MALTA AND CYPRUS WILL BE RATIFYING A TAX TREATY IN THE VERY NEAR FUTURE. ONCE CONCLUDED THIS TREATY SHOULD PROVIDE CYPRIOT COMPANIES WITH A METHOD OF ACCESSING MALTA'S VERY FAVOURABLE TREATIES WITH THE UNITED STATES AND THE NETHERLANDS.

The above double taxation treaty information was kindly supplied by The Central Bank of Cyprus.