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Cyprus Fund tax structure

 

Updated: March 2015

Cyprus Alternative Investment Fund (AIFs) structure and tax planning opportunities on immovable property

Doing Immovable property investments in Bulgaria, Czech Republic, Greece, India, Poland, Romania, Ukraine and United Kingdom through Cyprus Alternative Investment Funds (AIFs)

The plan

Foreign investors wish to set up a Fund in a favourable tax jurisdiction with attractive fund legislation (i.e. Cyprus) to invest in immovable property in Bulgaria, CzechRepublic, Greece, India, Poland, Romania, Ukraine and United Kingdom.

Steps

  1. A Fund established in a favourable tax jurisdiction with attractive fund legislation (i.e. Cyprus)
  2. The Fund establishes a Cypriot company / companies through which to invest in Bulgaria, CzechRepublic, Greece, India, Poland, Romania, Ukraine and United Kingdom
  3. The funding of the Cyprus company / companies can take place by equity
  4. Cyprus Company owned by the Cyprus Fund can invest in the share capital of a foreign company i.e. where the property is situated or
  5. Cyprus Company owned by the Cyprus Fund can finance foreign company (i.e. where the property is situated) by debt
  6. Foreign company (i.e. where property is situated) invests in immovable property

 

Tax and general consequences

1) Establishment/ funding

Minimal capital duty of approximately €126 (assuming an authorised share capital of 1000 shares of €1 each) issued at a high premium.

 

2) Dividend income i.e. rental income

Taxability in Cyprus

Income tax

Dividends received by a Cypriot tax resident company from a non Cypriot tax resident company are unconditionally exempt from Income Tax in Cyprus.

Special defence contribution

In accordance with the provisions of the Special contribution of defence law, dividend income received by a Cypriot tax resident company from a non Cypriot tax resident company is also exempt from defence contribution.

Note that the exemption from defence contribution will not be available if:

–       The dividend paying company engages, directly or indirectly, more than 50% on activities which give rise to investment income; and

–       The foreign tax burden on the dividend paying company’s income is significantly lower than the tax burden on the Cypriot company. Significantly lower is taken to mean less than 6,5%.

No minimum holding period is required.

Conclusion:

Under the assumption that the activities of the foreign entities will be of a trading nature or be subject to at least 6,25% tax, the dividends to be received by Cyprus Company from these entities will be exempt from both income tax and special defence contribution in Cyprus.

Taxability in foreign countries – Withholding taxes

Bulgaria: Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in Bulgaria as follows: 10% or 5% (minimum holding of 25%) OR Parent / Subsidiary Directive: 0% withholding tax in Bulgaria with no minimum participation and holding period thresholds

Czech Republic: Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in Czech Republic as follows: 5% or 0% (minimum holding of 10% for a continuous period of at least 12 months) OR Parent / Subsidiary Directive: 0% withholding tax (minimum holding of 10% for a continuous period of 2 years)

Greece: Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in Greece as follows: 25% but (10% withholding tax as per Greek tax local legislation) OR Parent / Subsidiary Directive: 0% withholding tax (minimum holding of 10% for a continuous period of 2 years)

India: Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in India as follows: 16,995%

Poland: Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in Poland as follows: 5% or 0% (minimum holding of 10% for a continuous period of 24 months) OR Parent / Subsidiary Directive: 0% withholding tax (minimum holding of 10% for a continuous period of 2 years)

Romania Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in Romania as follows: 10% OR Parent / Subsidiary Directive: 0% withholding tax (minimum holding of 10% for a continuous period of 2 years)

Russia: Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in Russia as follows: 10% or 5% if direct investment of €100.000

Ukraine: Double tax Treaty with Cyprus: Dividend income of Cyprus Company will be subject to withholding tax in Ukraine as follows: 15% or 5% if minimum holding of 20% or an investment of at least €100.000

United Kingdom: Rental net profits are included in the taxable income of the Cyprus company and will be taxed at the corporate income tax rate of 12,5%. 75% of the gross rental income is also subject to Special Defence Contribution at an effective tax rate of 2,25%.

 

3) Disposal of shares

Cyprus

According to the Cyprus domestic law, the disposal of the shares of a company will not result in any taxes in Cyprus irrespective of the provisions of a double tax treaty.

Taxability in foreign countries – Disposal of shares

Bulgaria: Under the double tax Treaty with Cyprus shares in a company owing immovable property may be tax in Bulgaria at the rate of 10% (i.e. Bulgaria has the taxing right), unless the Bulgarian company is listed in an approved stock exchange.

Czech Republic: Under the double tax Treaty with Cyprus shares in a company owing immovable property may be tax in CzechRepublic. CzechRepublic has the taxing right. However under  Czech Republic local legislation gains derived from the disposal of shares of a company in the Czech Republic that owns immovable property situated in Czech Republic will be exempt from taxation in the Czech Republic subject to the local participation exemption conditions (minimum holding of 10% for a continuous period of 12 months).

Greece: Under the double tax Treaty with Cyprus, Shares in a company owing immovable property may be disposed without taxation in the country of the company holding the property. Cyprus has the taxing right therefore the sale of the Greek company’s shares by the Cyprus company will be exempt from taxation in Cyprus and Greece.

Special tax on immovable property.  Special annual tax is imposed at 15%, on the objective value of the immovable property held by nonresident entities. The tax is not applicable if the identity of the ultimate beneficial shareholder is disclosed to the Greek Tax authorities and the individual obtains a Greek Tax Identification Number.

India: Under the double tax Treaty with Cyprus, Shares in a company owing immovable property may be disposed without taxation in the country of the company holding the property. Cyprus has the taxing right therefore the sale of the Indian company’s shares by the Cyprus company will be exempt from taxation in Cyprus and India.

Poland: Under the double tax Treaty with Cyprus, Shares in a company owing immovable property may be disposed without taxation in the country of the company holding the property. Cyprus has the taxing right therefore the sale of the Polish company’s shares by the Cyprus company will be exempt from taxation in Cyprus and Poland.

Romania: Under the double tax Treaty with Cyprus, Shares in a company owing immovable property may be disposed without taxation in the country of the company holding the property. Cyprus has the taxing right therefore the sale of the Romanian company’s shares by the Cyprus company will be exempt from taxation in Cyprus and Romania.

Russia: Under the double tax Treaty with Cyprus, Shares in a company owing immovable property may be disposed without taxation in the country of the company holding the property. Cyprus has the taxing right therefore the sale of the Russian company’s shares by the Cyprus company will be exempt from taxation in Cyprus and Russia.

After 1st January 2017 According to Russian local tax legislation, any capital gains from the disposal of shares of a Russian company whose assets consist of more than 50% of immovable property situated in Russia will be subject to withholding tax of 20%.

Ukraine: Under the double tax Treaty with Cyprus, Shares in a company owing immovable property may be disposed without taxation in the country of the company holding the property. Cyprus has the taxing right therefore the sale of the Ukrainian company’s shares by the Cyprus company will be exempt from taxation in Cyprus and Ukraine.

United Kingdom: Shares in a company owing immovable property may be disposed without taxation in UK including residential property of a value of less than 2m.

 

4) Fund and Cyprus Companies Outflows

Dividend payments to the Fund and Cyprus Company

Cyprus does not impose any withholding tax on dividend payments made to non-Cypriot resident recipients.

Therefore the dividend payments from Cyprus Company to the Fund and from Fund to non-Cypriot resident recipients will not suffer any withholding tax in Cyprus.

 

5) Capital reduction and liquidation proceeds of the Fund

Due to the fact that the shareholders of the Fund is not a Cypriot tax resident, the income that the shareholder will receive in terms of capital reduction or liquidation proceeds will not be subject tax in Cyprus.

 

Other aspects of Cyprus Investment Funds (Alternative Investment Funds – AIFs)

– Alternative Investment Funds are now regulated by the Cyprus Stock Exchange.

– Not necessary to have a local bank acting as Custodian

– Not necessary to appoint a manager if fit and proper directors

– If no physical presence, appoint a local administrator company to carry out the administration work

– Low taxation for fund managers

– Cyprus VAT: a) Trading in shares is exempt from VAT when the shares are sold to EU resident clients and, b) Outside the scope of the Cyprus VAT legislation when the shares are sold to non EU resident clients.

– Low cost base

– Wide spread use of English language

For more consultation please contact us on:

Email: [email protected]

 

The authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this website.

Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.

PKF Cyprus firms are member firms of the PKF International Limited network of legally independent firms and do not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.”

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