At first glance the protocol is a simple case of updating the long-standing treaty and bringing certain definitions into line with the latest OECD double taxation treaty model.  On the other hand it may be regarded as an attempt by Moscow to close what has hitherto been one on the most lucrative loopholes for Russian 9and other0 property speculators for many years.

Advantage:  The new protocol includes the provision for the removal of Cyprus from the Russian blacklist.  This means that dividends received by Russian companies from Cyprus subsidiaries will finally be able to qualify for the Russian dividend participation exemption. Subject to ratification, the protocol is expected to come into effect on 01/01/2010.

Changes:

• Withholding tax remains at 0% on interest and royalties.
• The maximum withholding tax rate of 10% is reduced to 5% (if the beneficial owner has directly invested the capital of the company paying dividends a minimum investment equivalent to €100,000 (from $100,000 USD).

Capital gains on immovable property

• Companies which hold more than 50% of their assets in Russian immovable property will be taxed in the country where the property is situated.
• However this does not include gains from the alienation of shares listed on an approved stock exchange or from a corporate reorganisation and further does not include gains derived from a pension fund, provident fund or from the governments of either the Russian Federation or Cyprus.
• This provision will not come into effect until 2014 thus allowing time to prepare mitigating the tax implications of this change subject to requests from clients.

Redefinition:

• ‘Dividends’ have been given a broader definition to include payments on shares of mutual investment funds or other similar collective investment vehicles and depository receipts for shares.

• ‘Interest’ now includes debt claims of any type (penalty charges for late payments or interest are classified as dividends).

Clarity:

• Where the ‘effective management’ of a person (other than an individual) cannot be determined: The competent authorities of the two countries will agree to reach a mutual decision on the matter at hand.
• The definition of ‘Permanent Establishment’ has been expanded to include the taxation of profits from services performed in one country by an entity of another country through an individual(s) present in the other country exceeding in aggregate 183 days in any 12 month period.

• Distributions from mutual investment funds are to be treated as dividends.  This is a welcome change as dividends are subject to a maximum withholding tax of 10% whereas under current Russian law, distributions from mutual funds are subject to a 20% withholding tax.

Conclusion: The effects of the only major amendment being the capital gains tax amendment to be introduced in 2014 can be limited by seeking timely tax advice.

The treaty remains the most favourable double taxation treaty concluded with the Russian Federation and retains the attractive 5% withholding tax on dividends for investments equivalent to €100.000.

The following income tax rates apply to individuals:

Foreign pensions are taxed at 5% and are subject to an annual exemption of €3.417.

Exceptions

• Interest – 100%
• Dividends – 100%
• Profits from the sale of securities(1) – 100%
• Remuneration earnt in Cyprus by an individual who becomes resident in Cyprus during the term of employment.  For the period up to and including the 3 tax years following commencement of the employment – 20% (up to a maximum of €8.543 per year)
• Salary for services provided outside of Cyprus to a non-Cyprus resident employer – 100%
• Lump sum payment for retirement, pension, or compensation for death or injuries. – 100%
• Capital sums accruing to individuals from any payments to approved funds – 100%

(1) “Securities” means; debentures; shares; bonds; and other securities related to legal entities howsoever incorporated and any such options thereon.

Tax deductions

The following is deducted from income:

• Contributions to trade unions or professional bodies – 100%
• Loss of current and/or previous years – 100%
• Rental income – 20%
• Donations to approved charities – The whole amount
• Costs incurred for building maintenance where there is a Preservation Order – Up to €598 per square meter (depending on the size of the building)
• Social Insurance, provident fund, medical fund, pension fund contributions and life insurance premiums (the allowable annual life insurance premium is restricted to 7% of the insured amount) Up to 1/6 of the chargeable Income

•Double taxation is avoided if a resident in one of the treaty states obtains income from the other treaty state. A double tax treaty provides reduced or even nil rates of withholding taxes on dividends, interest and royalties, paid out of the contracting state.

•By taking advantage of Cyprus’s double tax treaties the tax liability can be kept to a minimum.

It is charged at the rates shown in the table below:

Note:

*  Interest income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to special contribution for defence at 3% (instead of 10%).  In the case where the total income of an individual (including interest) does not exceed €11.960 in a taxable year, then the rate is reduced to 3%.

Deemed dividend distribution

When a Cyprus resident company does not distribute dividends within two years from the end of a tax year; 70% of accounting profits will be deemed to have been distributed. Therefore the 15% special contribution for defence is payable on deemed distribution of dividends by shareholders who are Cyprus tax resident. Deemed distribution can be reduced by payments of any actual dividends already paid during the same period.  Where a Cyprus company is owned by another Cyprus company (with shareholders not tax resident in Cyprus), then defence contribution paid by the subsidiary may be claimed back by non resident shareholders.

Company dissolution

Upon dissolution, the cumulative deemed undistributed profits of the previous five years will be considered as distributed upon dissolution and thus subject to special contribution for defence.  This provision does not apply in the case of dissolution under a Reorganisation.

Reduction of capital of a company

In the event of a reduction of capital, amounts paid or due to shareholders will be subject to special defence contribution after deducting any amounts which have been deemed as distributable profits, up to the amount of undistributed taxable income of any tax year before the deduction of losses from prior years.

Some exemptions from corporation tax are:

·         Profits from an office (permanent establishment) in another country

·         Dividends (Company profits paid to shareholders)

·         Profits from the sale of shares and other securities

Expenses incurred by the company solely for business purposes can be deducted from corporation and include:

·         Employer’s contributions to social insurance and approved funds on employees’ salaries

·         Entertainment expenses for business purposes (with limitations)

·         Donations to charities

·         Building maintenance for buildings subject to a Preservation Order (with limitations)

The following types of expenses are not allowed:

·         Expenses related to acquiring or maintaining of a private (saloon) car

·         Interest applicable to acquiring any asset (including a private car) not used in the business

Tax Losses

If a company makes a tax loss which cannot be set off against other income then it is carried forward so it can be set off against future profits.  There is no time restriction for this.

The losses of one company can be set off against the profit of another provided the companies are members of a group and both Cyprus tax resident.  Group is defined as; one company holding 75% or more of the shares of the other company.

Losses from an overseas office (permanent establishment) can be set off with profits of the company in Cyprus.

Annual wear and tear

If a company owns items of value (fixed assets) like; property; tools; vehicles etc then allowances are made for their depreciation (wear and tear).  Depreciation is calculated as a percentage of the cost of acquiring the asset.  The annual allowance is deducted from chargeable income.  The annual percentage by which the value of an asset is depreciated (rate of depreciation), depends on the type of asset.

Here are some examples:

• Plant and machinery 10%
• Tools in general 33.3%
• Furniture and fittings 10%
• Commercial motor vehicles 20%
• Commercial buildings 3%
• Motor boats 12.5%

Trusts have traditionally been very important tax planning devices. Even today a very high proportion of tax saving schemes involve trusts.

International trusts

International trusts are governed by the International Trusts Law of Cyprus. International Trusts are not taxed in Cyprus. In fact, Cyprus International Trusts enjoy important tax advantages, providing significant tax planning possibilities. The following advantages are indicative of the possible options for tax minimisation.

All income, whether trading or otherwise, of an International Trust (ie a Trust whose property is located and income is derived from outside Cyprus) is not taxable in Cyprus.

• Dividends, interest or other income received by a Trust from a Cyprus company are neither taxable nor subject to withholding tax.
• Gains on the disposal of the assets of an international Trust are not subject to capital gains tax in Cyprus.
• An alien who creates an International Trust in Cyprus and retires in Cyprus is still exempt from tax if all the property settled and the income earned is abroad, even if he is a beneficiary.
• The assets of an international trust are not subject to estate duty in Cyprus.
• Trusts are usually used by wealthy individuals for the purpose of protecting their estate from inheritance or capital gains taxes in their home country. They can also be used by expatriates settling into a trust before repatriating, assets acquired while working abroad, to protect such assets from the tax net of their home country.

1:- In the following case study a UK based company ‘UK Importer Co’ (an electrical goods imported and re-seller) is buying 1,000 TVs at £100 each, directly from China and selling to consumers in the UK at £200 each, thus making a profit of £100,000.  The corporation tax on this would be 28% = £28,000

However the incorporation of an offshore company in Cyprus can reduce the corporation tax liability for the UK importer & re-seller.

2:-  The China supplier sends the invoice for £100,000 to the Cyprus Company.

3:-  The Cyprus company ‘re-sells’ the goods to UK Importer Co by issuing a sales invoice for £150,000 (£150 per item) and the goods are shipped direct from the China supplier to the UK importer.

4:-   The UK importer buys the 1,000 electrical goods at £150 each but sells them  at the original price of £200 so the profit for the UK Importer Co is reduced to £50,000.  The UK corporation tax = £14,000.  Cyprus Corporation tax is 10%, so the Cyprus corporation tax = £50,000 x 10%) = £5,000.

In this single transaction the tax burden was reduced from £28,000 to £21,000 creating a saving of £7,000

Contact YourBooks today to order a Cyprus Company from just €700