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May 09, 2013

Cyprus – Recent developments and the way forward

The Memorandum of Understanding (“MoU”) which was formally approved in April 2013, between the Troika and the Republic of Cyprus sets the framework for recovery with the support of the EU and addresses  problems which mainly arose from the mishandling of public sector finances over several years, as well as, the exposure of Cyprus to the Greek debt. Cyprus agreed  to implement the required fiscal adjustments and structural reforms to support its competitiveness, as well as, sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances.

As outlined below these reforms will not affect the International Business Industry in Cyprus, which continues to be healthy and robust.

An overview of the Memorandum of Understanding

The total amount of financial assistance agreed by the Eurogroup is up to EUR10 billion to be disbursed over the next 3 years.

The key objectives and conditions of the MoU setting the economic adjustment are as follows:

Control public spending

A series of carefully planned measures have been agreed to overhaul public spending and reducegovernment deficit. The focus is on cutting costs and not on increasing taxes which is very positive for the International Services Industry in Cyprus.

Improving efficiency and productivity

The measures are also aimed towards Cyprus being more competitive in terms of labour by addressing issues such as the wage indexation and also moving towards a more liberal economic environment addressing issues such as protectionism over certain regulated professions.

 

Effect of the MoU on the International Services Industry in Cyprus

(a)    The agreed MoU contains provisions that solidify the position of Cyprus as an attractive jurisdiction for establishing and maintaining holding companies for the purpose of investments outside Cyprus, including the [e.g Russian Federation – change according to the jurisdiction of delete accordingly].

 

(b)    In this respect, the terms of the MoU which will affect the use of Cyprus companies as part of a corporate structure for the purpose of investments outside Cyprus, are the following:

 

(i)             Corporate tax rate will increase from 10% to 12.5%. However, please note the following:

 

(I)             This provision has minimal or no impact on holding companies the profits of which are derived either from the receipt of dividends from outside Cyprus or from the sale of shares which are exempt of taxation.

 

(II)            The provision may have an impact on the taxation of interest received by Cyprus companies in their ordinary course of business but, even in this case, since it is only the net interest received which is taxable, the effect is minimal.

 

(ii)            The special defence tax on interest payments received by a Cyprus company other than in the ordinary course of business is increased from 15% to 30%, noting that this in practice affects only interest received from bank deposits.

 

(iii)           Most importantly, the MoU and the anticipated Economic Adjustment Programme make no further changes to the corporate tax regime, and, particularly:

 

(I)             Gains of Cyprus companies from the disposal of shares they own remain tax exempt.

 

(II)            Dividends received by a Cyprus company from a company outside Cyprus remain tax exempt.

 

(III)           Gains of a shareholder of a Cyprus company from the disposal of shares in the Cyprus company remain tax exempt.

 

(IV)          Dividends received by a non-tax resident of Cyprus from a Cyprus company remain tax exempt.

 

(V)           No levy on financial transactions is imposed.

 

(c)    In light of the contents of the MoU, it is clear that the Cyprus Government, is fully committed to supporting and preserving Cyprus as a centre for the provision of corporate services and as a centre of establishing holding company and tax structures, a position which, by virtue of the terms of the MoU, does is not opposed in any way by the Troika.

 

(d)   The benefits, therefore, of the Cyprus holding company regime such as the tax free flow of dividends through Cyprus and the beneficial exit opportunities offered by Cyprus’s favourable national tax legislation and wide network of double tax treaties remain unaffected and, in fact, are reconfirmed by the signing of the MoU.

Finally, Despite the fact that  temporary capital controls have been enacted to safeguard the banking system in a bid to prevent a bank run. These capital controls do not apply to new cash coming into banks in Cyprus or to cash held in banks outside Cyprus, noting that, measures to restructure the banking sector aimed at restoring its reputation while carving its new role in assisting in Cyprus’ recovery are set to be announced on Friday 31 May, once these have been reviewed we will prepare an update.

 

We, at LSTS, are committed to providing the utmost support to our clients assisting them in  structuring vehicles for their investment both internationally and locally, thereby utilising Cyprus’ continuing attractive tax regime and extensive double taxation treaty network.