Tag Archives: Cyprus

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Cyprus Tax Resident

CYPRUS – POSITIVE AMENDMENTS IN THE TAX LEGISLATION

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TAX RESIDENT IN CYPRUS BY STAYING ONLY 60 DAYS DURING A TAX YEAR

A. INTRODUCTION

On 14 July 2017, the House of Representatives of Cyprus passed an amendment to the Cyprus Income Tax Law (2002 – 2016 as amended) (the “Cyprus Income Tax Law”) whereby an individual who spends in Cyprus 60 (sixty) or more days will be considered as a Cyprus tax resident provided that certain conditions are met.

This can be very beneficial for persons who have business ties in Cyprus since an individual who is tax resident in Cyprus and who is not domiciled in Cyprus is granted an exemption from taxes on dividends received either in Cyprus or abroad.

B. TAX RESIDENT INDIVIDUAL – NEW PROVISIONS

Under the new provisions of the Cyprus Income Tax Law, an individual will be a tax resident in Cyprus provided that all the below conditions are met:

  1. The individual stays in Cyprus for 60 (sixty) or more days in a tax year (1 January – 31 December)
  2. The individual, at any time during the tax year, exercises any business in Cyprus and/or is employed in Cyprus and/or holds a post (i.e. a director) in a company which is tax resident in Cyprus;
  3. The individual maintains a permanent home in Cyprus which can either be owned or rented.
  4. The individual does not remain in any other country for one or more periods which altogether exceed 183 (one hundred eighty three) days in the same tax year and he is not a tax resident in any other country in the same tax year.

It is clarified that an individual who meets the above conditions will not be considered a tax resident of Cyprus provided that, in the same year, he cease to i.) exercise of any business and/or employment in Cyprus and/or ii.) hold of a post in a company tax resident in Cyprus.

C. ENTRY INTO FORCE

The new provisions are effective as from 1 January 2017.


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Settlement of Taxes in Cyprus

Procedure for Settlement of Taxes in Arrears in Cyprus

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A. INTRODUCTION

In February 2017, the House of Representatives of Cyprus passed a law on the procedure for settling tax arrears, which covers the following taxes: 

(a) Income tax
(b) Special contribution for the defense
(c) Immovable property tax
(d) Capital gains tax
(e) Inheritance tax
(f) Special contribution for employed, retired and self­employed in the private sector
(g) Special contribution for refugees
(h) Stamp duties

Based on the provisions of the legislation the taxpayer shall be exempted from paying penalties, interest, charges on specified outstanding tax amounts and such exemption shall apply proportionately depending on
the number of installments that the taxpayer would agree with the Tax Department that will pay in settlement of all outstanding taxes (the “Arrangement”). Also during the Arrangement period no additional penalties, interests or charges will accrue.

An application should be submitted within a period of 3 months from the entry into force of the Law.

In terms of the procedure it should be noted as follows:

1.) The applications should be done on-line through the Ariadni Tax portal.
2.) The application is assessed by the Tax Commissioner within 15 days from the receipt of the application and the taxpayer is informed of the Tax Commissioner’s decision.
3.) If the Tax Commissioner does not respond within the 15-day period, the application is considered admissible and the applicant’s suggestions are adopted.
4.) The applicant should submit an acceptance of the Arrangement within a period of 15 days.
5.) The applicant taxpayer has the right to object to a Tax Commissioner’s decision to decline the application. The objection must be filed within a period of 15 days from the date the Tax Commissioner’s decision is
notified to the applicant. The objection must be assessed within a further period of 30 days.

Provided that the delays of fails to pay a certain number of installments then the Arrangement is cancelled and the taxpayer will need to pay all taxes, interest, penalties and charges.

The date of entry into force of the new provisions would have been specified in a notification that would have been issued by the Tax Commissioner which would have been published in the Official Gazette (the
Notification”).

Such Notification was issued on 23 June 2017.

 

B. SUBMISSION OF APPLICATION FOR THE ARRANGEMENT

The application for entering into the Arrangement must be submitted within three months from the effective date of the Notification. The effective date of the Notification is 3 July 2017 and therefore the deadline of the submission of the applications is 2 October 2017.

The submission should be done through the government internet portal Ariadni and both the Tax Commissioner’s decision and the debtor’s statement of acceptance are made through the website application.

On exceptional cases whereby there are technical issues in submitting the application on-line then such
application can be submitted in the District Tax Offices.

 

C. TAX LIABILITIES WHICH ARE COVERED BY THE ARRANGEMENT

This regulation relates to the following tax liabilities:

(a) The total amount of outstanding taxes up to and including 31 December 2015, which at the date of the application have been assessed by the Tax Department of Taxation and an assessment has been sent to the taxpayer in relation to this, irrespective whether there is already in place a lawful agreement between the Tax Office and the taxpayer for the repayment of such taxes by instalment or through a court order.

(b) Amounts which became payable through the submission of a provisional tax form which concerns the tax for the years up to 31 December 2015 and whereby the taxpayer did not pay such tax, and provided however that the taxpayer has submitted the annual tax return by 3 July 2017 in relation to these taxes.

(c) Tax liabilities which are assessed by the Tax Commissioner after the effective date of the Notification and related to tax years up to 31 December 2015. In such cases, the deadline for the application for the Arrangement shall be made within three months from the date on which the tax becomes payable, on the basis of the tax assessment which has been issued.

 

D. NUMBER OF MONTHLY INSTALLMENTS WHICH SETS THE PERCENTAGE OF EXEMPTION

Overdue taxes can be included in the Arrangement and be subject to the exemption of a percentage of penalties and interest due to non-payment of taxes due as follows:

Monthly instalments(%) of exemption
(a) one off payment 95%.
(b) from 2 to 8 90%.
(c) from 9 to 15 85%
(d) from 16 to 21 80%
(e) from 22 to 28 75%.
(f) from 29 to 35 70%
(g) from 36 to 42 65%
(h) from 43 to 49 60%
(i) from 50 to 56 55%
(j) from 57 to 60 50%

Payment of the agreed installments is made to the banks with the usage of a unique code or in certain cases to the Tax Office.

 

E. VARIOUS OTHER PROVISIONS

(a) Tax liabilities under the Arrangement will not incur additional penalties or interest for late payment, which is otherwise provided under the relevant legislation.
(b) The procedure to be followed is set in the Introduction of this Newsletter.
(c) The regulation is terminated in specific cases of non-compliance by the taxpayer with his obligations as set on the Notification these being:

  • i.) The non-timely submission of the tax returns
  • ii.) The non-settlement of the new tax obligations which arise after 31 December 2015
  • iii.) The delay in payment of the cumulative of 3 installments
  • iv.) The delay in payment of a single installment for more than 3 months including the month that the installment should have been paid

(d) Where criminal proceedings against a taxpayer are pending before the court and the taxpayer applies
for a regulation which is approved, the proceedings are suspended.

 

F. ENTRY INTO FORCE

The new provisions are effective as from 3 July 2017.


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Brexit

CYPRUS – UNIQUE TAX ADVANTAGES WITHIN EUROPE POST BREXIT

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Cyprus: Europe’s Optimal Tax Regime. The synergy created by Cyprus’ modern, simple and attractive tax regime coupled with its advanced and adaptable English Common Law legal system have created the EU’s most efficient and effective tax regime in tax planning and asset protection. Why:

0% Tax on Dividends received – Dividends received by Cypriot tax resident companies are exempt from Cyprus tax (subject to minor exceptions). The extensive network of Double Tax Treaties (“DTTs”) allows beneficial treatment in respect of withholding taxes (“WHTs”) in the source country.

0% Withholding tax on Dividend payments – Dividends paid by a Cyprus tax resident company to its non-Cyprus resident shareholder(s) are not subject to any withholding tax in Cyprus. Thus the non-Cyprus resident shareholder of a Cyprus tax resident company receives the dividends free of any WHT.

0% Tax on trading/sale of titles or shares – The disposal or transfer of titles is exempt from all taxes. Titles are described as shares, bonds, debentures and similar titles as well as rights thereon (options, futures etc). Cyprus is, therefore, the jurisdiction of choice in respect to M&A transactions.

0% Capital Gains Tax is paid in Cyprus on the transfer of immovable property owned by a Cyprus tax resident company abroad (outside Cyprus).

0% Estate Duty is payable on the inheritance of shares in case of the death of a shareholder.

0% Inheritance Tax

0% Net Wealth Tax 

0% Property Tax

0% Tax on Reduction of Capital & Reduction of Share Premium Account 

0% Withholding Taxes on Interest and Royalties – There are no WHTs on interest payments made by a Cyprus tax resident company. There is also no WHT on royalties arising from sources outside Cyprus. 

Lowest uniform corporate tax rate in the EU – 12.5%

International Cyprus Trusts (CIT) may be established to hold the shares of Cyprus companies or simply used as an effective means of asset protection – CITs do not pay any taxation on their profits. Amendments to Cyprus’ Trust Law have restored the CIT as one of the most effective instruments available today.

Unilateral Tax Credit Relief – Unilateral tax credits are granted on any tax paid abroad to any foreign country, irrespective of whether Cyprus has a DTT or not. In such a case the income is not taxed twice but only once.

Double Tax Treaties – Cyprus has an impressive and continually growing network of DTTs, a Cyprus company can benefit from the EU Directives to eliminate WHTs when collecting income from the EU. Unilateral tax credit on foreign taxes withheld at source is also available.

Anonymity of the beneficial owner – Anonymity is imperative to many investors, who do not wish to have their names appear on public record at the Registrar of Companies. In such instances it is possible to appoint a shareholder provided by LSTS, who will hold the shares on trust for the beneficial owner.

Losses can be carried forward and set off against future profits for the next five years.

Group relief – setting off the loss of one company with the profit of another is allowed provided both companies of the group are tax resident in Cyprus.

No Thin Capitalisation Rules – there are no provisions in the Law requiring companies to maintain a particular debt to equity ratio. Consequently, a Cyprus holding company may be capitalised with loans without any risk that interest paid at arms’ length to the parent company will not be deductible.

0% VAT for Holding Companies – holding activities fall outside the scope of the VAT in Cyprus and the Cyprus holding company engaged exclusively in holding activities is not entitled or obliged to register for VAT purposes.

0% Tax on Liquidation – A Cypriot holding company held by non-resident shareholders can cease operations in Cyprus and distribute assets to its shareholders in any form (dividends etc.) without any tax cost to the shareholders.

Non-Domicile Cyprus Tax Resident – Foreign nationals relocating to Cyprus (minimum 183 days) will obtain the status of a Non Domiciled individual, with significant tax benefits:

  • 0% Tax on dividends received by the individual in Cyprus
  • 0% Tax on interest in fixed deposits in Cyprus
  • Individual will only be taxed in Cyprus on their worldwide income
  • Reduced tax on rental income 

 

HOW LSTS CAN ASSIST YOU

LSTS may assist in:

  1. Assessment of your current business to determine income flows, intentions and ultimately to optimise tax gains and eliminate tax leaks.
  2. The establishment of a suitable Cypriot structure for minimising tax losses/leaks.
  3. Tax / Legal / Audit / Compliance / Fiduciary / Trust / Banking Services
  4. Assistance in availing you of the numerous tax advantages of Cypriot tax legislation.
  5. Keep you updated on all developments in Cypriot legislation.

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tax

CYPRUS – RUSSIAN DOUBLE TAX TREATY

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(ARTICLE 13 – ‘Capital Gains’ UPDATE) 

Capital gains tax on Cyprus shares holding immovable property in Russia has been postponed

UPDATE 29 DECEMBER 2016 

In an announcement by the Cyprus ministry of finance on 29 December 2016 it is stated that an agreement has been reached between the Russian Authorities and the Cyprus authorities for postponing the application of the Protocol amending Article 13 of the Cyprus – Russia double tax treaty (as amended in 2010) (the “Treaty”).

In accordance to Article 13 ‘Capital Gains’ of the Treaty the gains on sale of shares of a Cyprus company deriving more than 50% of their value from immovable property situated in Russia would be taxed in Russian Federation rather than Cyprus.  This clause was set to be effective from 1 January 2017.

Based, however, on the agreement reached on 29 December 2016 the application of Article 13 to the Treaty has been postponed and an additional Protocol to the Treaty will be released shortly providing that the application of the revised provisions of the Treaty will not apply until similar provisions are introduced in other bilateral double tax treaties between the Russian Federation and other European countries.

It should be noted that Cyprus does not levy any taxes on the sale of shares or similar titles.

 

 ANNOUNCEMENT PUBLISHED BY THE CYPRUS MINISTRY OF FINANCE

Announcement

Protocol amending Article 13 “Capital Gains” of the Agreement between 
the Government of the Republic of Cyprus and the Government of the 
Russian Federation for the Avoidance of Double Taxation with respect to
taxes on income and on capital.

The Ministry of Finance announces that an agreement has been reached between the Russian Authorities and the Authorities of Cyprus for postponing the application of the Protocol amending Article 13 of the Agreement between the Government of the Republic of Cyprus and the Government of the Russian Federation for the Avoidance of Double Taxation with respect to taxes on income and on capital, which was signed on October 7th , 2010.

In parallel, an additional Protocol is being finalised, providing for the application of the revised provisions of Article 13 of the said Agreement, until similar provisions are introduced in other bilateral Agreements for the Avoidance of Double Taxation between the Russian Federation and other European countries.

December 29th, 2016
MINISTRY OF FINANCE NICOSIA

HOW LSTS CAN ASSIST YOU

LSTS may assist in:

i.) The establishment of a suitable Cypriot structure for holding properties in Russia.

ii.) Provide further guidance on the new provisions to the new double tax treaty.

iii.) Keep you updated on the developments on the matter. 


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Business creditors liquidation

Creditors Voluntary Liquidation

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Creditors Voluntary Liquidation

FOREWORD

Below we set the procedure for the creditors’ voluntary liquidation for a Cyprus company with references to the Cyprus Companies Law Cap. 113 (the “Cyprus Companies Law”) followed by a practical step by step procedure of the actions necessary to complete such a liquidation.

LSTS members are licensed liquidators under the Cyprus Insolvency Practitioners Law, 64(I) of 2015 and can be appointed as liquidators in relation to Cyprus company liquidations.

 

PROCEDURE FOR THE CREDITORS’ VOLUNTARY LIQUIDATION

In accordance to the Cyprus Companies Law a company can be wound up voluntarily provided that the company resolves under a special resolution that the company be wound up voluntarily (Article 261 (b)).

The above resolution is passed at an Extraordinary General meeting (“EGM”) convened by the directors at the request of the members holding not less than 10% of paid up share capital having the right to vote at such meeting. Such request must be signed and sent by the members to the registered office address of the company.  The directors must within 21 days of such request proceed and convene the EGM (Article 126).

At the same time, the Company seeks, also, to convene a meeting of the creditors of the Company (“Meeting of the Creditors”) on the same or the day following the day of the convention of the EGM while the notices relating to the Meeting of the Creditors must be sent to the Creditors, by post, simultaneously with the dispatch of the notices relating to the EGM.

In addition, the Company needs to publish the notice for the convention of the Meeting of the Creditors in the Official Gazette of Cyprus as well as in two local newspapers circulated in the district within which the registered office of the Company is situated.

In this regards, the Directors of the Company shall:

  1. Prepare a statement showing the assets and liabilities of the Company along with any outstanding affairs accompanied with a list of creditors of the Company showing also the estimated amount of the claim which will be presented in the Meeting of the Creditors and
  2. Appoint one of the directors to be the chairman of the Meeting of the Creditors.

(Article 276)

As regards to the appointment of the liquidator, it should be underlined that both the Creditors and the Company (through its Members) may, during the Meeting of the Creditors and the EGM respectively, indicate one or more person(s) to be appointed and act as the liquidator(s) of the Company.

However, it is worth noting that in the case that the proposal of the Creditors and that of the Company differs, the proposal made by the Creditors prevails. In that case, any director, member or creditor of the Company may within seven days from the day of such proposal, file an application to the Court requiring the latter to issue a Court Order approving the appointment of the liquidator that has been proposed by the Company to be appointed and act as the liquidator of the Company instead of or in conjunction with the liquidator proposed and appointed by the Creditors.

(Article 277)

Furthermore, in case the Creditors deem so appropriate, they may opt to appoint an Inspection Committee which may consist of up to five persons, in which case the Company has the right to also appoint up to another five persons to be part of the Inspection Committee subject however to the approval of the Creditors and/or the Court, as the case may be (Article 278).

Upon appointment of the liquidator the powers of the directors cease unless the Inspection Committee or, if no such committee exists, the creditors approve the continuation of those powers (Article 279).

In case the liquidation lasts for more than one calendar year, the liquidator is obliged to convene Meetings of the Members / Creditors at the end of every year or within three months from the end of every year or in any extended but reasonable time permitted by the Registrar of Companies for the purpose of submitting to such Meetings a report relating to the actions and/or transactions that have taken place in the course of the liquidation of the Company within the (respective) previous year (Article 282).

At last, as soon as the liquidation procedure has been completed, the liquidator shall send notices convening the final Meetings of the Members / Creditors of the Company and submits the final accounts accompanied by a report stating the way in which the affairs of the Company have been liquidated while he/she may be required to provide explanations and/or justifications for his/her actions.

The notices for both Meetings must be published in the Official Gazette of the Republic of Cyprus at least one month before the date of the respective Meeting.

Following the convention of both Meetings, the liquidator is obliged to file with the Registrar of Companies a copy of the account and the report concerning the Meetings within one week from the date of the last of the two Meetings (if these are not held on the same day).

The Company is considered as liquidated following the expiration of the three month period following the registration of the copy of the account and the report submitted by the liquidator. Such date may, however, be extended by a Court order issued following an application of the liquidator or any other interested party provided that the Court Order has been submitted to the Registrar of Companies within seven days from the date of its issue.

 

STEP BY STEP PROCEDURE ON THE MEMBERS VOLUNTARY LIQUIDATION

  1. Shareholders notify the company of their intention to proceed with the voluntary liquidation
  2. Shareholders send a letter to the registered office of the Company and addressed to the Directors of the company declaring their intention to proceed with the creditors voluntary liquidation.

  3. The Directors convene an EGM within 21 days of receiving the above notice. At the same time they call for a Meeting of the Creditors to be held on the same day or one day after the EGM.
    1. The Directors prepare the following to present in the Meeting of the Creditors:
      1. Statement of Assets and Liabilities
      2. List of creditors and estimated amount of their claim
    2. The Directors hold a Directors meeting whereby the statement of assets and liabilities and list of creditors and estimated amounts is presented and approved and resolve to:
      1. Convene an EGM and a Meeting of the Creditors with the following subjects:
        1. The voluntary winding up of the company and
        2. The appointment of the liquidator
        3. The appointment of the Inspection Committee (if required).
      2. and

      3. Appoint of one director to act as the chairman of the Meeting of the Creditors
    3. The Directors convene the EGM and the Meeting of the Creditors by giving at least 21 days’ notice and publishing such notice in the Cyprus Government Gazette and two local newspapers.
    4. The shareholders and creditors provide a proxy to a person to attend and vote on their behalf (optional)
    5. The creditors present a debt verification statement showing their debt as well as a declaration showing the security they hold over the assets of the Company (if any).
  4. Holding of an EGM

    The shareholders hold an EGM whereby they vote (personally or through the proxies) on:

    1. Proposal for the winding up of the company (Special Resolution)
    2. Recommendation of the liquidator (Ordinary Resolution)
  5. Holding of a Meeting of the Creditors

    The Creditors hold a meeting chaired by one of the directors of the company whereby they vote on the following:

    1. Proposal of the winding up of the company (Special Resolution)
    2. Recommendation of the liquidator (Ordinary Resolution)
    3. The appointment of the Inspection Committee (if required)

    A Greek translation of the EGM/Meeting of the Creditors, certified as true copy of the original by the Secretary, must be prepared and delivered to the Registrar within 15 days of such EGM and Meeting of the Creditors.

  6. Appointment of the Liquidator

    Within 14 days of the Liquidators appointment (date of the EGM/Meeting of the Creditors), the Liquidator must provide the following documents to the Registrar:

    1. Notification of appointment to be published in the Government Gazette (HE43)
    2. Notification of appointment to be kept by the Registrar (HE42)
  7. Preparation of the statement of distribution of assets. When the liquidation finishes and the liquidator distributes all the assets to the shareholders, the liquidator prepares a statement showing such distribution (if applicable).
  8. Notice to the Final EGM and Meeting of the Creditors

    The liquidator calls for a final general meeting to present such account prepared and provide explanations in relation to this.

    The notice of such meeting has to be published in the Government Gazette at least 1 month prior to such meeting.

  9. Final EGM and Meeting of the Creditors

    The shareholders hold the Final EGM and the Creditors hold the Final Meeting of the Creditors at the date set and whereby the liquidator presents the final accounts and the shareholders and Creditors approve such accounts.

  10. Delivery to the Registrar of the final documents

    Within 1 week after the final General Meeting and the Meeting of the Creditors (which ever comes last) the Liquidator has to deliver to the Registrar of Companies a copy of the accounts prepared along with a return for the holding of the meeting and the date of such meeting.

HOW CAN LSTS ASSIST YOU

LSTS may assist in:

i.)  Being appointed and act as the liquidator in the creditors’ voluntary liquidation of Cyprus companies.

ii.) Providing you with guidance on the process of the liquidation.


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tablet finance liquidation

Members Voluntary Liquidation

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Members Voluntary Liquidation

FOREWORD

Below we set the procedure for the members’ voluntary liquidation for a Cyprus company with references to the Cyprus Companies Law Cap. 113 (the “Cyprus Companies Law”) followed by a practical step by step procedure of the actions necessary to complete such a liquidation.
LSTS members are licensed liquidators under the Cyprus Insolvency Practitioners Law, 64(I) of 2015 and can be appointed as liquidators in relation to Cyprus company liquidations.

 

PROCEDURE FOR THE MEMBER’S VOLUNTARY LIQUIDATION

In accordance to the Cyprus Companies Law a company can be wound up voluntarily provided that the company resolves under a special resolution that the company be wound up voluntarily (Article 261 (b)).

A resolution shall be a special resolution when it has been passed by a majority of 75% of the members and giving at least 21 days notice for such resolution.  Such notice shall be less than 21 days if the majority of the number of the shareholders representing 95% or more of the nominal value of the voting shares. (Article 135(2)).

The above resolution is passed at an Extraordinary General meeting convened by the directors at the request of the members holding not less than 10% of paid up share capital having the right to vote at such meeting. Such request must be signed and sent by the members to the registered office address of the company.  The directors must within 21 days of such request proceed and convene the Extraordinary General meeting (Article 126).

Prior to the Extraordinary General Meeting the directors will need to prepare the Statement of Assets and Liabilities and a Statutory Declaration of Solvency which must be sworn before the Registrar of District Court by the majority of the directors, stating that the Company can pay off all its debts within 12 months from the start of the liquidation. The declaration must be delivered to the Registrar of Companies before the date of the resolution for the winding up (i.e. the Special Resolution) (Article 266).

At the Extraordinary General meeting the company will approve the winding up of the company and also appoint the liquidator in order to settle any outstanding business and distribute the assets of the company. The company may also determine the remuneration of the liquidator. It should be noted that upon the appointment of the liquidator all the powers of the directors will cease. (Article 268).

Provided that the company approves the winding up at the Extraordinary General Meeting (by Special Resolution) it will need to provide to the Registrar a copy of such Special Resolution, within 15 days of passing such Special Resolution, so that this is published to the Government Gazette. (Article 262)

Along with the above mentioned resolution and within 14 days of his appointment the Liquidator must publish in the Government Gazette (form HE43) and deliver to the Registrar for registration the notice of his appointment (form HE41) (Article 288).

Once the winding up and the affairs of the Company is completed the Liquidator must prepare an account showing how the winding up took place and how the company’s property was distributed, and calls for a final general meeting to present such account prepared and provide explanations in relation to this. Such final General Meeting is convened by the Liquidator by publishing a notice in the Government Gazette setting the date, time and purpose and has to be published at least 1 month prior to such meeting (Article 273).

Within 1 week after the final General Meeting the Liquidator has to deliver to the Registrar of Companies a copy of the accounts prepared along with a return for the holding of the meeting and the date of such meeting.

The Registrar of companies registers the accounts and the returns received by the Liquidator and after the passing of 3 months from such date, the company is deemed to have been dissolved.

 

STEP BY STEP PROCEDURE ON THE MEMBERS VOLUNTARY LIQUIDATION

  1. Shareholders notify the company of their intention to proceed with the voluntary liquidation

Shareholders send a letter to the registered office of the Company and addressed to the Directors of the company declaring their intention to proceed with the members voluntary liquidation.

  1. The Directors convene an Extraordinary General Meeting within 21 days of receiving the above notice
    1. The Directors prepare the following to sign before the Registrar of District Court (sworn affidavit):
      1. Statement of Assets and Liabilities
      2. Statutory Declaration of Solvency
    2. The Directors hold a Directors meeting whereby the declaration of solvency and statements of assets and liabilities is presented and approved and resolve to:
        Convene an extraordinary general meeting with the following subjects:

      1. The voluntary winding up of the company and
      2. The appointment of the liquidator
    3. The Directors send the notice of the meeting giving at least 21 days notice (or less if such notice is waived by the shareholders).
    4. The shareholders provide a proxy to a person to attend and vote on their behalf (optional)
    5. The shareholders provide the consent to hold the EGM earlier than the required notice (optional)
  2. Holding of an EGMThe shareholders hold an EGM whereby they vote (personally or through the proxies) on:
    1. Winding up of the company (Special Resolution)
    2. Appointment of liquidator (Ordinary Resolution)
    3. Authorisation to the liquidator to distribute the assets among the shareholders (Extraordinary Resolution)

    A Greek translation, certified as true copy of the original by the Secretary, must be prepared and delivered to the Registrar within 15 days of such EGM.

    The Registrar will proceed and publish this EGM in the Government Gazette.

  3. Appointment of the LiquidatorWithin 14 days of the Liquidators appointment (date of the EGM), the Liquidator must provide the following documents to the Registrar:
    1. Notification of appointment to be published in the Government Gazette (HE43)
    2. Notification of appointment to be kept by the Registrar (HE41)
  4. Preparation of the statement of distribution of assets When the liquidation finishes and the liquidator distributes all the assets to the shareholders, the liquidator prepares a statement showing such distribution (if applicable).
  5. Notice to the Final EGMThe liquidator calls for a final general meeting to present such account prepared and provide explanations in relation to this.

    The notice of such meeting has to be published in the Government Gazette at least 1 month prior to such meeting.

  6. Final EGMThe shareholders hold the Final EGM at the date set and whereby the liquidator presents the final accounts and the shareholders approve such accounts.
  7. Delivery to the Registrar of the final documentsWithin 1 week after the final General Meeting the Liquidator has to deliver to the Registrar of Companies a copy of the accounts prepared along with a return for the holding of the meeting and the date of such meeting.

 

HOW CAN LSTS ASSIST YOU

LSTS may assist in:

i.)  Being appointed and act as the liquidator in the members’ voluntary liquidation of Cyprus companies.

ii.) Providing you with guidance on the process of the liquidation.

 


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CYPRUS – INDIA DOUBLE TAX TREATY

CYPRUS – INDIA DOUBLE TAX TREATY (UPDATE)

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India officially rescinds the notification issued to Cyprus

NEW UPDATE 16 DECEMBER 2016

Further to the announcement issued in the Indian Government gazette on 14 December 2016 whereby the rescind of Cyprus as a notified jurisdiction was published, the Indian government has subsequently issued a corrigendum retrospectively rescinds Cyprus notification u/s 94A.

The word “this” in the below sentence, which was effectively referring to the current date (14/12/2016) of the publication in the Gazette, was replaced with the word “the” which now refers to the initial notification issued dated 1/11/2013.

“[…] with effect from the date of publication of this the notification in the Official Gazette.”

On 16 December the Government of India has issued a press release for the completion of the internal procedures for the revised double taxation agreement between India and Cyprus. The press release is set below:

PRESS RELEASE BY THE GOVERNMENT OF INDIA

Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi, 16th December, 2016.

PRESS RELEASE
Sub : Notification of Completion of Internal Procedures for Revised Double
Taxation Avoidance Agreement between India and Cyprus

A revised Agreement between India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal evasion (DTAA) with respect to taxes on income, along with its Protocol, was signed on 18th November, 2016 in Nicosia, which will replace the existing DTAA that was signed by two countries on 13th June 1994. The Protocol was signed by Mr. Ravi Bangar, High Commissioner of India to Cyprus on behalf of India and Mr. Harris Georgiades, the Minister of Finance on behalf of Cyprus.

Both sides have now exchanged notifications intimating the completion of their respective internal procedures for the entry into force of the DTAA, with which the revised DTAA shall come into effect in India in the fiscal years beginning on or after 1st April, 2017. The revised DTAA will enable source based taxation of capital gains on shares, except in respect of investments made prior to 1st April, 2017. In addition, the DTAA will also bring into effect updated provisions as per international standards and in accordance with the consistent position of India.

In a separate development, the notification of Cyprus under section 94A of the Income Tax Act, 1961, as a notified jurisdictional area for lack of effective exchange of information, has been rescinded with effect from 1.11.2013 [Notification No. 114/2016 dated 14.12.2016]. The bilateral economic ties between the two countries are expected to be further strengthened by these measures.

(Meenakshi J. Goswami)
Commissioner of Income Tax
(Media and Technical Policy)
Official Spokesperson, CBDT.

 

India officially rescinds the notification issued to Cyprus

UPDATE 14 DECEMBER 2016

On 14 December 2016 the Indian Government published in the Government Gazette the recission of the Notification issued to Cyprus 1 November 2013 officially removing Cyprus from India’s black list.

ANNOUNCEMENT PUBLISHED IN THE INDIAN GOVERNMENT GAZETTE

MINISTRY OF FINANCE
(Department Of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, 14th December, 2016
No. 114 /2016

S. O. 4033 (E). — In exercise of the powers conferred by sub section (1) of section 94A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby rescinds the notification of the Government of India in the Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, number 86 of 2013 published in the Gazette of India, Part II, section 3, sub-section (ii) vide S.O. 3307(E) dated 13k November 2013, except as respects things done or omitted to be done before such rescission, with effect from the date of publication of this notification in the Official Gazette.

[F.No. 500/02/2015-FT&TR-III] GAURAV SHARMA, Under Secy,

 

India and Cyprus sign the treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion

UPDATE 18 NOVEMBER 2016

On 18 November 2016 Cyprus, represented by the Finance Minister Harris Georgiades, and India, represented by the High Commissioner Ravi Bangar, have signed the treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (“DTAA”).

Upon the DTAA entering into force the Indian Authorities will rescind retrospectively the classification of Cyprus in the ‘Notified Jurisdictional Area’ as from 1st of November 2013.

As noted in our earlier newsletter, once the notification of November 2013 is formally withdrawn, a Cyprus company can file a return of income in India and claim refund of the amount withheld in excess of the provisions of the Cyprus-India tax treaty. If for example a Cyprus company was the recipient of interest under Compulsory Convertible Debentures and 30% is WHT by the Indian payer, then the Cypriot company can file for a return of tax and obtain the 20% provided it is able to provide a tax residency certificate.

CHANGES IN THE DTAA

Source based taxation

The new DTAA provides for a source-based taxation of capital gains arising from alienation of shares, instead of a residence-based taxation provided under the existing DTAA. This amendment matches the provisions of the India – Mauritius DTAA.

There is however a grandfathering provision on investments undertaken prior to 1st April 2017 whereby the taxation on the disposal of such investments (shares) at any future date will remain with the contracting state of residence of the seller.

Mutual assistance in collection of assets and exchange of information

There are provisions in the new agreement for the assistance in the collection of taxes and also updated provisions relating to the exchange of information based on OECD standards.

Royalties

The withholding taxes on royalty payments are reduced from 15% to 10% which is in line with the tax rate under the Indian laws.

Effective date

The DTAA will enter into force on the date of the completion of the necessary internal procedures and the exchange of notifications by the two countries and shall have effect in India in fiscal years beginning on or after April 1, 2017.

 

Indian Cabinet approves Agreement and the Protocol between India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion

UPDATE 24 AUGUST 2016

On 24 August 2016 the Union Cabinet chaired by the Prime Minister Shri Narendra Modi has given its approval for signing of an Agreement and the Protocol between the India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.

The revised Agreement which is to be signed between the Republic of India and the Republic of Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“DTAA”) and Protocol to this Agreement will replace the existing DTAA signed by both countries on 13th June, 1994.

The DTAA will enter into force on the date of the notification by the two countries (this is expected to be done within 2016), and shall have effect in India from the first day of the next fiscal year (i.e. after 1 April 2017).

BACKGROUND

On 1 November 2013, Cyprus was notified by the Indian Ministry of Finance as a notified jurisdictional area, which meant that transactions carried out by Indian taxpayers with entities based in Cyprus would come under increased scrutiny from the Indian tax authorities and a withholding tax would be imposed on payments by Indian taxpayers to recipients in Cyprus.

In addressing the negative implications arising from this notification the Cyprus government immediately entered into direct consultations with India at the Competent Authority level. The outcome from these consultations was successful.

In December 2013 the Cyprus Ministry of Finance issued a press release stating that it has been agreed that the circumstances that have caused India to notify Cyprus as a “notified jurisdictional area” will be immediately resolved. Into this effect India and Cyprus agreed to adopt the OECD model for the exchange of information and improve the channels of communication.

It has been also agreed that when the rescission of the notification is issued it will have retrospective effect from 1 November 2013 which is the same date the notification was initially provided. Such rescission is expected to be issued soon.

 FINAL POSITIVE OUTCOME ON THE NEGOTIATIONS

As announced by the Cyprus Ministry of Finance on June 29th, 2016, the negotiation on the Double Taxation Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between Cyprus and India has been successfully completed, in New Delhi.

Narendra Modi will reinforce the strong relations between Cyprus and India by visiting Cyprus in September 2016.

Following the negotiations:

1.) The Indian Authorities agreed that they will proceed with retrospectively rescinding the classification of Cyprus in the ‘Notified Jurisdictional Area’ as from 1st of November 2013.

As noted in our earlier newsletter a Cyprus company can file a return of income in India and claim refund of the amount withheld in excess of the provisions of the Cyprus-India tax treaty. If for example a Cyprus company was the recipient of interest under Compulsory Convertible Debentures and 30% is WHT by the Indian payer, then the Cypriot company can file for a return of tax and obtain the 20% provided it is able to provide a tax residency certificate.

2.) It has been agreed that similarly to the Mauritius – India new double tax treaty that there will be source based taxation for gains from the alienation of shares. However investments undertaken prior to April 1st 2017 are grandfathered with the view that taxation of disposal of such shares at any future date remains with the contracting state of residence of the seller.

This means that capital gains arising from transfer of shares of an Indian company acquired before 1 April 2017 would not be taxable in India. Since Cyprus does not levy any taxes on the sale of “titles” any sale of Indian company’s shares held by a Cyprus company acquired prior to 1 April 2017 will not give rise to taxes either in Cyprus or India.

  

ANNOUNCEMENT OF THE MINISTRY OF FINANCE OF THE REPUBLIC OF CYPRUS

The complete announcement issued by the Cyprus Ministry of Finance is set below.

Source: Cyprus Ministry of Finance

Direct link here.

 

 

HOW CAN LSTS ASSIST YOU

LSTS may assist in:

i.) The establishment of a suitable Cypriot structure for holding the shares of Indian companies.

ii.) Provide further guidance on the new provisions to the new double tax treaty

iii.) Keep you updated on the developments on the matter


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Intellectual Property Rights – Cyprus Tax Structures

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Intellectual Property Rights – Cyprus Tax Structures

OPPORTUNITY WINDOW CLOSES 31 December 2015

FOREWORD

In July 2012 the Cyprus Income Tax Law, Law 118 of 2002 was amended to provide, amongst others, very beneficial tax incentives and exceptions relating to income deriving from the intellectual property rights (“IP”). The provisions of the revised tax legislation relating to IP and which became effective from 1 January 2012 were analyzed in our previous newsletter.

In  February 2015, the Organization for Economic Cooperation and Development (OECD) published a paper titled ‘ Action 5: Agreement on Modified Nexus Approach for IP regimes’ as part of the Base Erosion and Profit Shifting (BEPS) review which was based on the September 2014 progress report on “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”, which discussed possible approaches to requiring substantial activities in the context of intangible property (IP) regimes such as patent boxes.

Under the above the “modified nexus approach” was adopted under which emphasis is placed on the existence of a substantial economic activity in order for the owner of the IP to enjoy the preferential tax regime.

On 5 October 2015 the OECD released the final papers of its Base Erosion and Profit Shifting (BEPS) Action Plan.  Included within the paper related to IP boxes (Action 5) are further details regarding the OECD recommended transitional rules for existing IP boxes moving to the OECD recommended ‘modified nexus approach’.

It was expected that the OECD’s proposed transitional rules for existing IP boxes would continue to allow IP which joins the relevant IP box by 30 June 2016 to continue to benefit until 30 June 2021 (the latest).  However, the OECD’s latest recommendation in this area for most cases of IP acquired directly or indirectly from related parties is that the transitional rules (applying until 30 June 2021, the latest) should only apply to IP already within the relevant IP box by 31 December 2015 (six months earlier than expected).

The OECD further recommends that there is enhanced transparency of IP joining existing IP boxes as from 6 February 2015 and benefitting from the transitional rules by way of exchange of information between tax authorities.

It is expected that the Cyprus IP box will be amended in line with the recommendations of the OECD in this area and you should consider whether action should be taken now prior to 31 December 2015.

NEXUS APPROACH

Even though each country can maintain its preferential IP regimes, under the “nexus approach” a particular emphasis is placed on the existence of a substantial economic activity in order for the owner of the IP to enjoy the preferential tax regime.

In particular under the “nexus approach” the benefits of the IP regime will be conditional on the extent of Research and Development (R&D) activities of the taxpayer receiving the benefits. The proportion of the expenditures which will directly relate to the development activities of the IP and which demonstrate the real value added by the taxpayer will act as a proxy of how much substantial activity the taxpayer undertook.

Under the nexus approach the proportion of the income relating to IP that can benefit from the IP regime is the same proportion of “qualifying expenditure” and “overall expenditure”. The income that may receive the benefits is defined in the below calculation:

formula

Qualifying expenditures:

Qualifying expenditures are defined as expenditure that must have been incurred by the taxpayer and must be directly connected to the IP asset.

These expenditures should only include expenditure that are necessary for actual R&D activities and they would not include interest payments, building costs or acquisition costs.

Overall expenditures:

Overall expenditures are defined as expenditures that are directly connected to the IP asset and only include expenditure that are necessary for actual R&D activities.

The difference between Qualifying expenditure and Overall expenditure is that the Qualifying expenditure must have been incurred by the taxpayer whereas Overall expenditure include also expenditure incurred by related parties and also the acquisition costs are included in the Overall expenditure.

Outsourcing the development of the IP would be possible however only development costs incurred by unrelated parties would count as qualifying expenditure. Outsourcing the development of the IP to related parties would count towards overall expenditure and not qualifying expenditure.

Overall income:

Overall income is limited only to IP income and includes royalties capital gains and other income from the sale of IP assets.

MODIFIED NEXUS APPROACH

The modified nexus approach addresses the issue of groups having to develop the IP in limited number of entities including the company owning the IP in order to qualify. This could impose restructuring costs on groups which have dedicated R&D companies in order for them to retain the relief in future.

In order to address the above issue the “modified nexus approach” countries can allow a qualifying expenditure up-lift up to 30% on the qualifying expenses.

This means that Overall expenditure incurred which are not also Qualifying expenditure (i.e. acquisition costs or costs paid to related parties for the development of IP) can be included in Qualifying expenditure up to the level of 30% on the already existing Qualifying expenditure.

Example :

Qualifying expenditure (R&D incurred by the taxpayer): EUR100,000

Acquisition costs: EUR10,000

R&D expenditure by subsidiary: EUR40,000

Maximum up-lift amount: EUR100,000 * 30% = EUR30,000

Total Qualifying expenditure in example: EUR130,000 

CLOSE OF OLD REGIME FOR NEW ENTRANTS

Under Article 5 of BEPS there can be no “new entrants” to any existing IP regime after the date that a new regime consistent with the modified nexus approach takes effect and no later than 31 December 2015.  “New entrants” include both new taxpayers not previously benefiting from the regime and new IP assets owned by taxpayers already benefiting from the regime.

In order to give protection for taxpayers benefiting from existing regimes, countries are allowed to introduce grandfathering rules. Under such rules, all taxpayers benefiting from an existing regime may keep such entitlement until a second specific date (“abolition date”).

The abolition date would be 30 June 2021. After that date, no more benefits stemming from the respective old regimes may be given to taxpayers.

LIMITED OPPORTUNITY – 31 DECEMBER 2015

There is only a limited time to enter into the Cyprus scheme, since it and all similar schemes will be closed to new entrants from 31 December 2015. However, companies that join the scheme before then can benefit from substantial savings until June-2021.

Cyprus’s IP box regime provides for a maximum tax rate of 2.5% on income earned from IP assets. The comparable rate in its nearest competitor, the Netherlands, is twice that amount, at 5%. Luxembourg (5.76%) and Belgium (6.8%) follow close behind the Netherlands, but far behind Cyprus.

The Cyprus IP box regime also applies to a wider range of income than any other European scheme, most of which restrict benefits to income from patents and supplementary patent certificates.

ACT FAST 

Even though any “new entrants” to the IP regime prior to 31 December 2015 (or before a new regime consistent with the modified nexus approach takes effect if earlier) will enjoy the benefits of such regime until 30 June 2021, nevertheless OECD is currently discuss measures to mitigate the risks that new entrants seek to avail themselves of existing regimes with a view to benefiting from grandfathering.

Such measures include monitoring of new entrants and imposing possible restrictions to these entrants.

It would therefore benefit any business with significant IP assets or income to promptly examine the option of benefiting from Cyprus’s favorable IP taxation regime while the opportunity lasts. 

HOW CAN LSTS ASSIST YOU

LSTS may assist in:

i.) The establishment of a suitable Cypriot structure for holding intellectual property and the transfer of the business’s intangible assets into it.

ii.) Provide further guidance on the new provisions in relation to the IP regimes

iii.) Keep you updated on the developments on the matter


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Protected: Deoffshorisation Impact and Solutions

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Russia Deoffshorisation [Update]

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RUSSIA DEOFFSHORISATION

31 March 2015 Update 

Notification requirements for foreign structures – New date 15 June 2015

A bill has been submitted to the Upper House of the Russian Parliament, moving the deadline for submitting notifications on participation in foreign companies from 1 April to 15 June 2015.

Our expectations are that this bill will be approved.

As per the bill submitted, the notification of participation in foreign companies as of 14 June 2015 (previously 1 January 2015) shall be submitted on 15 June 2015. In case the foreign structure is liquidated before 15 June 2015, the Russian tax resident will not need to submit the notification.

It should be noted that the form of the notification is still under discussion.

Forward

On 25 November 2014, a law providing amendments to the Tax Code of the Russian Federation, introducing the concept of tax residency for legal entities and controlled foreign companies (“CFC”) (the “Law”), was signed by president Vladimir Putin. The Law came into effect 1 January 2015. (Russian Deoffshorisation)

The law is set to establish rules relating to CFC, the tax residency of organisations and the taxation of profit from the “indirect” sale of immovable property and is a central instrument for the implementation of the Russian Government’s policy of deoffshorisation of the Russian economy which will have a great impact to the majority of the companies and businessmen with assets or operations outside the Russian Federation.

CONTROLLED FOREIGN COMPANIES

Definition of CFC

In accordance to Article 25 of the Law, a CFC is foreign company meeting all the conditions below:

1.) The company is not considered as a tax resident of the Russian Federation;

2.) Controlling persons of the company are the companies and/or individuals recognised as tax residents of the Russian Federation.

A Russian resident is to be recognised as a controlling person of a CFC if his participation interest is at least:

  • 25% (including spouse, minor children and other interdependent persons)
  • 10% if his participation interest together with those of other Russian residents is at least 50%

2015 is set to be a transitional period and the minimum required participation is 50%.

A Russian tax resident will be deemed as the controlling person of a foreign company even if the above thresholds are not met provided that the Russian tax resident can exercise influence on the decisions made by such foreign company in terms of the distribution of profits by virtue of direct or indirect participation to such company, an agreement with the management of the foreign company or any other relationship with such company.

A Russian tax resident’s control over a structure without a legal personality, such as a trust or a foundation, is assessed by reference to the ability of the Russian tax resident to exercise influence on the person that manages the assets and specifically in relation to the distribution of profits, either by virtue of the legislation of the country governing such structure or the foundation documents. The Law does not relate the control of the Russian tax resident to the latter’s level of participation interest and as such sets no specific percentage. The lack of clear definition of the above concept leaves room for differences in interpretation to arise. We believe that the Law will be amended in the future to provide a more clear definition and interpretation to address the above issue.

The Law allows a Russian tax resident to set himself as the controlling person of the structure without a legal personality even if the above provisions are not met.

Exemptions

The below foreign companies are exempt from being considered as CFCs:

1.) Companies with permanent location in a treaty country (except for those countries that do not exchange information with the Russian tax authorities) and with an effective tax rate of at least 75% of the average weighted rate (rules for calculating the average weighted rate are outlined below).

2.) Companies with permanent location in a treaty country (except for those countries that do not exchange information with the Russian tax authorities) and the company’s share of income from passive activities is not more than 20%.

Income from passive activities is defined in Article 309.1 of the Law as:

  • Dividends
  • Distributions of profit or property, including distributions in liquidation
  • Interest income from any kind of debt liabilities
  • Income from the use of the rights to the objects of intellectual activity
  • Income from the sale of shares or assignment of rights in the foreign entity that is not a legal entity under the foreign law
  • Income from the sale of immovable property
  • Income from the lease of sublease of immovable property
  • Income from the sales (including redemption) of investment units in mutual funds
  • Income from the provision of consulting, legal, accounting, auditing, engineering, advertising, marketing services, services for information processing as well as conducting research and development activities
  • Income from services for the provision of personnel
  • Other comparable income to the above categories

3.) Non-for profit companies that do not distribute income

4.) Companies formed in a country of the Eurasian Economic Union

5.) Foreign structures without the formation of a legal entity such as trusts or foundations, provided however that in accordance to the private law or foundation documents of the structure all of the below are met:

i.) the founder is not entitled to receive any assets from the structure after its formation

ii.) the rights of the founder given under the structure such as any right to dispose property, indicate the beneficiaries or any other right cannot be transferred to any other person except in inheritance or succession

iii.) the founder cannot receive any profit from the structure upon the distribution of such profit to all of its members and beneficiaries and

iv.) the foreign structure has no possibility of distributing profit among its members or beneficiaries

6.) Banks or insurance companies having a license or authorised to engage in these activities which operate in a territory that exchanges information with the Russian Federation.

7.) Issuers of certain types of Eurobonds, if the interest income on such bonds is at least 90% of the issuer’s income

8.) Companies participating in certain foreign industrial projects primarily oil and gas (at least 90% of income).

Formulas for effective tax rates and average weighted tax rates

As mentioned above, companies having a foreign effective tax rate of at least 75% of the average weighted rate in Russia are exempt from being considered CFCs.

The foreign effective tax rate is defined by the Law as:

FETax: TAX/INCOME

where:

TAX = Tax amount calculated by the foreign company and its subdivisions (including the amounts of withholding taxes charged on CFC income)

INCOME =

Profits calculated in accordance to Article 309 of the Law (see below)

Profits of CFCs registered in jurisdictions that have a tax treaty with Russia are to be calculated based on the Company’s financial statements prepared in accordance to the laws of that country provided that such financial statements are subject to a statutory audit.

In all other cases the profits are to be calculated in accordance to Chapter 25 of the Russian Tax Code.

The average weighted tax rate is defined by the Law as:

AWTax: (RR1*I1+RR2*I2)/(I1+I2)

where:

RR1= Russian profit tax rate. This is currently 20%

I1= The total profits of the foreign company excluding dividends received. Zero if the result is negative.

RR2 = Russian dividend tax rate. This is currently 9% however this will increase to 13%

I2 = Dividends received by the foreign company

Calculation of CFC Profits

Share of profits:

The profit share of the CFC will be included in the tax base of the Russian tax resident to an extent corresponding to the size of the Russian tax resident’s direct or indirect participating interest in the CFC accounting also the length of time that the Russian resident held that interest.

Period of profits:

The period into which the CFC profits are included in the Russian resident tax computation is i.) for individuals: the end of the tax period following the tax period which in accordance to the CFC’s local legislation the financial statements are prepared and ii.) for entities: 31 December of the calendar year following the year in which the financial statements are prepared in accordance to the CFC’s local legislation.

Definition of CFC profits:

The profits of the CFC are defined as:

Companies preparing audited FS

For CFCs located in a jurisdiction with which Russia has a double tax treaty and such CFCs are required to prepare audited financial statements then the profits of the CFCs are defined as the pre-tax profits (losses) as found in their financial statements.

As evidence of the CFC profits, the Russian resident must provide to the Russian tax authorities the CFCs financial statements along with the tax returns
submitted as evidence.

Companies not preparing audited FS

For CFCs which are either located in a jurisdiction not having a tax treaty with Russia or which are not required to prepare audited financial statements, then the profits/(losses) of these companies are determined in accordance to the Russian Tax Code.

These entities must submit documentation to the Russian tax authorities as evidence of the amount of profits/losses. Such documentation can be statements of bank accounts and source documents of transactions.

If the results of the CFCs are not presented in Russian Rubles then the amounts should be translated into Russian Rubles using the average rates as set by the Central Bank of Russia for the period of the financial results.

In determining the profits of a CFC, the income/expenses of the CFC should exclude any amounts derived from the revaluation of securities, financial derivatives marked to market and also any provision for expenses as well as the reversal of such provisions.

The CFC’s profit is reduced by the amount of dividends paid out of that profit, including both the interim dividends paid within the year but also the final dividends paid after the end of the year. If the CFC does not distribute profits due to an increase in the charter capital such profits shall not be taxed in Russia.

The tax on the CFC’s profit is further reduced by the amount of tax paid on such profit under the laws of the foreign country and/or Russian law as well as by the amount of corporate income tax paid by any permanent establishment of the CFC in Russia.

The threshold for including a CFC’s profit in the Russian tax resident’s tax base will be RUB50mln for 2015, RUB30mln for 2016 which is set to be the transitional period. From 1 January 2017 the threshold will be RUB10mln.

Treatment of losses from a CFC

The Law permits a CFC’s losses to be carried forward indefinitely, provided however that the Russian taxpayer informs the authorities of the existence of the CFC for the period it obtained the loss.

Losses incurred by a CFC during the three financial years prior to 1 January 2015 can also be carried forward.

Notification requirements for CFC

The Russian tax resident has the obligation to notify the tax authorities of participation in:

  • CFCs
  • foreign organisations of more than 10 percent
  • foreign structures not involving the formation of a legal entity such as foundations or trusts (including cases where the taxpayer is the founder of such a structure, or the beneficial owner having the right to the income (profit) of such a structure in the event of distribution)
  • Russian organisations (with the exception of business partnerships and limited liability companies) in which they have an interest of over 10 percent.

The deadline for notifying the tax authorities of participation in a foreign company is one month after the grounds of such notification arise. The notice of participation in foreign companies for which the grounds for submission arose prior to 1 January 2015 shall apply from 1 April 2015.

The deadline for notification of a CFC is 20 March of the year following the tax period in which a share profit of a CFC is required to be taken into account for a controlling person and as such the deadline for notification of a CFC is 20 March 2016.

Penalties

Failure of the Russian tax resident to include in its tax declaration the information required in relation to the CFC, such information being the financial statements and other documents required by the Russian Tax Code as well as the auditors’ report (provided that the CFC is subject to a mandatory audit), or the submitting of inaccurate information on the CFC will result in a penalty of RUB100,000.

Failure of the controlling person to submit to the Russian tax authorities the notice of the participation on the CFCs for the relevant calendar year or the submission of false information will result in a penalty of RUB100,000 for each CFC for which information was not submitted or falsely submitted.

Failure of the controlling person to submit to the Russian tax authorities the notice of participation on the foreign organisations or the submission of false information will result in a penalty of RUB50,000 for each foreign organisation for which information was not submitted or falsely submitted.

The penalty for non-payment or underpayment of tax as a result of non-inclusion in the tax base of a share in the profit of a CFC is 20% of the amount of the unpaid tax with the minimum amount being RUB100,000.

Reporting in relation to foreign companies and foreign structures which own property in Russia

Foreign companies and foreign structures without the formation of a legal entity having property taxable in Russia shall, in addition to the notification requirements for CFC as illustrated above, report to the local Russian tax office, having the authority at the location of the property, information of the participants in the foreign company or foreign structure without the formation of a legal entity information about the participants, including disclosing the indirect participating interest of any individual or public company whose direct interest exceeds 5%.

Wrongful or late submission of the above information will result in a penalty of an amount equal to 100% of the tax calculated on the company’s property. Such penalty will be calculated in proportion to the interest held by the Russian tax resident in the company or, in case it is not possible to define the % held by a person in the foreign company or foreign structure without legal entity, the proportion to the number of participants.

Liquidation

A foreign entity shall not be recognised as a Russian resident if a resolution of the shareholders/founders for the liquidation of the foreign entity was effected in previous or current tax periods and the liquidation procedure was completed before 1 January 2017.

DETERMINATION OF THE TAX RESIDENCY STATUS OF FOREIGN LEGAL ENTITIES

Tax residents in Russia

Russian tax residents are defined as:

  • Russian organisations
  • foreign companies which are deemed to be tax residents in Russia under an international tax agreement
  • foreign companies for which the effective management is in Russia

A foreign entity which is domiciled in a foreign jurisdiction having an effective tax treaty with Russia and operating in Russia through a standalone division[1], has the right to recognise itself as a Russian Resident and be treated the same as Russian companies. Such company will not be recognised as a CFC.

Effective Management Definition

The effective management is in Russia if:

  • the location of the majority of the meetings of the board of directors or equivalent management body is in Russia as opposed to any other country or
  • the foreign entity’s senior management primarily perform their executive management duties in Russia or
  • decision making and actions relating to the current activities of the company which fall within the competence of the executive management are regularly conducted from Russia.

The executive management of a foreign entity will be considered to be exercised outside Russia if it carries out business using its own qualified personnel and assets in a country in which it is resident and which has a tax treaty with Russia. The foreign entity may be asked to submit supporting documentation evidencing the above.

The Law provides secondary criteria that are to be taken into account if necessary (after considering the first 2 points expressed above) in determining the effective management:

  • the location of the maintenance of the accounting and other financial records (other than consolidation),
  • the location of other management records, and
  • the location of the operation management of the foreign entity’s personnel.

Special Grounds on Which Effective Management is Not Considered to be in Russia

The Law provides rules that normal shareholder activities will not result in a foreign subsidiary being deemed to be tax resident. In particular the carrying out of the following activities in Russia will not in itself be considered as signifying that effective management of a foreign company is exercised in Russia:

  • the preparation and adoption of decisions on matters falling within the authority of the general meeting of shareholders (participants) of the foreign company;
  • preparation for the holding of a meeting of the board of directors of the foreign company;
  • the performance in Russia of particular functions pertaining to planning and control of the activities of the foreign company, including: strategic planning, budgeting, the preparation and drawing-up of consolidated financial statements, internal auditing and internal control and the adoption

(approval) of standards, methodologies and policies which apply to all or a substantial proportion of subsidiary organizations of the organization in
question.

Exclusion of foreign Entities from Russian Residency having their Effective Management in Russia

The Law provides particular exclusions of foreign entities that even thought they meet the Effective Management definition, yet they are not considered to be Russian residents.

These exclusions are:

  • the foreign company has permanent residence in a treaty jurisdiction and is deemed to be tax resident there in accordance with the tax treaty between Russia and that jurisdiction (i.e. tax residents in the jurisdiction of incorporation);
  • foreign companies whose core activity involves participation in production sharing agreements, concession agreements, licence agreements or service agreements on a risk basis or other similar agreements with the government of the corresponding state (territory) or with institutions (State authorities, State companies) authorised by that government;
  • foreign holding companies subject to several conditions being met;
  • foreign companies that are operators of new offshore hydrocarbon deposits (shelf projects) or direct shareholders (participants) in the operators of such deposits.

GAINS ON DISPOSAL OF SHARES IN PROPERTY RICH COMPANIES AND TRANSFER OF ASSETS WITHIN THE GROUP

Tax in relation to indirect sales of property rich companies

Under the Law, proceeds from sales of shares and participating interests in foreign companies, over 50% of whose directly or indirectly owned assets are real estate in Russia, as well as financial instruments derived from such shares (participating interests), will be taxable in Russia, unless the securities concerned are traded on a recognised stock exchange.

Taxation of transfers of assets free-of-charge from shareholders

Transfers of assets to a Russian company from a majority shareholder or transfers of assets to a subsidiary in which the recipient is the majority shareholder are exempt from tax. The Law restricts the exemption if the parent company or subsidiary, the assets from which are received, is resident in a jurisdiction on the Ministry of Finance’s blacklist.

For the exception of profits to apply the assets must not subsequently (within 1 year) be transferred to a third party unless such assets consist of cash.

ACTUAL RIGHT TO RECEIVE INCOME

Under the Law the application of benefits under international tax treaties, such as exemption from tax and reduced withholding tax rates, are restricted to the “actual recipient (beneficial owner) of income”.

Person who has an actual right to income

A person who has an actual right to income will be a person who, by virtue of direct or indirect participation in an organisation or control over an organisation, or by virtue of other circumstances, has the right independently to use or dispose of that income, or a person in whose interests another person has the authority to dispose of the income in question.

The functions performed and the risks assumed by persons will be considered in deciding to which person, if any, treaty benefits apply in relation to Russian-source income.

A foreign person will not be deemed to have an actual right to income if that person possesses limited powers in
relation to the disposal of the income and carries out intermediary functions in relation to it in the interests of another person without performing any other functions and without assuming any risks, directly or indirectly paying the income in question (in whole or in part) to that other person who, were that income to be received directly from sources in the Russian Federation, would not have the right to the application of the provisions of a tax treaty under which a reduced tax rate or exemption from Russian tax would apply.

Applying the provisions of the international treaty by the person/entity having the actual right to receive income

For the purposes of the double tax treaty, besides the tax residency confirmation, a tax agent is entitled to request confirmation that the recipient of income has the actual right to receive such income.

If the foreign entity recognises that it has no actual right to receive such income then the provisions of the international treaties with Russia can be applied to another person participating directly/indirectly in the Russian organisation that paid the income in the form of dividends. The right to apply the provisions of the international tax treaties of Russia shall be applicable to the next person/ entity that participates directly in the entity that recognised it had no actual right of the income in the form of dividends. If that entity also recognises that it has no actual right to income then the right to apply the provisions of the international treaties of Russia shall apply to the next person in the corresponding order of participation.

If the person having actual right to receive the income in the form of dividends is a Russian tax resident and participates indirectly in the Russian organisation that paid such income then such person can apply the provisions of Article 284 clause 3 sub-clause 1 of the Russian Tax Code whereby no tax is levied on the Russian organisation receiving the dividends provided that:

i.) that on the date of the decision to pay dividends to the organisation receiving the dividend the latter owned continuously the right of at least 50 percent of the shares for at least 365 calendar days giving the right to receive dividends in an amount equal to not less than 50 percent of the total amount of dividends paid by the organisation.

ii.) the foreign entity through which it participates in the Russian organisation is no less than 50 percent in the period from the payment date of the dividends until the end of the tax period in which the dividend payment is performed.

HOW WE CAN ASSIST YOU

LSTS can provide guidance and assistance on the following:

1.) Review the group structure and identify companies that may become CFCs, assess the impact and formulate a strategy;

2.) Consider the economic efficiency of the existing structure and review potential restructuring opportunities;

3.) Review the current financial structure and develop options for converting from a “back-to-back” structure into single-level structures;

4.) Develop alternative structures and options for organising contractual structures in connection with a higher risk profile;


[1] Article 11 of the Russian Tax Code defines the separate division being a separate unit of the organization which is equipped with stationary jobs. The jobs are considered stationary if they are created for a period exceeding one month; Further guidance has been provided RF Ministry of April 29, 2004 under letter N 09-3-02 / 1912.


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