Tag Archives: Tax Structures

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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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Cyprus Serbia Double Tax Treaty

Cyprus Serbia Double Tax Treaty

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CYPRUS SERBIA DOUBLE TAX TREATY

Presentation Contents:
  • Cyprus Tax Provisions as a Holding Jurisdiction
  • Cyprus Tax Provisions as a Financing Jurisdiction
  • Cyprus Tax Provisions as an Intellectual Property Vehicle
  • Cyprus Tax Provisions – Payments by Serbia
  • Cyprus Serbia Double Tax Treaty
  • Cyprus Structures Investing in Serbia

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Cyprus Russia Double Tax Treaty

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CYPRUS RUSSIA DOUBLE TAX TREATY

Presentation Contents:
  • Significant Developments in 2012
  • Cyprus Tax Provisions as a Holding Jurisdiction
  • Cyprus Tax Provisions as a Financing Jurisdiction
  • Cyprus Tax Provisions as an Intellectual Property Vehicle
  • Cyprus Tax Provisions – Payments by Russia
  • Cyprus Russia Double Tax Treaty – Effective changes
  • Cyprus Structures in Investing in Russia

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Cyprus Poland Double Tax Treaty

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CYPRUS POLAND DOUBLE TAX TREATY

Presentation Contents:
  • Desired Attributes for a Holding Location
  • Cyprus Corporation Tax
  • Management Control
  • Cyprus Poland Double Tax Treaty [Jan 2013]
  • Benefits of Cyprus Entity
  • Cyprus Company Structures
  • Summary
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Cyprus UK Double Tax Treaty

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Cyprus UK Double Tax Treaty

  • Cyprus UK Double Tax Treaty
  • Cyprus Holding Company
  • Cyprus Financing Company
  • Financing Company structure using Cyprus Incorporated Maltese Resident
  • Cyprus – Luxemburg Financing Structure
  • Cyprus Holding Company – Real Estate
  • Cyprus SPV for trading in “titles
  • Shipping companies in Cyprus
  • Key considerations
  • Summary

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Cyprus Financing Tax Structures

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CYPRUS FINANCING TAX STRUCTURES

BACK TO BACK LOANS

One Tier Financing Company

Provisions of the Law

Article 33 of the Income Tax Law 2002 (the “Law”) gives the Inland Revenue Department the power to adjust transactions between connected companies, entities and individuals on an arm’s-length basis and to tax the resulting deemed profits, gains or benefits.

The Income Tax Office (ITO) was invoking Article 33 when a loan from a Cyprus company to a related party was considered below market rates and imposing a deemed interest income on the Cyprus company which it sought to tax at, at the applicable income tax rates at that time.

For example, if a Cyprus company had provided a loan of 0% to a related party then the ITO was imposing tax on the deemed interest as if that Cyprus company had given a loan at market rates (i.e. 5%).

In relation to back-to-back loans there was an uncertainty as to which was the minimum margin which would be acceptable by the ITO as being at arm’s length and, therefore, complying with Article 33 of the Law.

In 2011 after numerous requests by members of the Institute of Certified Public Accountants in Cyprus ( ICPAC) to address the issue of the back-to-back loans with the Income Tax Office and formalise what was by that time an unofficial common practice as to the minimum acceptable margins on the back to back loans, the ICPAC sent a letter to the ITO requesting an official guidance.

On 27 June 2011 the ITO has responded to the request of ICPAC officially setting the definition of the back to back loans as well as the detailed guidance on these loans.

The guidance provided is set out below:

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The Cyprus International Trust [Reviewed]

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THE CYPRUS INTERNATIONAL TRUST

On 8 March 2012 the House of Representatives in Cyprus enacted the International Trusts (Amending) Law of 2012 effecting various structural amendments to the International Trusts Law of 1992.

A new era began for Trusts in Cyprus giving a favourable trust regime by ensuring that international investors, settlors and beneficiaries enjoy the highest possible degree of protection in a modern and attractive favourable environment.

Settlors, trustees and beneficiaries are now highly protected as the provisions of the international trust law clearly provide that in case the trust is governed by Cyprus law any foreign laws can not affect their rights as identified in the trust deed.

In addition, strict confidentiality is secured prohibiting any disclosure of information unless a court order is issued.

The reform of the International Trusts Law gives Cyprus the most modern and favourable trust regime in Europe and restores it to the “premier league” of trust jurisdictions.

Regulated by the International Trust Law of 1992 as amended by the International Trust (Amending) Law of 2012 (together the “Law”)

Forward

Formation of a Trust under the Law:

  • The settlor is not a resident of Cyprus during the calendar year immediately preceding the creation of the trust;
  • At least one of the trustees at the time of creation is a resident in Cyprus during the whole duration of the trust;
  • No beneficiary (except a charitable institution) is a resident of Cyprus in the calendar year immediately preceding the year of creation of the Trust;
  • The Trust property can include immovable property situated in Cyprus.

Validity of the Cyprus International Trust

1.   Following the amendments (the “Amendments”) of the Trust Law (the “Law”)in 2012 any issues pertaining to, inter alia, the validity, interpretation, amendment or administration of an international trust or a disposition to an international trust will be determined by the laws of Cyprus without regard to the law of any other jurisdiction.

2.   It is noted that, any inheritance or succession statutes in Cyprus or overseas will not affect any transfer or disposition of property or similarly affect the validity of a CIT. The Trust consequently supersedes all inheritance laws.

3.   Following point 1. above, the Amendments provide that no disposition to an CIT may be challenged on the basis that it contravenes the laws of another jurisdiction such as, inter alia, any forced-heirship laws, forced succession laws or inheritance laws or mandatory provisions of family law or laws prohibiting or not recognising trusts.

4.   Following the Amendments the trustees’ fiduciary powers and duties and the powers and duties of any protectors of the trusts are governed exclusively by Cyprus law.

Reserved Powers to the Settlor

1.   Following the Amendments the Settlor is permitted to reserve powers to himself, to retain a beneficial interest in trust property, or to act as the protector or enforcer of the trust.

2.   Note that the reservation of any right or interest in the Trust by a Settlor directly or through his capacity as protector or enforcer of the trust shall not affect the validity of the trust.

3.   The powers referred to above are the following:

i.    to revoke, vary or amend the terms of a trust;

ii.   to advance, appoint, pay or otherwise apply income or capital of the trust property;

iii.  to give binding directions as to the appointment or removal of a director or officer of any company wholly or partly owned by the trust;

iv.  to give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, pledging or charging of the trust property;

v.   to appoint or remove any trustee, enforcer, protector or beneficiary;

vi.  to change the law of the trust;

vii. to restrict the exercise of any powers or discretions of a trustee by requiring a consent of the Settlor.

Cyprus International Trusts and the Tax Aspect

Cyprus International Trusts provide significant tax and estate planning possibilities to interested parties.

  1. Income
  • Only the income and profits of an international trust derived or deemed to derive from sources within Cyprus are subject to all taxes that are applicable in Cyprus, noting that dividends or interest received from Cyprus sources are not taxable. The beneficiary will not be taxed on any income derived from sources outside Cyprus.
  1. Dividends
  • Dividends or other income received by an International Trust from a Cyprus Company are neither taxable nor subject to withholding tax.
  1. Capital Gains
  • Gains on the disposal of the assets of an International Trust are not subject to capital gains tax in Cyprus. As stated in point 1 if the assets are situated in Cyprus then it is subject to Capital Gains Tax in Cyprus.
  1. Estate Duty
  • An International Trust created for estate duty planning purposes would not be subject to estate duty in Cyprus.

Advantages of a Cyprus Trust

  1. Estate Planning
  • An individual with assets outside his country of residence, which country may in future extend its exchange control restrictions to include remittance of overseas funds, may wish to retain the flexibility of overseas funds by transferring them to a Cyprus International Trust.
  • An individual who wishes to divest himself of personal assets for various reasons, such as protection from creditors or family members can achieve this through a disposition to a Cyprus International Trust.
  • Persons permanently leaving one country and taking up residence in another, may obtain fiscal advantages in their new country by placing funds in an appropriate Settlement in Cyprus
  1. Anonymity
  • An individual who wishes to keep the ownership of a company anonymous and confidential, can do this by setting up a Cyprus International Trust which owns the shares in the company.

 Conclusions

Protection of the assets from external parties (creditors / family members) thereby securing the assets for successors:

The only way that a creditor can have a claim over the trust property is if he can prove to the courts of Cyprus that the CIT was made with the intent to defraud the creditors of the Settlor at the time of the transfer of the Settlor’s assets to the trust.

The Settlor can determine who the successors will be, irrespective of the inheritance laws  in his country of domicile:

All matters arising in relation to a CIT or any disposition of property to or upon such a trust are to be determined according to the laws of the Republic of Cyprus without reference to the law of any other jurisdiction.

Creditor Protection

  • The CIT offers maximum protection against all claims of creditors (or family members) on the property under the trust regardless of the beneficiaries being the Settlor himself or his close family members or whomever he wishes to benefit from the CIT.
  • In accordance to the Law no creditor’s claim can invalidate the trust irrespective of whether such a claim is brought in the event of the Settlor’s bankruptcy or liquidation and irrespective of whether such a claim was brought under Cypriot or foreign law (foreign law protection analysed in detail in the “Protection from foreign law” section below).
  • A creditor may only have a claim over the trust property is if he can prove to the courts of Cyprus that the CIT was made with the intent to defraud the creditors of the Settlor at the time of the transfer of the assets to the trust.
  • The Law provides that even if there is such a claim the creditor cannot bring any action if more than two years have elapsed from the date when the transfer or disposal of assets was made to the trustees of the CIT.
  • The Law further defines the creditor as being the person to whom the Settlor owes a debt or has any other obligation at the time of creation of the trust or the date the property was transferred to the trust.
  • Consequently, a Settlor who transfers his property on the day before entering into risky ventures would not be at risk from a person who became a creditor after that date, noting that this has not yet been tested by the Cypriot courts.
  • The Law also defines the “intent to defraud” as being the intention of the Settlor to avoid in bad faith any obligation owed to the creditor. The onus is on the creditor to prove a dishonest intention to avoid any obligation.

Protection From Foreign Laws

The Law protects the CIT from foreign laws as it explicitly provides that any question relating to the validity or administration of a Cyprus International Trust or a disposition to an international trust will be determined by the laws of Cyprus without reference to the law of any other jurisdiction, and that the law relating to inheritance or succession in force in Cyprus or any other country will not in any way affect the validity of the Cyprus International Trust or any transfer or disposition of property to it.

The definition set by the Law is as follows:

All matters arising in relation to an international trust or any disposition of property to or upon such a trust, including without limitation matters as to:

1.   The validity, interpretation or effect of the trust or disposition or any variation thereof;

2.  The validity or effect of any transfer or other disposition of property to a trust;

3. The administration of the trust, whether it is conducted in the Republic or elsewhere, including matters concerning the functions, appointment and removal of trustees, protectors and enforcers;

4.  The existence and extent of any functions in respect of the trust, including without limitation powers of variation, revocation and appointment, and the validity of the exercise of any such function;

5.  The powers, obligations or duties of the trustees, protectors or enforcers or as to the liabilities or rights of the trustees, protectors or enforcers are to be determined according to the law of the Republic without reference to the law of any other jurisdiction.

  • It is provided that the law relating to inheritance or succession in force in the Republic or in any other country shall not affect in any way the transfer or disposition or the validity of the Cyprus International Trust.
  • The provisions of the Law further ring-fence the CIT from the possibility of foreign authorities bypassing the protection of this section of the Law by the simple expedient of bringing proceedings relating to an international trust before the Courts of a foreign jurisdiction, and then seeking recognition and enforcement of that foreign judgment in Cyprus.
  • The Law protects the CIT from the above by conferring exclusive jurisdictional competence in relation to the CIT on Cypriot courts but more importantly stipulating that the provisions of the Law shall apply regardless of any other provisions of the rules on conflicts of law applicable in the Republic and shall constitute a fundamental rule of law, whose compliance is a matter of public order.
  • The importance of the last provision is that it sets the matter being of a “public order” which is of course an established ground for refusing recognition and enforcement of foreign laws and judgments.
  • The Law also provides ample protection where the CIT affects rights arising under foreign laws from a ‘personal relationship’or ‘heirship right’ by providing that dispositions to a trust may not be challenged on the grounds that they conflict with the laws of another jurisdiction for example regarding family and succession issues, or on the ground that the foreign jurisdiction does not recognise the concept of trusts.
  • The Cyprus courts will not recognise a forced heirship claim which seeks to defeat an otherwise valid CIT, and such claims cannot be enforced against assets held in a CIT simply because the laws of the foreign jurisdiction prohibit or do not recognise the concept of a trust.
  • Practically, if the assets of a CIT are situated outside Cyprus, it is possible that a foreign court order could be applied to assets situated in the jurisdiction despite the presence of the robust Cyprus provisions. Such a scenario may be averted by “Cypriotising” the trust property / foreign assets to further protect them from claims of foreign courts by gifting the assets / trust property to a Cyprus company and then disposing the shares of the Cyprus Company to the CIT.

The Cyprus International Trust is the most effective and modern Trust instrument available at the moment in international tax planning and estate planning. There are no comparable competitors to the CIT in the Common Law world, and there are no comparable equivalents under Continental Law.


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Cyprus Ukraine Double Tax Treaty

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CYPRUS UKRAINE DOUBLE TAX TREATY

On 4 July 2013 the Ukrainian parliament approved the bill for ratification of the double tax treaty between Cyprus and Ukraine which was signed 8 November  2012 and which replaced the 1982 agreement between Cyprus and Soviet Union. This followed the initial failed attempt 18  June  2013 of the Ukrainian government to secure the majority of the parliamentary votes needed for the ratification. The law will enter into force when it is signed by the Ukrainian president and published in the Ukrainian government official journal. Provided that the notifications of the completion of all the required ratification procedures are exchanged between the two countries within 2013, then the new treaty will be applicable from 1 January 2014.

The new Cyprus Ukraine double tax treaty maintains almost all of the beneficial features of the previous treaty which set Cyprus as the preferred jurisdiction for investments into Ukraine, accounting for more than 25% of these, and at the same time puts an end to the long-standing uncertainty that existed due to the several years of negotiations between the two governments and the international pressure toward Ukraine to eliminate the, what was described as, “preferential” tax treaty with Cyprus.

The provisions of the new double tax treaty which safeguards Cyprus’ dominant position as the primary investment route into Ukraine are briefly set below:

Dividends, Interest and Royalties

Article 10: Withholding tax on dividend payments

Dividends paid are subject to a 5% withholding tax provided that the owner holds at least 20% of the capital of the company paying the dividend or has invested an amount of at least EUR100.000.

In all other cases a withholding tax of 15% applies.

Article 11: Withholding tax on interest payments

Interest paid is subject to a 2% withholding tax.

Article 12: Withholding tax on royalty payments

Royalties paid on income from copyright of scientific work, any patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience is subject to a 5% withholding tax. All other cases are subject to a 10% withholding tax.

Capital gains

Article 13: Capital gains tax

Even though as per Article 6 of the double tax treaty any income generated from immovable property located in either Cyprus or Ukraine may be subject to tax at the state where the immovable property is stated, Article 13 states that capital gains from a sale of shares (including capital gains on disposal of shares in immoveable property rich companies) is taxed in the country of residence of the seller. Since gains on sale of titles are exempt from Cyprus tax then there is no tax on the profits on sale of shares of Ukrainian companies holding immovable property.

Exchange of information

Article 24: Exchange of information

The provisions for the exchange of information use the exact wording of article 26 of the O.E.C.D. model and moreover the double tax treaty states all the necessary steps relating to the request for information in order to demonstrate the foreseeable relevance of the requested information. These steps will provide to the taxpayers maximum protection against misuse of the clause.

The information to be supplied includes;

i.    the identity of the person under examination;

ii.  a description of the information requested including the form and manner in which the requesting state wishes to receive the information;

iii.   the tax purpose for which the information is sought;

iv.   the grounds for believing that the requested information is held by the contracting state to which

v.    the request is addressed, or is in the possession or under the control of a person within its jurisdiction;

vi.   the name and address of any person who may hold the information requested, if known;

vii.  A written statement that the provision of such information is in compliance with the legislation and  the administrative practices of the requesting state and that if the requested information was within the state in question, the competent authority may procure the information in accordance with its own laws and its ordinary administrative practices; and

viii. a written statement that the contracting state making the request has exhausted all other reasonable means of obtaining the requested information.

In Cyprus under the Assessment and Collection of Taxes Law the written approval of the Attorney General authorising ultimate disclosure is needed, and this will only provided only on a case by case basis. The Attorney General has not, to date, granted such authorisation in any case.

LSTS Group having vast experience in international tax structuring can assist you in your requirements in finding the optimal and tax efficient structure. Such examples are found on our presentation below. The presentation is available for subscribers.

The content is restricted for subscribed users only. Please register to our website or contact us on info@lsts.com.cy.

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