Cyprus: Gateway for Russian and CIS Companies to the London Capital Markets
by Cleo Papadopoulou, Tax Partner, PricewaterhouseCoopers Cyprus
Strategically located at the crossroads of three continents (Europe, Asia and Africa), Cyprus has always played a major role as an international business and financial services centre. Following its accession to the European Union (EU), in May 2004, this position has been enhanced further.
The implementation of wide ranging structural and legal reforms has provided more credibility and transparency to Cyprus and has strengthened its relevance in the European, and more specifically to the London, capital markets scene. With its strategic location, favourable tax regime and business environment, well-developed commercial infrastructure, strong banking sector and multilingual and highly skilled workforce, Cyprus has rightly emerged as one of the most favoured holding company jurisdictions worldwide.
Russian and CIS companies traditionally reap these benefits by selecting Cyprus to host their investment holding company. The next step is to use it as a gateway to efficiently and effectively access the European capital markets, especially London, the most important and lucrative one. This is even more relevant and feasible now with the integration and harmonisation of the European capital markets of which Cyprus is an integral part.
The main characteristics of Cyprus that establish it as a gateway for Russian and CIS companies to the London capital markets are outlined below.
An excellent tax regime for holding companies
As a holding company location, Cyprus is a natural choice since it is possible for income to be collected by a Cyprus company tax-free. In addition Cyprus offers a very effective and quick tax-free exit route to investors.
The Cyprus tax system offers full participation exemption on dividend income and on gains on disposal of shares without the imposition of any conditions.
An investor can therefore invest in Russia and the CIS through a Cyprus holding company. Profits can be distributed to the Cyprus company from the Russian and CIS subsidiaries with the very low withholding taxes permitted under the beneficial bilateral tax treaties. In Cyprus dividend income will be exempt from taxation and repatriation from Cyprus to the EU investor will be tax-free as Cyprus does not levy withholding taxes on distributions to any persons outside Cyprus. The reverse is also possible: a non EU investor wishing to invest in the European market, taking advantage of the EU Parent Subsidiary Directive to eliminate withholding taxes from the EU subsidiaries on dividend payments to the Cyprus holding company.
In summary the main benefits of the Cypriot tax system include:
- Lowest corporate tax rate in the EU – 10%;
- Full tax exemption of disposal of titles (shares, bonds, debentures etc) and rights thereon (options, futures etc);
- Full participation exemption on dividends and profits from permanent establishments outside Cyprus;
- No thin capitalisation rules (companies can be funded by 100% debt) and no Controlled Foreign Corporation rules (CFC rules);
- Unilateral tax relief for foreign tax credits (and possibly underlying tax);
- Losses carried forward indefinitely;
- Group relief available (companies that are part of a group can consolidate their results, thus allowing losses of one company to be set off against profit of another company);
- Mergers, acquisitions and spin-offs can be effected without tax cost;
- Zero withholding taxes to non-residents;
- No exit costs;
- Fully compliant with EU and OECD rules;
- Application of all the EU Directives; and
A wide network of double tax treaties with countries in the CIS region as well as some favourable treaties with Eastern European countries.