Tax legislation of the Republic of Cyprus is one of the most attractive legal systems of the European Union. Especially effective are the structures using Cypriot companies in terms of capital gains, holding activities, tax optimisation of remuneration of board members, supervisory boards and any securities transactions. The lowest level of corporate taxation in the European Union – 10% and only 17% the VAT rate does not give the whole of Cyprus’ ‘legislative offer’.
Cyprus, as an EU Member State, enjoys all the privileges of European law, including the Treaty ban on discrimination, including tax. At the same time, Cyprus' internal legislation allows tax-neutral capital transfers to typical tax havens such as Seychelles, Cayman Islands and Belize.
Therefore, Cypriot companies are an integral link of multi-level structures, covering at least two companies optimizing the tax burden. The use of the Cypriot company will not result in restrictions on the so-called ‘source tax’ and other obligations that would impose a direct trade with the offshore company.
One of the most commonly used Cypriot solutions is a holding company with the aim of optimizing dividends and other comparable profits from corporate profits. In Poland these profits are taxed at the level of 19%.
The implementation of the holding structure boils down to the transfer of ownership of shares or shares in a company of Polish law (optionally a company from another Member State of the European Union) to a Cypriot entity.
Thus, the dividend paid by the Polish entity to the majority shareholder of the Cypriot company is not taxed on the basis of the relevant European law.
Cyprus' internal legislation exempts dividends and other capital gains from taxation on the territory of Cyprus, while not charging the so-called "source" tax for their payment to foreign shareholders.
The receipt of dividends from Cypriot company by a Polish natural person is taxable on 9% the level, some of which may be used for the remuneration of Polish members of the company's board.
These salaries constitute a tax cost for the Cypriot company and in accordance with the Polish-Cyprian double taxation agreement and the internal law of Cyprus are not taxable in Poland or Cyprus.
Cypriot companies are also used to optimise the taxation of operating activities in the field of the sale of goods and the provision of services. Regardless of the specific channels of movement of goods or services, when sold in the Member States of the European Union, it is fiscally most advantageous for the company to sell in Cyprus.
The proceeds obtained from the operation of the Cypriot trading company will be subject to the lowest EU-wide corporate tax, while the company will be able to reduce its tax base by a number of costs, including the non-taxable remuneration of its Polish board members, which will further reduce the effective income tax rate.
It is also possible to reduce the profits of the Cypriot company by using an additional offshore company or established in the United Arab Emirates.
Remuneration of members of the Management Board
The double taxation agreement with Cyprus relieves both Poland and Cyprus of the remuneration of directors of Cypriot companies who are tax residents in Poland.
The concept of ‘director’ under double taxation agreements, including agreements with Cyprus, is a much broader concept than its understanding under commercial law and covers any remuneration of board members and supervisory boards.
The establishment of a subsidiary in Cyprus, which will take over a separate part of the activity of the parent unit established in Poland, is attractive not only because of the lack of taxation of its management. Cyprus legislation provides for a number of attractive tax solutions to optimise the international fiscal burden.
The rate of income tax in Cyprus is lowest in the EU and is 10%, There are currently no requirements for the minimum share capital of Cypriot companies. The application of the above optimization method is most often limited to taking over by the shareholder of the Polish unit the function of director of the related Cypriot company.
The shareholders of Polish companies contribute to the newly created Cypriot company, which becomes a holding company for the Polish unit. The remuneration generated by this function in the structure of the Cypriot company will not be taxable in Poland or Cyprus.
The remuneration paid to directors of Cypriot companies is the tax cost for these companies. The acceptable (market) remuneration of the Cypriot company's director depends on the financial situation of the company, although there are no legal obstacles to paying the director's contractual remuneration when the Cypriot company generates losses.
Payment of dividends
In this context only 9% the effective level of taxation of dividends paid by Cypriot companies is one of the many opportunities to reduce the fiscal burden on international capital groups that the country's legislation offers.
The basis for this reduction in taxation of dividends paid from sources in Cyprus is the provisions of the Polish-Cyprus double taxation agreement.
This legal qualification for taxpayers derives from the regulation of the Polish-Cyprian double taxation agreement, which allows deduction from 19% CIT tax due on dividends in Poland, 10% the income tax which the Republic of Cyprus has the right to collect from these incomes, which it does not, however, make due to the tax exemption laid down in its national law.
Limited joint-stock company
A particular type of use of Cypriot companies is that the company, which is tax resident in Cyprus, assumes the function of shareholder of the Polish limited partnership. Since the company which is a shareholder of the above structure is a tax resident of a foreign state, it cannot, in principle, be taxed in Poland.
Thus, almost all the profit achieved from the operation of the Polish limited partnership is tax-neutrally transferred to Cyprus, where it can benefit from the tax exemption, as income from capital gains.
The concept of ‘capital gains’ under Cypriot law has a wide range of meanings, and in this case the income obtained by the Cypriot company, as it is a shareholder of the Polish limited partnership, is treated as a quasi dividend.
The income obtained in the above case by Cyprus is quasi passive, since it is a consequence of the resolution by the general meeting of shareholders on the distribution of profits, but at the same time it does not meet the requirements for any of the categories of passive income defined under Article 10-12 double taxation agreements with Cyprus.
In particular, this income is not a dividend. In the light of the provisions Article 7 Agreements with Cyprus, profits of the company one Contracting States shall be taxable only in that country, unless the undertaking is active In the second to a Contracting State by an establishment located there.
Judgment of the Provincial Administrative Court in Warsaw dated 15 March 2011 (reference no. III SA/Wa 1637/10
„Since (...) the company is a limited-stock company, registered in Poland, based in Poland and operating in Poland, it cannot be at the same time its own maternity facility in Poland. Nor can it be considered that a shareholder holding shares in a company – a company in Poland – owns in Poland an establishment within the meaning of the widely quoted provisions of the Polish – Cypriot agreement. It has shares in a company to make profits.” This interpretation is confirmed in the above-mentioned "precedent" judgment of the WSA in Warsaw dated 15 March 2011, in which the court held that ‘generated and transferred to the shareholder, a Cypriot legal entity, profits from the Polish limited-stock company will constitute profits to be taxed as profit of the company, according to Article 7(1) Polish - Cypriot agreement.”
Optimisation of securities taxation
Profit obtained in Poland from securities is taxable 19% income tax, which prejudges the cost-effectiveness of the measures to optimise the taxation of transactions. In the event that a Cypriot company sells shares or shares in foreign companies (e.g. in a Polish limited liability company), revenue obtained from this will be exempt from taxation.
The legal form of the transfer to Cyprus of the securities held should be aligned with the regulation of the local legislation of the State of residence of shareholders of the company whose shares or shares are transferred to Cyprus.
In practice, different solutions are used from aports to donations of private shares or shares in Polish companies to Cypriot companies. The next step is the sale of shares or shares by the Cypriot company, which accumulates the untaxed income obtained from it. The channels of its further distribution are widely known – i.e.
dividend and remuneration of directors of the Cypriot company
Licence claims
Income tax on revenues from licence receivables obtained by Polish tax residents in the territory of the Republic of Poland 20%. This is a flat-rate tax that is levied on revenue without taking into account the cost of obtaining it. The use of Cypriot companies in the process of optimising the tax burden of licensing activities may lead to significant tax savings. Cyprus may act as the owner of certain intellectual property rights or may engage in sub-license activities.
In the first the case to Cyprus is transferred, for example, by means of a share-capital transfer of certain intellectual property rights. The company grants a licence to use these rights to entities third, both linked and independent of the Cypriot licensing company.
The revenue generated by royalties will be taxable in Cyprus 10% The rate of corporation tax, with a possible withholding tax charged to the payment of royalties in the countries of the tax residence of the licensees, will be subject to credit for the Cypriot income tax.
In the second In the case of the owner of intellectual property rights, it is a ‘offshore’ company. Under Cyprus' internal legislation, payments of royalties to offshore companies will be at source free.
In this case, the offshore company will conclude a licence agreement with the Cypriot company, which will be subject to intellectual property rights. Cyprus will then grant sub-licenses for the use of the above-mentioned intellectual property rights to various external and related foreign entities.
Licensing claims paid by Cyprus to a company in the British Virgin Islands will not be subject to withholding tax in Cyprus, provided that Cyprus exercises its licensing rights outside Cyprus (by licensing foreign customers).
Cyprus Investment Funds
Cyprus investment funds are taxed on the same terms as ordinary Cypriot law companies, i.e. 10% CIT. A wide range of tax exemptions including:
• Exemption from taxation of gains from securities sales,
- Tax exemption of dividends from foreign sources (provided that the requirements resulting from the Directive 90/435 to 23 July 1990 on the common system of taxation applicable to parent companies and subsidiaries of different Member States (Official Journal of the European Union L, No. 225 to 20 August 1990),
- Exemption from taxation of income from securities sales,
- No withholding tax when paying dividends, interest and royalties to non-residents,
- No withholding tax when paying the profit from the fund to a foreign investor,
- exemption from taxation of income from the sale of real estate located outside Cyprus (in most cases).