Cyprus has one of the lowest rates of corporate tax in the EU at 12.5 per cent, putting it in the same league as the Republic of Ireland in terms of what it charges both onshore and offshore companies. But while Ireland’s low tax rate has hit the headlines with regard to inversions, the regime in Cyprus has stayed out of the limelight.
Last month, a delegation of members of the European Parliament visited Cyprus to look into its corporate tax practices. The MEPs met foreign minister Ioannis Kasoulides as well as Ministry of Finance head of tax policy George Panteli and tax commissioner Yannakis Tsangaris. There were also members of the Association of Cyprus Banks, Transparency International and the Cyprus Investment Promotion Agency present.
The visit was well-timed, coinciding as it did with the release of the Panama Papers by the International Consortium of Investigative Journalists. The leaked documents put tax right back at the top of the European Parliament’s agenda. It has already vowed to tackle tax evasion and limit legal loopholes.
Cyprus is clearly not an offshore tax haven and has made concerted efforts to assure both investors and regulators of its compliance with EU rules. But the combination of the Panama leak and the special delegation visit has led to increased media and supervisory scrutiny.
Q: What are the issues around corporate tax in Cyprus at the moment?
Elias Neocleous, corporate and commercial head, Andreas Neocleous & Co: The big issue for Cyprus, as for other financial centres, is defining its role in a climate of increasing scrutiny of companies’ and individuals’ financial arrangements, particularly those relating to taxation.
“Cyprus has sought to position itself as a reliable, secure jurisdiction”
Unlike some tax havens, which are used to illegally conceal assets and income for the purposes of tax evasion and other criminal activities, Cyprus has sought to position itself as a reliable, secure jurisdiction providing investors with protection of their investments and personal privacy. It aims to strike a balance between preventing abuse of the financial system on the one hand and maintaining investors’ right to privacy – and therefore personal safety – on the other.
Pavios Aristodemou, managing partner, Harneys Cyprus: Corporate tax is flat at 12.5 per cent, with 17 per cent withholding tax for Cyprus residents only. There are no particular issues surrounding corporate tax.
Cyprus-related M&A topped $4bn in 2015
King & Spalding was the most active M&A adviser last year, acting on three deals with Cyprus involvement at a value of $464.8m (£316.5m). According to data from Thomson Reuters, the total transaction value of Cyprus-related M&A transactions was $4.4bn, giving King & Spalding a market share of 10.5 per cent.
The matters on which King & Spalding was engaged invariably concerned oil and gas projects, and construction transactions.
Second-placed DLA Piper took the lead on a real estate deal in which Longway Trading sold its Cyprus subsidiary MountainPeak Trading for €285m (£217m). In total, DLA Piper advised on three deals with Cyprus involvement in 2015, worth $324.9m.
The top 10 advisers who worked on M&A transactions with any Cyprus involvement are a mix of US and UK-headquartered outfits. Clifford Chance is the highest placed magic circle firm, having advised on one deal worth $67m. Linklaters’ two transactions were valued at $7.6m.
Q: What progress has been made?
Neocleous: Cyprus has a competitive tax and business environment aimed at attracting investment from overseas. It has an attractive ‘economic citizenship’ programme, with safeguards against abuse. It also has a ‘non-domiciled’ regime providing exemption of investment income from tax.
To prevent abuse of these and other benefits of the tax regime, Cyprus has implemented all international best practice in regulation, registration and information exchange. There are requirements to discourage ‘brass plate’ companies and ensure companies that are tax-resident in Cyprus have a real presence.
There is a robust regulatory system, with financial registers accessible to law enforcement and tax authorities, and full exchange of information with overseas tax authorities.
Aristodemou: Cyprus has made considerable progress and its economy has been upgraded by all ratings institutions, with a positive future. The country has become compliant with OECD requirements and the public and private sectors have attracted direct investment into the country.
Q: What are the obstacles to further progress?
Aristodemou: Further progress can be made with more privatisation and a tax and legal regime to put Cyprus among the jurisdictions of choice for set-up and administration of funds.
A solution to the Cyprus political problem would most likely give a boost to international trade and enhance the position of Cyprus as a jurisdiction that is friendly for doing international business.
“Like Caesar’s wife we must be above suspicion, not only in form but in substance too”
Neocleous: There are no substantial obstacles to progress as the main regulatory framework already exists. What is important now is rigorous implementation. Unscrupulous service providers and their prospective clients must be made to learn that they will be unable to operate in Cyprus, and that no exceptions will be made.
On the other hand, any regulation needs to be proportionate to risk and avoid an excess of bureaucratic intervention.
Finally, clients must be assured their investments are secure and their personal privacy is maintained within the context of the law.
Q: How do Cyprus’ corporate tax laws compare with others in the Balkans?
Neocleous: Cyprus has a modern, simple tax system offering consistency, predictability and reliability so investors can predict the tax implications of their decisions with confidence. If desired, advance tax rulings can be obtained on proposed transactions or structures.
As befits a financial services centre, Cyprus’s tax system does not impose further taxation on financial transactions taking place through Cyprus. It has a wide network of double tax agreements covering 55 countries and, regardless of whether a double tax agreement is in force or not, imposes no withholding taxes on interest or dividends and no taxation of capital gains on financial securities.
Q: What has been the reaction to the Panama Papers leak?
Aristodemou: There has been some media coverage and relevant supervisory authorities are considering or preparing inquiries in cases where they believe some wrongdoing has been caused by Cypriot parties.
Neocleous: In our firm at least, the reaction has not been one of schadenfreude. Rather, the leak confirmed our view that everything we do should withstand scrutiny.
Like Caesar’s wife we must be above suspicion, not only in form but in substance too. I hope others in Cyprus share this view. As individuals, as firms and as a country our reputation for integrity is fundamental to our success – indeed, to our survival – as an international financial and business centre. We must treasure it and never put it at risk.