Establishment of companies in Cyprus
Our direct presence in Cyprus allows us to minimize the activities of intermediaries. This increases the level of quality of the services offered, and Cyprus is situated at a strategic point where the trade routes of Europe, Africa and Asia intersect. The tax system of this country should be considered as the most favorable to the objectives of tax planning among the tax systems of all countries belonging to the European Union. Doing business with companies established in Cyprus is one of the most popular formulas for favorable taxation of income. There are, however, many common mistakes made by tax residents of Poland who own companies in Cyprus. We explain how you can avoid them.
Although recently in the financial press it was often read that soon the tax system of Cyprus will no longer offer Poles such a wide range of possibilities when it comes to convenient forms of taxation, both for personal income and profits from economic activity, it is in fact not such a terrible devil, how they paint it. Cyprus was, is and will continue to be a very popular destination for Polish tax emigrants. Below we explain how to use the potential of Cypriot companies in international tax planning.
Amendment of the agreement on avoidance of double taxation
This solution is dedicated to natural persons, but is not the same as changing citizenship. It is associated only with a change of the jurisdiction in which taxes are paid and does not always have to be associated with literal emigration.
The most frequently chosen tax residences are Cyprus and Maltese. Depending on the jurisdiction you choose, certain conditions for obtaining tax residence must be met.
This is most often associated with declaring the intention to stay in a given territory for a certain number of days in a year. The elimination – as a result of legislative changes introduced in 2016 – of some instruments allowing the use of favorable forms of taxation resulted in a reduction in the tax efficiency of Cyprus. Nevertheless, Cyprus will still remain a convenient place to invest. Contrary to popular belief, in order to gain full confidentiality or avoid double taxation (in terms of Polish corporate income tax), it is not enough to establish a company in a country whose legal system provides for convenient solutions in the field of income taxation. At this point, it should be emphasized that the discussed issues cover a much wider spectrum of activities aimed at developing an appropriate business model – so that it is fully compliant with the regulations in force in the Polish legal system. Due to the above, we advise against using the services of tax advisers who do not guarantee the compliance of the applied solutions with the provisions of Polish law, and their activity is limited to ordinary intermediation in the registration of foreign companies.
This solution is dedicated to natural persons, but is not the same as changing citizenship. It is associated only with a change of the jurisdiction in which taxes are paid and does not always have to be associated with literal emigration.
The most frequently chosen tax residences are Cyprus and Maltese. Depending on the jurisdiction you choose, certain conditions for obtaining tax residence must be met.
Most often it is connected with declaring the intention to stay in a given territory for a certain number of days in a year.
Favorable tax system
The very well-developed infrastructure of the island, the legal system based on Anglo-Saxon law, high standard of specialist services, low maintenance costs, investment security, as well as a number of other tax benefits make Cyprus an ideal business environment.
Such lucrative conditions are conducive to the creation of a foundation for a holding structure – conducted in Poland or anywhere in the world. The aforementioned tax advantages include not only a very low rate of corporate income tax (12.5%), but also the possibility of not collecting – in some cases – a flat-rate tax on the payment of royalties by Cypriot entities to foreign licensors.
Tax exemptions may also apply to dividend payments between companies included in the holding company. In addition, the use of a Cypriot company gives the right to take advantage of the privileges, which are regulated on the basis of 62 agreements on the avoidance of double taxation concluded by Cyprus and provisions “harmonized” with the provisions of EU directives. As a result, Cypriot companies are often used in the practice of tax planning.
Appropriate implementation of the tax structure will minimize the burden, inter alia, in the following scope:
1. payments for the transfer of rights to computer programs made to a Cypriot company – if certain conditions are met, withholding tax can be avoided (or its amount reduced) under the provisions of the treaty on avoidance of double taxation;
2. dividend flow within a group of companies, as dividends paid by a foreign company to a Cypriot company are in principle exempt from income tax in Cyprus;
3. if certain requirements are met, also dividends paid by Cypriot companies to their partners are not subject to taxation; trading in securities, as this income may be exempt from income tax;
4. income earned by natural persons as a result of holding functions in the bodies of a Cypriot company – in certain circumstances, the income in question may not be taxable
Rules for collecting income tax in Cyprus.
Pursuant to the law in force in Cyprus, companies that are a tax resident in Cyprus are subject to corporate income tax (CIT).
Pursuant to these regulations, all legal entities are obliged to submit to the tax authorities of Cyprus, by August 1 of each year, information on the estimated amount of income tax in the current tax year (on the “temporary tax assessment” form (IR 6) calculated on the basis of the amount of income planned in this year and a tax rate of 12.5%).
The tax amount calculated in this way is collected in three equal installments by August 1, September 30 and December 31 of a given year. The assessment of income – and thus the amount of the tax burden – should be as precise as possible. The companies have the right to change the planned amount of income / tax at any time until December 31 of the current year. However, if, as a result of this change, the tax amount increases, there will be an obligation to pay interest in the amount of 5%, calculated on the difference between the amount declared earlier and the amount resulting from the change and for the period from the due date of individual installments.
Moreover, if, after the final annual settlement, it turns out that the difference between the planned amount of income and the amount of income due is more than 25%, an additional penalty of 10% is imposed on the company, calculated on the difference between these amounts. Skarbiec Law Firm offers professional assistance in creating tax-favorable structures – for managing the assets of wealthy entrepreneurs, which include, among others Cypriot companies, investment funds, or private foundations and trusts.
Companies in Cyprus and change of tax residence – a remedy for CFC.
Although companies registered in Cyprus, under Polish law, may be companies subject to the Controlled Foreign Company (CFC) regulations, the economic and economic benefit of having them may still be interesting from the point of view of tax rationalization, especially in the context of international tax planning. The combination of the registration of an offshore company with the change of the tax residence of its beneficial owner – e.g. to Maltese one, is not only an alternative to the domestic fiscal system, but also a remedy for CFC.
Provisions introduced from January 1, 2015 to the CIT and PIT Act (Article 24a of CIT and Article 30f of PIT), according to which a Polish tax resident (company or individual) will have to pay tax at the rate of 19% on income generated by a foreign company controlled, operating in a country with a favorable tax system, will not apply in a situation where the beneficial owner of an offshore company moves the center of its life interests, e.g. to Malta, while becoming a tax resident of Malta (the so-called ordinary residence). So if, for example, (to simplify) a Polish tax resident registers his business, e.g. under a LTD company in the Marshall Islands, and at the same time meets all the conditions allowing for the change of tax residence to Maltese, the revenues obtained by this company from activities performed outside Malta should not be subject to income tax in Malta.
At the same time, provided that the conditions for tax residence in Malta are met, there will be no tax obligation in Poland on these revenues. When planning such projects, one should take into account the increasingly common implementation of the CRS reporting standard, which includes the exchange of financial information, also for tax purposes. In particular, it is important for banks to provide information on the beneficiaries of their accounts, if the data in their possession indicate the Polish residence of such a beneficiary. This circumstance will be important in a situation where the bank account will be kept in a country that has already implemented the reporting standard. For this reason, it is crucial that the Polish tax residence is permanently lost.