The recent revelations in the Panama and Paradise Papers illustrated the need for companies to make a shift towards more responsible fiscal behaviour and tax responsibilities. International guidelines such as the OECD guidelines and the 4th EU AML Directive clarify that evasive fiscal practices will be disclosed. This article analyses the implications on some of the most established corporate structure vehicles, British Virgin Islands (BVI) business companies and Cyprus companies, by outlining their key characteristics and evaluating how each jurisdiction is adhering to stricter international compliance standards.
The main characteristics of the Cyprus corporate and tax legal system are:
- A flat corporate income tax rate of 12.5%;
- An extensive double tax treaty network with over 60 countries;
- Full EU member since 2004;
- OECD guidelines compliant;
- Dividend participation exemption (subject to certain conditions);
- Exemption from tax on gains from the disposal of securities (e.g. shares, bonds);
- No withholding taxes on interest and dividends;
- No taxation of capital gains (except for disposal of real estate in Cyprus or shares of company holding real estate in Cyprus);
- No succession taxes are applicable under the Cyprus Tax Code;
- No Controlled Foreign Company (CFC) rules;
- Foreign tax relief on income subject to both Cypriot and overseas tax;
- Exemption on profits of foreign permanent establishments (subject to conditions);
- The EU Mergers Directive allows for tax-neutral group restructuring;
- Attractive Intellectual Property regime in line with "modified nexus approach" (OECD Action5);
- No exit tax rules.
British Virgin Islands (BVI)
- No Capital Gains Tax, Gift Tax, Profit Tax, Inheritance/Estate tax, No Corporate tax;
- Legal and judicial system based on English common law with ultimate appeal to the Privy Council in England;
- Flexible and compliant regulatory framework in line with international standards;
- Proven judicial system and creditor-friendly insolvency legislation;
- Efficient company incorporation;
- Exemption from all local taxes and stamp duty;
- Asset protection and financial privacy (certain information may become public in the future);
- Ability to transfer domicile;
- No annual general meeting required; and
- No disclosure or minimum capital requirements.
Transparency and regulatory compliance over tax benefits
Both Cyprus and the BVI are similar in the way that both apply versions of the UK Companies' Act, both are based on a common law legal system and have both enjoyed stability and a reliable Court system. However a notable difference is that Cyprus is a full EU member state.
A structure involving a BVI company will enjoy the advantages of a favourable tax regime However, investorsand businesses appreciate that in certain cases, tax efficiency is inadequate when structuring a business vehicle to be put under scrutiny by certain jurisdictions that have become protective against such aggressive tax avoidance practices. Also, nil tax jurisdictions are nowadays not preferred by international clients due to the OECD's base erosion and profit shifting initiative (BEPS), which forces multinational enterprises to establish a transfer pricing policy.
Cyprus benefits from all EU treaties, regulations and directives, and freedom in capital movement. It offers an advantageous tax system that retains some tax characteristics of an offshore jurisdiction, whilst remaining in full compliance with the strict EU legislation and guidelines. Cyprus has embodied the arm's length principle (Income Tax Law, section 33), which is the cornerstone of the transfer pricing regulations that govern intercompany pricing for services, royalties, goods and loans between entities in a multinational level. Cyprus further introduced transfer pricing requirements in relation to intra group financing. Therefore it follows the transfer pricing guidelines of the BEPS initiative.
Both jurisdictions are fast moving away from the "tax heaven" model, secrecy and fast incorporation, to a more responsible and sustainable approach.