Using a Cyprus Investment as a Special Purpose Vehicle
Have you ever thought about purchasing real estate as an investment in Cyprus or abroad?
Foreign tax jurisdictions are growing increasingly complex and strict in constantly finding new ways to challenge the effectiveness of tax structuring via global financial centres and how they’re regulated by foreign authorities. Unsurprisingly such advances affect the Limited Company in Cyprus, however due to all the tax benefits, the prospect of using an SPV based in Cyprus remain an interesting prospect for many.
Generally, the standard in global taxation is that a business is taxed mainly in its determined country of residency. The issue arises in establishing principles and conditions to decide taxation residency as the standards differ over different jurisdictions.
For conducting financial transactions, the holding of assets and other payments, the Cyprus Limited Company is commonly utilised as a Special Purpose Vehicle or SPV. As a result of the latest regulation advances, the aforementioned structuring is currently easily challengeable by external taxation authorities, since the Cyprus Company has always had the obligation to return the received interest, dividends or payments to other foreign entities.
Reasons why Cyprus Company’s are favourable SPVs:
1. VAT exemption for Corporations owning Cyprus real state.
As a result of joining the EU in 2004, Cyprus companies now have to follow EU Directives that call for purchase of acquired real estate to incur VAT.
There was no VAT when a claim for a city license was recorded prior to the 1st of May 2004. After this date, VAT is paid at 18% of the transaction value. VAT can also be reimbursed for first time purchasers where the complete value of VAT was paid on any real estate acquired after the 1st of May 2004.
2. VAT exemption on buying land:
Transfer Fees are not applicable when selling shares of a business that possess Cyprus real state.
Property Transfer Fees; the provisional cuts in Transfer Fees that took effect in 2015 or after:
- No Fees charged when VAT was added to the real estate acquisition cost.
- A 50% discount on Fees when VAT was not added to the real estate acquisition cost.
3. Repair, maintenance and other charges can be accounted for (with a limit equivalent to 20% of rental income for entities possessing or owning real estate).
4. Selling real estate abroad will not incur Capital Gains Tax (CGT) in Cyprus.
Furthermore, as of December 2015, shares from businesses indirectly possessing Cypriot immobile real estate have capital gains tax charged, if a minimum of 50% of the shares’ market cost originates from the property. Nevertheless, Capital Gains Tax is imposed only on earnings from the real estate located in Cyprus.
5. None or close to zero Capital Gains Tax on selling of shares linked to real estate in a jurisdiction whereby Cyprus maintains a Double Tax Agreement (as per the “Property-Rich” clause).
Consequently the Cyprus Company’s duty and utility in global tax composition has to be continuously reassessed to keep up with the changing regulations. Undoubtedly, Cyprus provides one of the most beneficial tax frameworks and a business friendly environment. In order to utilise these, and minimise the risk of challenge by foreign tax authorities, the Cypriot Company should move from the role of the SPV, into the role of the investment/ holding/ organisational centre of a group.
For assistance with Special Purpose Vehicles in Cyprus, get in touch, our experts can advise you immediately.