A comparison of Cyprus and BVI corporate structures in the light of recent global tax reforms

Patrikios Pavlou & Associates LLC | View firm profile

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.

Cyprus

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
    Action 5);
  • 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.

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