CYPRUS – LITHUANIA TAX STRUCTURING Alecos Papalexandrou Tax Partner Lithuania, June 2012.
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Transcript of CYPRUS – LITHUANIA TAX STRUCTURING Alecos Papalexandrou Tax Partner Lithuania, June 2012.
Holding Company - Inbound Investment
Plan
• Establish Cyprus company to hold operating subsidiary in Lithuania for dividend stream income
Benefits
• Eliminate withholding tax in Lithuania on dividend payment to Cyprus
• Participation exemption on dividend income – No tax in Cyprus
• No withholding tax on dividends to parent whether EU or Non-EU
• No CFC rules in Cyprus
Parent Non-EU
Lithuania Opco
CyprusHoldco
0% withholding tax on dividends
EU Parent – Subsidiary Directive
Parent EU \ ЕС
0% withholding tax on dividends
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 2
Holding Company - Inbound Investment
• Investor from a country with no DTT with Lithuania
• Investment through Cyprus
• Dividends received by Cyprus holding Co exempt from tax (subject to conditions)
• No withholding taxes on payments out of Cyprus
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 3
Treaty Subsidiary
Treaty Subsidiary
LithuanianInvestor Co Lithuanian
Investor Co
Holding Company - Outbound investment
Plan
• Lithuanian investor establishes Cyprus company to hold various EU and non-EU operating subsidiaries for dividend stream income
Benefits
• Access to EU directives and DTTs of Cyprus in relation to holding EU and non-EU subsidiaries – No or low withholding tax on dividend (for example 5% in Russia, 0% in Ukraine)
• Full participation exemption on dividend income - No tax in Cyprus
• No withholding tax on dividends to Lithuanian parent
• No CFC rules in Cyprus
CyprusHoldco CyprusHoldco
EU Subsidiary
EU Subsidiary
Dividend payment 0% withholding tax
Dividend payment0% or low withholding tax
Dividend income 0% tax
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 4
Holding Company - Outbound investment
Plan
• Lithuanian investor establishes Cyprus company to hold various operating subsidiaries for dividend stream income
Benefits
• Access to favorable treaties
– No withholding tax on dividend from Ukraine
– Withholding Tax in accordance with Treaty
• Full participation exemption on dividend income - No tax in Cyprus
• No withholding tax on dividends to parent
• No CFC rules in Cyprus
LithuanianInvestor
CyprusHoldco
Dividend payment 0% withholding tax
Dividend payment0% withholding tax
Dividend income 0% tax
UkrainianOpco
UkrainianOpco
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 5
Holding Company with Foreign PE
In Cyprus :
1. Profits from PE abroad exempt provided:• Active income>50% or• Tax burden >5%
2. Losses of PE set off against Cyprus Co’s other income (but recapture rule)
3. Profits in PE country exempt if they relate to construction and/or assembly activities lasting within the periods specified in the Cyprus DTT Network.
Example:
Austria <24 months
Romania <12 months
RussiaUkraine
<12 months<24 months
Other Eastern
European Countries <12 months
Cyprus Co Cyprus Co
Investor Investor
Foreign PE Foreign PE
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 6
Financing Company - Inbound
• Interest deductible in operating country (Lithuania)
• No WHT in Lithuania based on EU Interest & Royalties Directive
• Small margin taxable in Cyprus at 10%
• No withholding taxes on payments out of Cyprus
Interest Payable
Interest Receivable
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 7
Finance Company - Outbound investment
Plan
• Lithuanian investor establishes Cyprus company to be the group finance company of EU and non – EU operations.
• Capitalisation with equity
Benefits
• Tax on profit margin 10%
• Access to EU interest directive and DTT network of Cyprus
– No or low withholding tax on interest
• Interest deductibility in paying company
• No WHT on dividends paid from Cyprus
Cyprus FinancingCompany
LithuanianInvestor
EU / non-EU
Opco
Dividend payment 0% withholding tax
Interest payment0% or low withholding tax
Profit Margin - 10% tax
Cyprus – Lithuania: Tax restructuring © 2012 Deloitte Limited 8
Financing Company - Outbound
• Profits reduced in operating company
• Low or no WHT in operating company based on DTT or EU Directive
• Small margin taxable in Cyprus at 10%
• No withholding taxes on payments out of Cyprus to Lithuania
Interest Payable
Interest Receivable
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 9
Financing Company
Margins on Loans – back to back structures
Transfer Pricing Considerations –
Acceptable indicative profit margins where low financing risk retained in Cyprus:
• Up to EUR€50m 0.35%
• From EUR€50m - EUR€200m 0.25%
• Above EUR€200m 0.125%
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 10
Intellectual Property Rights
Royalty Company (Inbound):
• Royalty premiums deductible in Lithuania• No WHT in Lithuania based on EU Interest &
Royalties Directive (subject to conditions)• Small margin taxed at 10% in Cyprus• No withholding taxes on payments out of
Cyprus
• As from 1/1/2012: cost of acquisition of IP can be
amortised over 5 years 80% of the profits from royalties,
including the profit from disposal of the IP, exempt from 10% corporation tax in Cyprus
Royalty Payable
Royalty Receivable
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 11
Cyprus IP Co.
Cyprus IP Co.
Royalty company - Outbound investment
LithuanianInvestor Co.
EU or DTTOpco
Dividend payment 0% withholding tax
Royalty payment0% or low withholding tax
Profit - less than 2% effective tax
Dividend Payable
Royalty Receivable
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 12
Plan
• Lithuanian investor establishes Cyprus company to be the owner of intellectual Property Rights. Capitalisation with equity (contribution of the IP)
Benefits
• Amortisation of cost of acquisition of IP over 5 years
• Tax on 20% of the profits from royalties, including profits from sale of IP, at the rate of 10% (therefore, effective tax rate lower than 2%)
• Access to EU interest & royalty directive and DTT network of Cyprus – No or low withholding tax on royalties
• Royalty deductibility in paying company
• No withholding taxes on dividend payments from Cyprus
• Royalty premiums are deductible in operating country
• Credit relief in Cyprus for WHT in operating country if any
Trading in Securities
• Profit is exempt from tax
• Use of Double Tax Treaties
• No withholding tax on payments out of Cyprus
• Result = 0% tax in Cyprus
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 13
Non Resident Trading Company
• Managed and controlled outside Cyprus
• Exempt from tax in Cyprus
• Non resident Cyprus registered company
• Use of EU VAT number and reputation
• Result = 0% tax in Cyprus
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 14
Employment Company
• Cyprus Company employs staff
• Charges at cost plus
• Profits taxable in Cyprus at 10%
• Profits reduced in operating country
• Employee costs reduced as employees pay less tax and S.I. Contributions *
• Employees exempt from tax in Cyprus
* Depends on nationality of employees and rules of operating country
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 15
Cyprus International Trusts
Plan• Set up a trust under the Cyprus International Trusts
Law of 2012
Benefits• Exempt from any taxation in Cyprus
• Exempt from any Capital Gains and Inheritance Tax
• Protection of Property
• Confidentiality
• Trading activities through the set up of a company owned by the trust
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 16
International Collective Investment Schemes
• An ICIS can take one of the following legal forms:
– Fixed Capital Company;
– Variable Capital Company;
– Unit Trust Scheme;
– Investment Limited Partnership.
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 17
An example:
OverseasInvestments
OverseasInvestments
Cyprus HoldCo Cyprus HoldCo
ICIS Partnership ICIS Partnership
General Partner(CyprusCo)
General Partner(CyprusCo)
Limited Partners Limited Partners
Lithuanian ParentLithuanian Parent
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 18
Thank you!
For more information you may contact:
Alecos PapalexandrouTel: + 357 25 868686E-mail: [email protected]
Cyprus – Lithuania: tax restructuring © 2012 Deloitte Limited 19