Business in Cyprus 2011 by Global Investment I Limited

Business in

Cyprus

4 Tactical Calculations Etched in Security with Cyprus Stock Exchange 6 Inside Perspective with Cyprus Investment Promotion Agency 10 MarketTalk with Deloitte

SPECIAL REPORT 2011

Your business and tax advisers in Cyprus We help you stay ahead of the competition

Deloitte is the largest private professional services practice worldwide. With over 450 professionals locally and with the support of the 170.000 professionals around the globe, Deloitte in Cyprus provides audit, tax, consulting, financial advisory, wealth management and other support services to local and international business companies. Discover why so many leading companies of all sizes, private and public, rely on us as their business and tax advisers year after year.

www.deloitte.com/cy

INTRODUCTION The Republic of Cyprus is an eastern Mediterranean island strategically located at the crossroads of three of the world’s most historically important continents: Europe, Asia, and Africa. A European Union member since May 1, 2004 and a member of the Euro-Zone since January 1, 2008, Cyprus also enjoys excellent business relations and flight connections with these continents. Historically tied to the UK as a former Crown territory, the UK remains one of their top trading partners to this day. Cyprus gained its independence from the United Kingdom in 1961, after 83 years of British control. At the moment, there are approximately half a million Cypriots living in the UK, and at least 50,000 British who reside in Cyprus. Indeed such an intertwined historical ark between the two countries over the previous century shall lead to continued interplay between them in the future, both economically and culturally. Despite the recent worldwide economic downturn the growth of Cyprus was less affected than most, thanks to conservative government fiscal management and industry focus on financial services and tourism. The country enjoys low inflation and low unemployment rates when compared to the EU average, as well as strong consumer purchasing power. With the lowest corporate tax rate in the European Union at only 10%, the island is an ideal jurisdiction for Holding Companies. Moreover, it has over 40 bilateral tax treaties, including with the United States. Cyprus has no withholding tax imposed on dividend income, interest, or royalty payments to non-Cypriot beneficiaries. Profits from overseas permanent establishments are tax-exempt. The international competitiveness of Cyprus is reflected by objective independent international assessments. Specifically, the “Global Competitiveness Report 2010-2011” of the ‘World Economic Forum’ ranks Cyprus 40th among 139 countries, while the “Do-

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ing Business 2011” report of the ‘World Bank’ ranks Cyprus 37th among 183 countries and 15th among 26 EU countries on the ‘ease of doing business.’ The banking, accounting, legal, and financial services are extremely efficient and one of the strong points of the economy. The labour force is largely multilingual and highly qualified and the labour costs are low compared to the EU average. Cyprus has an advanced telecommunications network and infrastructure, as well as, a wide network of air-routes offering excellent connections with Europe, Africa, and Asia, as well as modern ports and first-rate sea connectivity. Cyprus has undergone important liberalisation and reform of its financial system since its accession to the European Union (EU) in May 2004. The supervisory regime, laws, and regulations in Cyprus have been brought in line with the relevant EU directives as recognised by the IMF’s 2006 assessment. Not to be outdone by the financial sector, the shipping industry in Cyprus ranks among the 10 leading maritime nations in the world and is a highly reputable international shipping centre with a merchant fleet exceeding 21 million in gross tonnage (accounting for 16% of the EU fleet) and nearly 2000 vessels. It constitutes one of the largest ship-management centres in the world with approximately 50 ship-management companies and marine-related foreign enterprises that conduct their international activities in the country. Cyprus has also developed into a transhipment centre for Asia Pacific trade with Europe and with shipping markets situated along the coasts of the Levant and Black Sea, or the North Adriatic. The island is a natural hub for other main-line deep-sea trades passing through the Mediterranean, to North Africa and the Middle East. A major development in the industry is the new tax tonnage system whereby taxes will be charged on the basis of the

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net tonnage of the vessels rather than the income generated. It is expected that this will allow Cyprus to increase its lion’s share of the EU shipping industry, as this new taxation system will result in larger percentages remaining in the pockets of shippers compared to income generated taxation schemes. Michael McBride a partner at one of the oldest law firms specialising in Cyprus’ shipping sector Chrysses Demetriades & Co. LLC believes “There is no doubt that Cyprus’s shipping activities on the worldwide stage shall increase, as has been happening for the last 47 years. Additionally, the fact that Cyprus is now a full member of the EU and of the Eurozone provides stability, certainty and a sense of well-being.” Furthermore he adds “Against the background of countries: (i) trying to plug their deficits through (inter alia) increased taxation, and (ii) pressurising tax havens to eradicate tax evasion, Cyprus offers a legitimate tax environment and certainty within which a company can base its activities, and more importantly plan its future.” One aspect of Cyprus lost in the discussion of its financial, shipping and commerce initiatives will be unavoidable upon stepping off an aircraft and opening your eyes: her beauty. A long desired destination for Britons, Cyprus is steeped in history, and one of the most culturally diverse countries in the world. Many people flock to Cyprus to experience its rich background and multifaceted influences—Cyprus has periodically embraced many cultures at certain points over dozens of centuries. This culture thrives during mild winters and lush Mediterranean summers, and is perfect for those looking to enjoy anything from simple time away in an outdoor café to a challenging round of golf. Whether in on business, holiday or a combination of the two, the old world charm and new age opulence of Cyprus and her shores will be sure to lure you in for an intimate, pleasurable experience.

Editor: Robert Rimsky Project Manager: Kuljit Kaler Regional Director: Joseph Bove Design: The Arland Group

The views expressed in Business in Cyprus Special Report 2011 are not necessarily those shared with the publisher, Global Investment I Limited. Wishing to reflect the true nature of Cyprus, the editor has included articles from a number of sources, and the views expressed are those of the individual contributors. No responsibility or liability is accepted by Global Investment I Limited for any loss to any person, legal or physical, as a result of any statement, fact or figure contained in Business in Cyprus Special Report 2011. This publication is not a substitute for advice on a specific transaction.”

Business in Cyprus

Tactical Calculations Etched in Security The Cyprus Stock Exchange continues to evolve. The origin of the Cyprus Stock Exchange (CSE) is dated to 1996, when its official operation began, according to the regulatory and legal framework that was voted by the Cyprus House of Representatives. The Cyprus Stock Exchange is a modern securities market, fully compliant with the relevant practices of the EU Directives in the European Union, of which Cyprus has been a full member since May 2004. With reliable and modern procedures, which compare to all developed stock exchanges around the world, and with the ambition of playing a central role in the region, the CSE offers great opportunities to Cypriots as well as to foreign investors. The Cyprus Stock Exchange is a regulated securities market through which transactions on listed securities take place, such as stocks, warrants, bonds, or any other securities that are listed on the stock exchange. The CSE offers all basic functions of securities trading (i.e. listing, trading, clearing, settlement and registration—central registry operations). The CSE is fully regulated by the Cyprus Securities and Exchange Commission and, with effect from June 2009, the CSE is also a recognised stock exchange, by the UK tax authority, HM Revenue & Customs, and is thereby granted international acknowledgment as such. In July 2009, The CSE launched a new market, the Emerging Companies Market (E.C.M.), in which the first six companies listed their securities. The E.C.M. operates as a multilateral trading facility and is offered by the CSE to cover the needs of companies that want to develop further through the listing of their securities in the CSE and the achievement of their development plans. This market provides multiple benefits to the interested companies and investors, through simplified listing requirements and lower costs.

“Growth from this reality stems from the fact that regulation in Cyprus is continually updated and improved.” Particularly, the E.C.M. is characterised as unregulated and therefore it does not come under the mandatory provisions for regulated markets, which impose strict listing requirements and continuous obligations. The E.C.M. is addressed to unlisted companies seeking finance and easy access to a secondary market, as well as to investors seeking new investment opportunities, investing in companies with high prospects for development, but also high risk. Listing on the E.C.M. offers the following advantages to the companies: it is an alternative method of securing financing at a competitive cost, it promotes the recognition and reputation of the company’s international identity, and it prepares them, if they wish, to transfer to the regulated market of CSE. Cyprus is regarded as an attractive financial centre, since the pro-

vision of low cost investment funds services (i.e. fund set up, portfolio management, distribution, administration, etc) is based upon the country’s flexible business oriented regulatory framework, which is fully aligned with the European directives and international best practices. Also contributing to this is the fact that the Cyprus Company Law derives from the UK Company Law, and a strong banking sector with over forty banks providing custody, administration and other services to funds. In combination with its simplified, favourable and transparent tax regime, Cyprus has rapidly developed as a strategic investment centre in the crossroad of the three continents, providing unique opportunities for the promotion of investment funds and utilisation of all the perspective benefits derived from its effective and reliable infrastructure. Growth from this reality stems from the fact that regulation in Cyprus is continually updated and improved. Competent authorities like the Central Bank of Cyprus, the Cyprus Securities and Exchange Commission, and the Cyprus Stock Exchange have engaged in a long-term development effort to grow the investment funds sector. The long lasting commercial relationships of Cyprus with countries of the Middle East, Asia and Russian Federation have established Cyprus as an ideal domicile for fund managers from across the globe. The CSE has played a catalytic role in the promotion of funds, especially since 2004, when the Law about Open Ended Undertakings for Collective Investment in Transferable Securities (UCITS) was set into force. Moreover, the adoption of both UCITS IV and AIFM Directives, regarding the UCITS and non UCITS hedge funds entail the major challenge for the fund managers and administrators, who are seeking the most favourable location for the domiciliation of their funds and the successful conduct of their business. Cyprus offers many competitive advantages and has simple procedures for the re-domiciliation of such investment funds and their managers: the reliable, modern and flexible regulatory environment, the low business operational cost, the well developed infrastructure of providing financial services, the favourable tax regime—especially the wide network of beneficial double tax treaties—allow Cyprus to be regarded as an ultra competitive choice, compared to other European investment centres. The stock exchange is expected to continue growing over the next few years for several reasons. According to Demetra Kalogerou, “The strategic aim of the CSE is to further develop and improve its competitiveness through the continuous provision of new investment products and services, using sophisticated technology in order to satisfy the changing needs of market participants, and to meet the intensified international competition.” Many industry players believe the CSE shall continue its effort to strengthen its position. Indeed, the CSE is regarded as a favourable choice for listing securities since they can take advantage of the additional benefits CSE offers, such as tax incentives, as well as its competitive pricing policy and its trustworthiness. Transparency requirements agreed to in law will further benefit the investment funds sector in Cyprus, and contribute to the further growth of the Cyprus Stock Exchange in the near future. v

Business in Cyprus

A Window to the Past Creates a Rock Solid Present

How Cyprus remained affixed to traditional British prudence.

Private banking in Cyprus has evolved from a minor industry to play an important role in the Cyprus economy. The creation of significant wealth locally in recent years combined with continued growth in foreign funds that use Cyprus as a hub for investment and business, the high savings ratio of the local population and the growing client appetite to diversify their wealth in a variety of asset classes for investment products are important reasons. Cyprus’ tax system provides significant benefits for clients carrying out their private banking activities through Cyprus. Due to these factors, Cyprus has emerged as an important centre for International Business—the ample benefits it offers to companies desiring to expand their activities, world-class services and excellent infrastructure have all helped facilitate this growth. With its well-educated workforce, high standard of living, excellent communication systems, advanced transport and mild climate, Cyprus excels as a prime business location. Indeed Cyprus has become a ‘one-stop-shop’ for International Business, and it serves as an important hub for investors in Central, Eastern Europe, the ex-CIS countries, and, as it was many centuries ago, it has again become the perfect bridge between the Middle East and Europe. The abolition of restrictions on the movement of capital began with the official accession of Cyprus to the European Union on the 1st May 2004, as well as the adoption of the Euro currency on the 1st of January 2008. The Cyprus regulatory regime is indeed strong. The Central Bank of Cyprus maintains a constructive and open relationship with mutual understanding of the role of the regulation and its effect on banks, and vice versa. The strict liquidity requirements imposed by the Central Bank of Cyprus along with the proactive measures taken regarding the financing for real estate projects and investments in property back in 2007, has shielded the banking sector and enabled the banks to continue their profitable course throughout the years of the crisis. In contrast, some foreign banks have posted record losses during the crisis years, due to their excessive risk taking and investments in toxic products. Leading the way in private banking in Cyprus is Eurobank EFG. According to Eurobank EFG Cyprus’ CEO Michael Louis, “We began our operations in Cyprus in the summer of 2007, and in that time we have maintained a strategy to focus primarily in the Wholesale market. We are now operating in five main areas: Corporate Banking for Medium-Large size Companies; Investment Banking in co-operation with our Group Investment Banking unit in Greece; Asset Management in co-operation with our Asset Management unit in Greece; International Business Banking and finally Private Banking for High Net Worth Individuals.” During these three and a half years of operation,

Eurobank EFG Cyprus has grown rapidly and managed to become a significant player in the Banking Sector. In the Private Banking area, EFG was awarded the Euromoney award as the Best Private Bank in Cyprus for 2010 and this award was repeated for a second consecutive time in 2011. Eurobank EFG believes that this award truly reflects the quality of their Private Banking services, the Group’s technical know-how and expertise, the wide range of investment products they offer to clients and, above all, the fact that they offer personalised and discrete services of unparalleled quality. Banks across the globe are indeed treading unchartered waters and have noticed changes in the behaviour of investors. Investors are trying to diversify their investment portfolio in terms of geographic location, currency and industry sector to manage market risk. Unfortunately the risk undertaken by investors for each investment is not always tangible—a fact that became more apparent during the crisis. Larger diversification in a Portfolio minimises risk for the targeted expected return. Another important trend that has developed is that investors tend to place their funds in simple, transparent products, which they understand well. The Cypriot DTA network is rendering considerable advantages to businesses and individuals who have chosen to establish legal entities in Cyprus. These tax treaties legally supersede local tax legislation and for this reason they are useful tax-planning tools to protect businesses and individuals against double taxation of income earned in other countries. With the signing of each DTA, an increase in business to and from the other country is usually observed. Historically, the geographic position of Cyprus has always helped the island to act as a gateway for trade and commerce from Europe to the Middle East, Central and Eastern Europe. As a result of the above, a significant number of nationals of the above countries reside in Cyprus and/or visit frequently, or use Cyprus as a gateway for their international business banking activities and form a substantial target group for private banking. Above all, the major advantage that is emerging is the fact that Cyprus and its Banking sector have remained conservative and fared well in the global financial crisis. The Cyprus Banking Sector did not need and did not receive any assistance from the Government because it is strictly regulated by the Central Bank of Cyprus which as a prerequisite required banks to be well capitalised, with ample liquidity. This is a key for the way forward, because it demonstrates in the best possible way that Cyprus and its Banks have remained a pillar of stability and safety to which foreign and local investors and Private Banking clients will trust their wealth to in 2011 and beyond. v

Business in Cyprus

An International Business and Financial Centre in the Heart of the Mediterranean

Inside Perspective:

One of the fastest growing countries in the European Union, Cyprus has transformed itself into one of the Mediterranean’s most dynamic businesses and financial centres, across the gateway to three continents and offering world-class professional services in the European By Phidias Pilides, Chairman Union’s most tax-efficient environCyprus Investment ment. Promotion Agency The third largest island in the Mediterranean, Cyprus is strategically situated in the south-eastern corner Mediterranean at the junction of Europe, Middle East and Asia. Accession to the EU and the Eurozone has boosted Cyprus’ attraction as an international business and financial services centre, offering investors an EU location with easy access to large EU markets as well as emerging economies of the Middle East, North Africa, Eastern Europe and Asia. The island ranks among the countries with the lowest corporate tax rate at 10% in the EU and the Euro Area and has concluded Double Taxation Agreements with 45 countries while engaging in continuous negotiations for additional treaties. Cyprus is also listed in the OECD white list as one of the countries implementing the internationally agreed tax standard. The legal system in Cyprus is based on the Common Law of the UK and is fully harmonized with the framework of laws and regulations of the EU. Cyprus also provides an advanced transport network and telecommunications infrastructure, two International airports and three modern port facilities. Cyprus is currently one of the most attractive locations for foreign investments, ranking among the front-runners of the world for both FDI performance as well as high FDI potential. According to the Central Bank of Cyprus, in 2009, inflows of foreign direct investment totalled 4.1 billion Euros, while the corresponding figures in 2008 and 2007 were 2.8 and 1.6 billion Euros, respectively, showing an upward trend in attracting foreign direct investments.

Quality Services and Talent Cyprus’ business infrastructure development is mainly attributed to the rapidly expanding role of the services sector. A wide range of specialised legal, accounting, banking, business consultancy, auditing and taxation services are available. Highly qualified and well-trained professionals provide expert and reliable advice on all aspects of business and commercial law, at a local and international level. Many international consultancy firms have an active presence on the island. Cyprus is one of Europe’s highest investors in education with

well-educated, qualified and multilingual workforce. Today, 47.5 % of the population of working age 25-34 years has completed tertiary education, putting the island well above the EU average of 32.3%.

International Shipping Centre Cyprus enjoys an international reputation as a shipping centre in Europe. The island’s merchant fleet is growing, reaching a top 3 position in Europe and a top 10 global ranking. There are more than 2,000 registered vessels with 40 million gross tonnages. The European Union approved a new Tonnage Tax System with which ship-owners, charterers and ship-managers are exempted from income tax or any other tax on dividends paid to shareholders, on interest earned on working capital and on any profit made from the sale of a ship.

Banking, Finance and Investment Funds In 2009, Financial Intermediation services accounted for 9% of GDP and the Cyprus banking sector operated eight local banks and the presence of 33 international banks. With more than 920 branches and the employment of over 12,500 people, the sector is very well-regulated and the system is sound and liquid with a comfortable capital adequacy and sufficient profitability. The commercial banks and specialised financial institutions offer full local, national and international services in a cost-effective and flexible manner while being EU compliant. Major Cypriot banks have successfully gone through the 2010 EU-wide stress testing exercise coordinated by the Committee of European Banking Supervisors (CEBS), in cooperation with the European Central Bank, and the Central Bank of Cyprus. The global financial crisis and the expectation of the implementation of the European Commission’s regulatory and supervisory frameworks for the Alternative Investment Funds, can stimulate migration for Funds operating outside the EU. Cyprus is excellently positioned to serve such Funds as a very attractive relocation destination, but also as a Centre for the provision of EU-wide professional and financial services, related to the new regulations. Experienced and recognised Cypriot organisations provide services for International Collective Investment Schemes (ICIS) as well as offering first class international Asset Management and Private Banking services to international clients. Cyprus offers one of the world’s most globally-orientated and business-friendly environments for establishing financial and corporate structures. It has developed into a bridge of co-operation and may be used not only as an effective jurisdiction for routing investments within the EU, but also as a portal for investment outside the EU, particularly into the rapidly growing economies of Central and Eastern Europe, India and China. It is therefore justifiably considered as the gateway of Europe which continues to expand its reputation as an international centre of business excellence. v

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Business in Cyprus

Not So Common Advantages Cyprus has the progressive legislation to become a regional business hub.

What type of incorporations do you typically see in Cyprus? The Cyprus Company Law is based on the English Companies Act of 1948. Therefore the legal system and return forms are very similar to those in the UK. There are two main legal forms of Companies under the law of Cyprus: the Company Limited by shares (which is subdivided into Public companies and Private companies which are also subdivided into Exempt Private Company and Limited Private Company) and the Company Limited by guarantee. Further, section 347 of the Companies Law Chapter 113 provides for the registration in Cyprus of foreign companies under the form of a branch. Since October 2004, when Cyprus approved the complete freedom of direct investments by non-residents in Cyprus, approval by the Central Bank of Cyprus was no longer necessary for nonresidents who wished to establish a company in Cyprus, or acquire shares in existing Cyprus companies, or otherwise to invest in or from Cyprus. The same applied for direct and portfolio investments by natural or legal persons from EU member states. Also, there is no longer a distinction between local companies and International business corporations (IBCs), the profits of all Cypriot companies are taxed uniformly.

Why is Cyprus an attractive jurisdiction for incorporations? How does it compete with other low tax jurisdictions? Cyprus is, indeed, an attractive destination for incorporations and investments mainly because it manages to successfully combine various modern financial and business tools. With EU accession, dividends paid to Cyprus from other EU countries have no tax withheld in those countries. Besides the low corporate tax rates, the numerous double tax treaties that Cyprus has concluded with other countries—including with all eastern European countries—offer tremendous possibilities for international tax planning through Cyprus in view of the fact that any tax paid in a country with which Cyprus has a treaty is deducted from the Cyprus tax payable on the same income and Cyprus does not impose any withholding tax and dividends, interest and royalties paid by business companies.

How can UK based HNWI’s and corporations benefit from setting up various structures and Cyprus companies? What are you currently doing to increase business from the UK? The tax benefits of a Cyprus company are not limited to any jurisdiction. Cyprus companies, from a tax planning perspective, undoubtedly reinforce tax optimisation. Along with its taxation system, Cyprus maintains an extensive network of Double tax treaties. A Double tax treaty has also being concluded between Cyprus and UK, applicable since 1974, and aims at cultivating further business cooperation which will increase capital and cash flow between the two countries. Up until 2003, Cyprus companies were problematic in UK transactions caught under the anti avoidance provisions of the bilateral tax agreement. Such problematic transactions were eliminated af-

ter the decision of Cyprus to abolish preferential taxation of 4.25% imposed on the Cyprus International Business Companies (IBCs) and to impose a uniform tax rate of 10% applicable to all legal entities in Cyprus. Further, the most remarkable achievement of the recent past for Cyprus was the 2008 provision of exchange of information which further strengthened its transparent position. The approach of Cyprus does not only aim to increase the reliability of the foreign investors and their relevant tax authorities but at the same time it aims at increasing attractiveness for business set up in Cyprus deriving from the UK and all over the world.

With Cyprus’ strong DTA network, how can an international investor benefit from facilitating investment through Cyprus? At this stage perhaps it is worth mentioning some of the general tax features of the Cyprus jurisdiction from which investors may benefit. Besides the lowest corporation tax in Europe (of 10%), inbound dividends are not taxable in Cyprus and there are provisions under which such dividends may be exempted from Special Contribution to Defence Fund (SCDF) In turn, outbound dividends are not subject to any withholding taxes in Cyprus and they are not subject to SCDF unless they are distributed to Cypriot resident individuals. Additionally, there are no withholding taxes on interest and royalties received, no capital gains tax on the disposal of shares provided that an immovable property in Cyprus is not involved, no inheritance tax provisions and finally Cyprus has fully implemented all EU Directives obtaining in such way all the tax benefits applicable to intra-community transactions. Taking this benefit a step further, Cyprus has incorporated the provisions of the EU Directives in its national legislation which means third countries can be equally benefited. In addition to this, the use of a Cyprus holding company is the most popular practise of tax optimisation for foreign investors. Furthermore there are various other legal proposals which can serve the purpose of international investors i.e. Cyprus international trusts, international collective investment schemes etc.

What services does Christodoulos G. Vassiliades & Co. LLC offer in terms of incorporations? We pride ourselves in being a full service law firm which can provide a wide range of services to our clients. This means that an investor can incorporate and run his company quickly and efficiently using the in-house services provided by our firm in order to maintain the company in good standing from all aspects, without having to obtain these services elsewhere. We have an internal banking department, tax consultants and a litigation department as well as closely related accounting and audit firms available to cater to our clients at any time. v By Christodoulos G.Vassiliades, Managing Director Christodoulos G.Vassiliades & Co. LLC

Business in Cyprus

MarketTalk with Deloitte Highlighting the benefits of Cyprus as an International Tax Planning Centre.

What are the major advantages of the Cypriot tax regime for the international investor? Cyprus is an attractive jurisdiction to create tax efficient international corporate structures. Certain provisions of the domestic tax legislation combined with a wide network of double taxation treaties with forty four countries and the implementation of the EU Directives, offer to international investors a particularly attractive framework with low overall taxation maximising the return on their investments. Specifically, dividends received by Cypriot companies and profits of their foreign permanent establishments are completely exempt from tax under certain conditions. Gains of Cypriot companies from the disposal of shares, bonds, other securities and a wide range of financial instruments are also exempt. Interest rate spreads of financing company structures can be very low and are taxed at the low rate of 10%. Moreover dividends and interest can be paid to nonresident shareholders and investors without any withholding tax in Cyprus and unilateral credit relief is available for tax withheld abroad regardless of the existence of a double tax treaty with the respective country. When all of these favourable tax conditions are combined, they create an extremely attractive platform for international entrepreneurs for investment holding and financing operations, the establishment and management of funds, for holding and exploiting intellectual property rights, for shipping activities and for trading in commodities and in the international stock markets.

What changes and growth have you seen in the last two years with regards to Cyprus being used for international tax planning purposes? Because of the tax advantages mentioned above, Cyprus has emerged during the last eight years as one of the most favoured holding company jurisdictions offering significant opportunities for the design and implementation of smart tax planning schemes. Due to the global financial crisis and its impact on international trade, business transactions, cross border investments and M&A activity, the conditions in the international markets during the last couple of years were not so favourable and growth in the international business sector was low. However, despite the drop in new company registrations observed at the end of 2008 and during 2009, the numbers started picking up in 2010, when Cyprus experienced growth compared to 2009 and the forecast for 2011 appears even more promising. Growth has been observed during the last two years also in the licensing of new Cyprus Investment Firms (“CIFs”), the registration of foreign Undertakings of Collective Investment for Transferable Securities (“UCITS”) for the marketing of their units in Cyprus and new notifications were received by harmonized UCITS Management Companies whose home country is an EU Member State concerning the cross-border provision of services in the Republic. The number of International Collective Investment Schemes established in Cyprus and regulated by the Central Bank of Cyprus has also marked significant growth.

How does the extensive Double Taxation Treaty network of Cyprus help to drive business and facilitate international investment?

Nicos S. Kyriakides Head of Financial Advisory Services Deloitte Limited

The driving factors come from a combination of the extensive Double Tax Treaty Network, the EU Directives and the attractive provisions of the domestic tax law. Cyprus can play a very important role to facilitate international investors trying to access international capital markets. Despite the comparatively small size of its economy on the global stage, with the attractiveness of its tax regime and the legal and other financial advantages it has, Cyprus offers a tax efficient route and a robust legal framework for businessmen seeking an intermediary location for investments abroad and one of the best platforms to facilitate the flow of inbound investments into a number of attractive and developing markets and in particular the vast Russian and Indian economies. The Company Law framework has recently been amended to enable also the establishment of societas europaea, cross-border mergers and the transfer of the legal seat of a company to and from Cyprus. All the above constitute some of the main reason why Cyprus appears as one of the most significant investors in the Russian economy. The Russian Government appears to be determined to attract foreign investment by creating a favourable environment for the re-investment back into the country of Russian capital, which is abroad and the establishment of favourable conditions for attracting foreign investors in general. Russia is one of the largest economies in the world and an important trading partner and energy supplier for the EU. Cyprus can play a very important and active role in the efforts of the Russian Government and the Russian business community to attract foreign investors in Russia. It can serve as a bridge between Russia and the rest of the world, through which vast amounts of investment traffic into Russia can flow. The visit of the Russian President at the beginning of October 2010 and the signing of the protocol amending the Double Taxation Treaty with Russia has lifted a lot of the uncertainty surrounding the future of the Treaty and the development of inbound and outbound investments from Russia through Cyprus. President Medvedev has effectively given an official blessing for the development of such business opportunities. Other territories which attract investments through Cyprus structures are most of the central and eastern European countries, the Middle East and India. Cyprus holding companies are often used as the vehicles through which important Groups are listing on International Stock Exchanges shares, bonds and other instruments and we have a number of examples for listings on the London Stock Exchange, the main market and AIM, as well as the Stock Exchanges of Warsaw, Tel Aviv, Bratislava and a number of others.

How do you see foreign companies and HNWI using the superior DTA network of Cyprus? Cyprus has an extensive network of Treaties for the Avoidance of Double Taxation with forty four countries and a number of other treaties are currently being negotiated. The DTA network of Cyprus includes all central and eastern European countries, as well as the CIS countries and a number of these treaties contain some very favourable provisions and low withholding tax rates for extracting income in the form of dividends, interest and royalties from the foreign jurisdiction.

Business in Cyprus The number of foreign companies and High Net Worth Individuals who will be using the extensive network of Cyprus DTAs is expected to grow. As already mentioned the structures which can be used to provide benefits are for investment holding and financing operations, the establishment and management of funds, for holding and exploiting intellectual property rights, for shipping activities and for trading in commodities and in the international stock markets. In addition to the advantages and benefits mentioned above HNWIs can use Cyprus International Trusts in designing their tax optimisation structures to ultimately hold the investments they can gather under a Cyprus holding company structure belonging to the trust.

Cyprus has recently passed some legislation around UCIT’s and funds. Why would Cyprus be an attractive jurisdiction for international investment funds? Cyprus is indeed launching a strong bid to become a base for International Collective Investment Schemes (“ICIS”). Over the past ten years the island has been used by Collective Investment Schemes based in the well established fund centres like Cayman Islands, Luxembourg and Ireland to invest heavily in Eastern Europe, Russia, the CIS, the Middle East and India. Taking advantage of the provisions of the domestic tax legislation, the favourable Double Tax Treaty network of Cyprus with these territories and the ability to benefit also from the EU Directives, Cyprus entities were used in a “Two-tier Fund” structure as the investing vehicle to invest on behalf of the parent/the fund. The structure is known as a “Feeder Fund”. Although Cyprus caters for UCITS, which are under the supervision of the Cyprus Securities and Exchange Commission, it is also well placed to host non-UCITS funds, known as ICIS. The law in force for ICIS, which are under the supervision of the Central Bank of Cyprus, was established in 1999 and allows ICIS which are established and based in Cyprus to enjoy a number of tax and other benefits, which can positively impact on their performance. ICIS, which can either be of limited or unlimited duration, under the Cyprus law can take one of four different types of entities; Fixed or Variable Capital Companies, Unit Trusts and Limited Partnerships. Building on the reputation of a top-tier financial jurisdiction and its involvement in the structuring of international investment funds, Cyprus is now seeking to take a more prominent role in the fund industry arena and promote itself as an ideal location for the establishment of investment funds, both EU regulated Undertakings of Collective Investment in Transferable Securities (“UCITS”) and alternative investment Funds. The Authorities believe and we share and support this view that Cyprus has the know-how and the necessary ingredients to develop the infrastructure through a competitive pricing policy, a reliable banking sector and the support from experienced professionals, which are the basic requirements to build this industry. The attraction of international investment funds, fund managers and the providers of other services connected with this sector will contribute towards achieving more integration and strengthen even further the position of Cyprus as an international financial centre.

What trends do you see for 2011 in terms of international tax planning in Cyprus? What is Deloitte Cyprus’ plans and focus for 2011? Following the effects of the Global financial crisis the Global economy is undergoing certain restructuring and consolidation, being rebuilt on more solid foundations; on the strong and healthy industrial and commercial business units that have survived and hopefully on a more effective regulatory environment, closely monitored and su-

pervised by the regulating bodies. In an effort to inject funds in the economy, government spending on infrastructural projects is also expected to rise. As the world economy is slowly recovering from the crisis, the prospects of business development are expected to be more dynamic and promising. More acquisitions and cross border transactions are anticipated which will unavoidably increase the need for proper and tax efficient structuring for those deals. The Cyprus Business Community is closely watching global developments with particular emphasis on the European and Russian economies. The financial and banking systems of Cyprus have demonstrated a high degree of resistance towards the crisis, by having low exposure to subprime financial instruments, thus maintaining strong and healthy liquidity and capital adequacy ratios, unlike other financial institutions worldwide. The Cyprus banking system, which is under the effective supervision of the Central Bank, is in a position to continue servicing global demand by providing a secure shelter for deposits and other liquid funds. Cyprus can offer efficient and attractive solutions for those who want to take advantage of the challenges and opportunities which appear on the global markets. We expect the demand for international tax planning connected to Cyprus to be linked to listings on London and other European Stock Markets of Groups from recovering economies of Eastern Europe, Russia, Ukraine and the rest of CIS, shipping and shipping related activities to take advantage of the new tonnage tax regime and the establishment of funds and CIFs. It will be considered a great success for Cyprus, if we manage to direct part of the outbound investment from China into Europe and Russia through our country. Another sector on which we will concentrate our efforts during 2011 is the renewable energy sector. A number of significant projects have started and a number of others have been licensed and are now at the stage of seeking finance and investors. The size of these projects certainly requires investment from abroad. We are heavily involved in providing financial advice in this field and are hopeful that a significant number of Green Energy MWs will be financed and commissioned in Cyprus during 2011 facilitating Cyprus towards achieving its objectives in this area. Business success in today’s rapidly changing global environment requires the ability to rely on your business partners. At Deloitte, the multidisciplinary environment, the expertise of the staff, combined with an industry-focused approach, enable the firm to offer integrated business solutions to its clients. Deloitte offers professional services in auditing, accounting, tax, financial advisory, and consulting, and provides the link for investors looking to establish a company in Cyprus. We undertake to advise our clients on how to create a tax efficient corporate structure by exploiting the vast resources of the international network of Deloitte; we support our clients to establish a company in Cyprus and we provide all the required services to enable them to operate their companies efficiently and in compliance with the requirements of the law. Furthermore through our Financial Advisory and Corporate Finance service lines we offer M&A advisory, Financial and Tax due diligence work, project and company valuations and listings in international stock markets. Our primary objective is to provide quality services to our clients and to become their trusted financial advisors. v Contact Information: Limassol Tel: +357 25 868616 Mob: +357 99 611827 Email: nkyriakides@deloitte.com

Nicosia Tel: +357 22 360300 Email: infonicosia@deloitte.com Larnaca Tel: +357 24 819494 Email: infolarnaca@deloitte.com

Business in Cyprus

The Wind of European Shipping A vital hub for Centuries, Cyprus extends its reach.

The Cyprus flag is a high quality flag, offering a considerable number of important advantages to ship owners who register their vessels on the Cyprus registry. One key advantage is the extensive network of local inspectors of Cyprus ships, covering important ports worldwide in order to ensure efficient and effective control of Cypriot vessels and to avoid detentions by port state Mr. Serghiou control, resulting in fewer inspecDirector Department of Merchant Shipping tions of the ships and less delays at the ports of both MoUs and the USA. Cyprus also has bilateral agreements with 23 countries, through which Cypriot ships receive either national or favoured nation treatment in the ports of those countries. The economic benefits of the Cyprus registry are multifaceted. An EU flag with a competitive tonnage tax scheme based upon the ship’s net tonnage will likely save owners double-digit percentage points. There is no tax on profits from the operation, chartering or management of a Cyprus registered vessel, on dividends received from a vessel owning, chartering or management company, on interest earned on the working capital of a Cyprus tax resident shipping company and on the income or profit made from the sale of a Cyprus ship. Low fees exist for ship registration and for other registry transactions, and treaties are in place to ensure avoidance of double taxation with 45 countries. These important advantages are complemented by low set up and operating costs for companies looking to register in Cyprus. The Cyprus flag has been removed from the Black List of the Tokyo MoU in 2001 and that of the Paris MoU in 2005. During 2009, a new success for Cyprus was accomplished. The Cyprus flag was removed from the ‘List of Targeted Flag States’ of the US Coast Guard, as a result of achieving a three-year moving average detention ratio far below the respective average Coast Guard flag Administration ratio. Therefore, the Cyprus flag is considered today among the highest quality flags in the world, and consequently, it is classified in the White List of the above MoUs. The above success is the outcome of a systematic and intense effort of the Department of Merchant Shipping, for the improvement of the quality of the Cyprus fleet and the image of the Cyprus flag. The new tonnage tax system for Cyprus merchant shipping was approved by the European Commission in March of 2010, as compatible with the requirements of the EU acquis, in accordance with the 2004 guidelines on State Aid to Maritime Transport. The signifi-

cance of the approved system lies in the fact that it goes far beyond any other tonnage tax system approved in the EU and compares favourably with similar systems of leading maritime centres outside Europe. The new system enhances the competitiveness of ship owners, ship managers and charterers, encourages the employment of European personnel and the maintenance of shipping know-how and gives a new impetus to the growth of the shipping sector. Taxation is calculated on the basis of the tonnage of the ship instead of the income generated. The tax will be charged on the basis of the net tonnage of the vessels. Owners of Cyprus ships will continue to be automatically taxed with tonnage tax. Ship owners, charterers and ship-managers participating in the tonnage tax system are also exempted from income tax or any other tax or levy on dividends paid to shareholders, on interest earned on working capital and on any profit made from the sale of a qualifying ship. The simplified tonnage tax is not linked to a notional income or a corporate tax rate. This is the main feature of the Cyprus system and is approved for the first time for EU Member States, particularly a state with an open registry. The tonnage tax base is extended to include profits from the sale of vessels, interest earned on funds used as working capital and dividends paid directly or indirectly out of profits generated from maritime activities. It is clear that the new regime contributes toward a safe, competitive and stable environment for shipping companies, which is essential for their growth and expansion. The system therefore provides Cyprus with a competitive advantage and is expected to improve the already strong position of the country in the shipping world and to promote it both as a thriving international registry, and a quality maritime centre. At the same time, the tonnage tax secures a stable fiscal environment for Cyprus shipping for the long term. It also introduces incentives for new shipping activities and extends the implementation of the EU maritime transport policy beyond European boundaries. In 2011, the Department of Merchant Shipping will also be focused on promoting the new tonnage tax scheme abroad. The existing legislative and administrative framework in Cyprus already offers a variety of incentives to ships flying the Cyprus flag, which they can utilise in order to enhance their competitive position. It is expected that many new companies will be established in Cyprus in order to take advantage of this new favourable taxation system, as this has been seen as a major growth opportunity by international shippers, and Cyprus itself. The government of Cyprus shall maintain its policy of ensuring Cyprus’s leading role as a maritime centre and to continually develop the maritime cluster and upgrade the Cyprus registry in terms of both quality and quantity in years to come. v

Business in Cyprus

Shipping News: PwC A practical look on the effects of new shipping legislation in Cyprus. What advantages does the newly EU approved shipping tonnage tax scheme present? What improvements have been made? The legislation is a major success for the Cyprus shipping industry and offers new opportunities. It introduces two new TT schemes applicable to ship-owners of non-Cyprus flag vessels and for the first time to charterers. It also extends the application of the TT regime (and exemption from profits tax) currently enjoyed by ship-owners and ship-managers; amongst others, it grants exemption of interest received that relates to the working capital of the company and extends the exemption of the profit on sale of ships. Another important change is the fact that shipping companies whose income is all subject top tonnage tax, will now be completely regulated by the Department of Merchant Shipping and not the Income Tax Office. Taking advantage of the opportunities offered by the new shipping legislation does not necessarily entail complex group restructurings and transfers of mortgaged vessels that are difficult to implement. There are ways of achieving substantial tax savings such as changing the flag of vessels, redomiciliation/change of residence of existing companies, or amendment of the existing operations, that are easier and quicker to implement. The opportunities are there and we can help our clients capitalise on them. How will this new tonnage tax scheme impact Cyprus as a shipping centre worldwide? The new legislation places Cyprus in a very competitive position. Cyprus has become the only EU country with an EU approved TT system that: (a) provides for TT on the net tonnage of the vessels rather than Corporation Tax on the actual profits, regulated by the DMS rather than the Tax Authorities (b) grants total tax exemption of profits tax and distribution tax at all levels (c) allows mixed activities within a company/group (shipping subject to TT and other subject to 10% corporation tax) (d) supports an open registry (e) allows split shipmanagement activities (crewing or technical) Can a Cyprus shipping company have non-shipping income without affecting its shipping exemption? If yes, how is this taxed? Absolutely and it is the only EU country that has an EU approved system that allows this. Such income is taxable at the lowest corporate tax rate in the EU (10%). The following general tax provisions in the Cyprus tax legislation, enhance the attractive shipping tax regime and render Cyprus an ideal location for the non-shipping activities of shipping groups: • General corporate tax rate of 10% (lowest in the EU) • Full tax exemption on disposal of shares and similar titles • Zero taxation on dividends received (subject to minor restrictions)

• Z ero WHT on all payments of dividends, interest and royalties to non residents • No CFC legislation • No thin capitalisation rules • Tax neutral reorganisations for both EU and non EU group companies • Full adoption of all EU directives • Extensive double tax treaty network What are the tonnage tax rates? The law provides full exemption to ship owners, charterers and ship managers from all profit taxes and imposes tonnage tax on the net tonnage of the vessels at the following rates. Shipowners & charterers Shipmanagers Units of net tonnage

€TT per 100 units

€TT per 400 units

0-1.000

36,50

1.001-10.000

31,03

10.001-25.000

20,08

25.001-40.000

12,78

>40.000

7,30

What is the industry currently doing to stay ahead of competing jurisdictions? What challenges do you see for the Cypriot shipping industry over the next year? Emphasis is given on continuous improvement of the existing infrastructure, the incentives given to individuals and companies operating in the shipping industry and the enhancement of the reputation of Cyprus. Also to increase the number of Cyprus Maritime offices and inspectors, offering services to Cyprus ships worldwide. Cyprus is a signatory to all international maritime conventions and has bilateral agreements on Merchant Shipping with 23 countries and looking for more. Of course the major challenge facing the industry in Cyprus is the continuous embargo on Cyprus ships by Turkey despite the attempts of the EU to stop this. What is your opinion of Cyprus shipping? Cyprus is already an established international and maritime centre within EU and globally with some of the world’s more prominent ship management companies based and operating from Limassol. Despite Cyprus Ship Registry being an open registry, we have a large number of companies established in the Island with shipping related activities such as marine insurers, brokers, suppliers etc. All the advantages mentioned and the commitment shown by the DMS and the private sector for high standard, efficient and qualitative service can only send a positive and optimistic message about the future of Cyprus shipping. v Cleo Papadopoulou, Partner Liakos Theodorou, Partner George Lambrou, Partner

www.pwc.com/cy

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We aim to offer you the value you are looking for. Value based on knowledge that our teams draw from 161.000 experts in 154 countries. But also on experience adapted to local needs. We focus on three main areas, audit, advisory and tax services. We work closely with you. We ask you. We listen. We learn what you want to do. Where you want to go. From all our international knowledge, we share the part that is suitable for you. And so we support you on how to achieve your own goals.

©2010 PricewaterhouseCoopers Ltd. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Ltd of Cyprus, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.