Black list.
As a result the island has managed to get itself removed from all tax blacklists published by EU member states and other rich nations. Spain, the lone EU holdout, removed Cyprus from its tax blacklist after the two countries signed an accord in 2009. Meanwhile Russia, one of the principal non-EU sources of inbound investment into Europe via Cyprus, removed the island from its own blacklist after the two signed a new double taxation avoidance agreement in April of 2009. Despite its new found respectability, Cyprus maintains just a 10% corporate tax rate, which along with Bulgaria, amounts to the lowest rate among full EU member states, and is among the lowest in Europe. With a geographically advantageous location between Africa, Europe and the Middle East - the island is regularly touted as a 'bridge between three continents' -- shipping is deemed a priority industry, and as such enjoys full tax exempt status.
Double tax.
Though tax reform and EU accession shifted the core of Cyprus' large financial services industry away from traditional offshore activities, such services are still offered by numerous firms. Onshore and offshore companies alike are subject to the 10% tax, but Cyprus's nearly 50 double tax treaties - among the highest number signed by any other OFC - including one with China, help to minimize tax exposure for companies working from the island. Meanwhile, unilateral tax-relief is granted to all Cyprus-registered companies for foreign taxes suffered irrespective of the absence of a double tax treaty. As one Cypriot advisory, Focus Business Services, notes: "Trading from a low-tax EU State such as Cyprus and using appropriate tax structuring to mitigate Cypriot tax, sometimes to levels well below 10%, is a far superior strategy nowadays than trading through an offshore company Catching up.
While creative accounting and registry practices can as always serve to minimize tax exposure, Cyprus is not likely to catch Hong Kong, Singapore, or the Seychelles anytime soon as a popular destination for off-shore activities among Chinese clients, said Hazel Zhu, director of the Shanghai office of OCRA Worldwide, a financial services firm with offices in both China and Cyprus. The primary appeal of Cyprus as a desti-nation and conduit for outbound investment, especially from Asia, is its proximity and access to European markets, something the Cypriot government is actively trying to promote, explained Andreas Athinodorou, who serves as chairman of the Cyprus Investment Promotion Agency's Funds Services Committee. The island is seeking to define itself as a "funds jurisdiction," he said. Cyprus has also recently become one of the top five holding destinations internationally, noted Athinodorou, who is also the CEO of Aspen Trust, a Cypriot financial services firm which assists foreign clients in a range of services including tax planning and the establishment of holding companies. While such services are especially popular among Russian and Eastern European clients, the last 18 months have seen a major uptick in interest among Chinese clients seeking Cypriot services, with activity accelerating in the last 6 months especially, said Athinodorou.
Capital gains.
Contributing to Cyprus's appeal as a jurisdiction conducive to the establishment of holding companies is the lack of tax on all capital gains, except those derived directly from the sale of immovable property located within Cyprus (which is taxed at 20%). Exemptions from taxes on capital gains made from all foreign stock and real-estate purchases have led a number of firms, including Aspen Trust, to expand into private wealth management services catering to high net worth individuals. Such services may be especially appealing to Chinese clients.
Keeping reliable.
Just as Europeans see Hong Kong as a stepping stone for investment into Asia, Cyprus, with its low taxes, robust financial services sector,reliable legal system and EU membership is increasingly positioning itself as the premier stepping stone to Europe, said Athinodorou. However, according to Hazel Zhu at OCRA, the British Virgin Islands still remain the most popular location for the establishment of holding companies by Chinese clients seeking access to European markets. Recent financial turmoil in Europe, and especially in close ally and trading partner Greece, has cast some doubt on the European project as a whole, especially the guarantee of financial stability that EU membership was supposed to convey on member states.
But while Cyprus was used extensively in structures for real estate, which took a major hit during the financial crisis, Cypriot banks had little exposure to toxic credit, and many became cash rich overnight as money left England, Spain and Greece. With its close economic and political ties, the island actually appears well positioned to benefit from a new wave of investment rushing into Greece, as the country seeks to shore up its financial situation through a surge of major infrastructure projects, much of which will be funded by international investment. The interest of major Chinese investors has already been piqued, and this could lead to a rise in Cyprus' popularity as a holding company destination among Chinese clients. "Greece is rushing to attract investment from countries with big sovereign wealth funds to help revive economic growth," wrote Kerin Hope of the Financial Times recently.
Joint ventures, shipbuilding deals, and charter agreements worth an estimated $615 million were announced during a recent visit to Athens by a delegation led by Zhang Dejiang, a Chinese vice-premier, the article noted. Chinese state shipping company Cosco, already in control of a Piraeus shipping terminal under a multi-billion dollar long term deal, is expected to enter into a joint venture later this year to establish a logistics hub near Athens for an estimated several-hundred million dollars.
Piggy back.
Chinese clients may see an unprecedented opportunity to piggy-back off this wave and benefit from Greece's attempts to right its faltering economy. But Greece still has one of the highest tax rates in Europe. Cyprus, with its low taxes and a plethora of financial firms with long histories of involvement in Greek investment projects, is likely to emerge as the logical point of entry. Furthermore, the island has demonstrated its willingness to adapt under the watchful eye of the OECD. As Europe seeks to stimulate its faltering economies, Cyprus may be just what they need.
