For Russia, Cyprus is a number one off-shore jurisdiction. Cyprus annual income from off-shore business is about 400 million dollars. This is why the fact that Cyprus has bought military equipment from Russia can be viewed as an attempt by Cyprus to bring its relations with this country to a new level. Cyprus has become an important strategic partner for Russia’s foreign policy not only in the Mediterranean but throughout Europe as a whole. Washington and Turkey, however, don’t welcome such relations between Cyprus and Russia.
What does all this mean for the owner of an off-shore firm? First of all, the deliveries of military equipment proves that official and unofficial ties with Cyprus are not accidental. This means that principles of economic relations (including off-shore aspects) won’t undergo serious changes.
Of course, Washington’s attitude doesn’t contribute to the stabilisation of the situation in the region. However, in this particular case, Washington can’t do much. Cyprus is a sovereign democratic state. Besides, the island enjoys support from Greece. Since Greece is a NATO member, its opinion can’t be neglected now, when the block is trying to expand to the East. It is not in Washington’s interests to aggravate the situation in the region. Most of the European countries sympathise with Cyprus. The US also has its own economic interests in Cyprus. It’s doubtful that Turkey, which controls 37 per cent of the island, will start any kind of military activities. Cyprus is considered to be a very stable politically jurisdiction with a financial sector that meets all the international standards.
Thus, one can be sure that Cyprus and its off-shore sector will remain a favourable sphere for Russian business. Of course, there are some tax agreements between these two countries. It’s very likely that Cyprus will remain for quite some time a legal hideaway from taxation for Russia. It is one of the few places in the world where the position of Russia and its capital is rather stable.
The basis for co-operation between the two countries is an agreement which helps to avoid double taxation. Among all of Russia’s agreements, the one with Cyprus is considered to be the most liberal. This agreement includes all the Cyprus companies (including off-shore companies) which operate in the Russian Federation. The income tax is ten times less than that levied on regular Cyprus companies and is only 4.25 per cent. Thus those Cyprus firms which operate in Russia have an opportunity to considerably decrease their tax losses. Provided only that their activities do not form a permanent representation, agency, because then, the enterprise would have to pay taxes as any other Russian company. However, in that case, taxes are levied only on the income from the activities of a permanent representation, agency. It is almost impossible to separate an agency’s activities from the independent activities of the mother company.
This agreement eliminates taxes on income received in the form of dividends, royalty payments (for the use of authorised rights, inventions, technological knowledge, know-how) etc. The Cyprus jurisdiction is unique. Firms in Cyprus are perfect for operations of foreign trade, holdings, shared funds, trusts, banks, ownership of ships and navigation. They can be used for construction, real estate investment, intellectual property management. Let’s discuss a few major types of commercial operations which are executed with the help of Cyprus off-shore jurisdiction.
OPERATIONS WITH SECURITIES
The advantage of operations with securities via Cyprus firms is the fact that income accumulates on the accounts of Cyprus companies and, thus, can’t be taxed by the Russian Federation authorities. Deals are stricken by the agents or brokers under a written power of attorney. There is a special paragraph in the agreement which says that "a person who has permanent place of residence in one of the contras (parties) to the agreement won’t be regarded as having a permanent representation in the other country only because he performs some market operations".
To understand this, one should analyse off-shore practice and other tax agreements. In accordance with the agreements between Russia and the USA, Great Britain and other countries, agent’s activity is not regarded as permanent representation, if the agent has an independent status. Thus a broker or an agent operating in the interests of a Cyprus company is not its permanent representation. Thus, only regular off-shore taxes are imposed. This conclusion is proved by the business practice.
CONSTRUCTION
Thanks to the agreement very favourable are construction activities. Any construction activities with a period of less than twelve months are not considered to be a permanent representation and, thus, are tax exempt in Russia. Cyprus construction companies are good for both the building of cottages and the building of large industrial enterprises.
SHIP OWNERSHIP AND SEA TRANSPORTATION
Recently Cyprus has become one of the largest sea business centres in the world. The shipping of its fleet is the sixth in the world. Cyprus ship owners usually have an off-shore status. Cyprus is widely used by Russian and CIS ship-owners. All the income from exploitation of the ships is tax exempt. There are several advantages of registering ships in Cyprus. The registration is low and other expenses and acceptable international status of the Cyprus fleet.
Cyprus is a member of a number of prestigious European and international organisations. This is Cyprus’s advantage over Panama and Liberia. International status plays a very important role whenever we speak about expensive and prestigious projects. The Cyprus Department of Navigation inspects all the ships which have been exploited for over 17 years.
For Russian ship owners very important is an agreement signed with Cyprus on sea navigation. Since 1990 the conditions for navigation are most favourable. According to the agreement Cypriot ships (as well as Russian ships in Cyprus) while entering ports or territorial waters enjoy the same rules and privilege as the native ships of the country. This agreement allows to conclude that mutual interests in the field of navigation have an official status and are approved on an international level.
INSURANCE COMPANIES
There is a wide range of opportunities for registering off-shore insurance companies in Cyprus. They are of two types. Like in other off-shore jurisdictions, captive insurance companies are registered in Cyprus.
They have the right to provide services only to their shareholders and their associated companies. There is almost no insurance control. The minimal paid-in capital is 10,000 Cyprus pounds. Insurance companies which have full rights are registered in Cyprus as well. Their minimal capital is 200,000 Cyprus pounds. Such a company must have a special license and present a business-plan of its activities. There are no limits on the activities as long as they correspond to the business-plan, and according to the type of risk companies receive corresponding licenses.
INTELLECTUAL PROPERTY
There is an article in the tax agreement with Cyprus which does not get the attention it deserves. Realisation of projects, construction and scientific research, engineering and testing don’t form permanent representation. There is a similar agreement with the Netherlands, but in that country there is an exemption: off-shore firms cannot be registered in the Netherlands. There is another peculiarity in the agreement between Russia and Cyprus: royalty payments, dividends and interest is tax "at source" exempt.
Such an innovation as royalty payments does not exist in the Russian legislation. Authorised rights and license payments are included into payments for services connected with the sale of intellectual property and for those connected with industrial experience sharing, knowledge and secrets of production, and know-how. This is another argument for the creation of an off-shore structure for companies which are eager to innovate and introduce some know-how.
HOLDING COMPANIES
A Cyprus holding is a convenient tool for investing in Russian securities, since dividends are tax ‘at source’ exempt. To be exempt you need to go through some formalities.
With a Cyprus holding you can invest not only stock but in real estate as well. Income tax rate is only 4.25 per cent. Income from re-evaluation of holding property is tax exempt. A Cyprus holding company is often used as a central unit of the international financial and investing schemes. This is mainly because of the number of agreements to avoid double taxation. Cyprus has signed such agreements with Austria, Bulgaria, Great Britain, Hungary, Germany, Greece, Denmark, Ireland, Italy, Canada, China, Kuwait, Norway, Rumania, the USA, France, Czechoslovakia, Sweden, Yugoslavia. Recently three more agreements have come into force with India, Malta, and Syria. The agreement with India has been ratified.
From these countries, only Great Britain, the USA and France included an article in their agreements which excludes off-shore businesses from tax benefits. It is not very typical for the world practice, since off-shore companies are not included into an agreement regime. This fact makes Cyprus an exception and a unique centre of international taxation planning.
Certainly Cyprus is not a tax free country it is rather a jurisdiction with a low tax level. In many aspects Cyprus is an optimal basis for the development of international branches and representations of Russian holding and financial industrial groups. At present the Russian Federation is working hard to conclude and prepare for practical use intergovernmental agreements to avoid double taxation when doing business with other countries. This work was started by the Soviet Union, from which Russia inherited 21 tax agreements. Among them there are two multilateral agreements with the countries - members of the Economic Co-operation Council.
Russia also used experience gained by such organisations as the United Nations and the Organisation for Economic Co-operation Development. The latter in the past few years has become a recognised adviser to the international community in the field of international taxation. Most countries use the convention to avoid double taxation worked out and suggested by the OECD. This convention is in a constantly being improved. International tax agreements are the basis for international relations in the sphere of taxation. These agreements are usually bilateral. However, there are several multilateral agreements, for example the Andes Treaty, Nordic Treaty, an agreement signed on the 27th May 1997 which frees the income of natural persons from double taxation and a similar agreement for juridical persons signed May 19th 1978 between countries - members of the Economic Co-operation Council There are also agreements concerning special kinds of business activities (sea, river, air and auto transportation).
The main purposes of these agreements are the following:
a) avoiding double taxation: a businessperson would not have to pay taxes in either the country of his permanent residency or the country where they do business;
b) preventing tax evasion;
c) distribution of tax rights and obligations between the states - parties to the agreement;
d) precise wording of the taxation procedures in the states - parties to the agreement;
e) developing trade, economic, cultural and scientific co-operation between the parties.
These agreements serve these purposes and encourage international investment and trade. These agreements can also be used to enjoy tax benefits, which are usually provided for developing countries (grants, charities etc.).
To avoid double taxation the government of the Soviet Union and the government of Cyprus signed a special agreement on October 29th 1982. Let us now discuss the most popular financial planning agreement articles.
INCOMES FROM AUTHORISED RIGHTS AND LICENSES
1. Payments for the use of authorised rights and licenses, received from a source in one country by a person whose place of residency is the other country, is tax exempt in the former country.
2. Payments for the use of authorised rights and licenses is considered to be, in this article, and payments received for the use of:
a) authorised rights on the works of art, literature, or science;
b) inventions, rationalisation proposals;
c) industrial and socially useful samples;
d) trade marks and service logos;
e) company names and similar property;
f) computer programs (software);
g) tapes for production of playback items;
h) tapes and films used for radio and television broadcasting;
i) know-how.
3. Rules of the article are also good for payments:
a) for sale, use, and giving the right to use single samples, if industrial, trade, or scientific;
b) for technical services, if these payments correspond to this article.
DIVIDENDS
1. Dividends received in the country - party to the agreement by a person whose permanent place of residency is the other country, is tax exempt in the former country.
2. This does not concern taxes levied on the incomes from which dividends are paid.
3. For the purpose of the agreement, the term ‘dividend’ means any income received from stocks, shares and other similar rights.
INTEREST
Interest received in the country - party to the agreement by a person whose permanent place of residency is the other country, is tax exempt in the former county. The term "interest" in this article means any income from loans, bonds, deposits etc. or any other income which for the purpose of taxation correspond to the rules of the article.
TAXATION OF PROPERTY
1. Real estate (belonging to a person whose place of residency is a country - party to the agreement) located in the other country, is taxed only in the country where it is located.
2. For this agreement the real estate is a property which is recognised as such by the country - party to the agreement where it is located.
3. Movable property, which belongs to a person whose permanent place of residency is one country - party to the agreement and which is located in the other, is taxed only in the former country.
While working out a financial plan special attention must be paid to Article 3 of the section on "Taxation of property". According to Articles 128 ,130,143 of the Constitution of the Russian Federation, money and securities (shares, stocks, bonds, etc.) are considered movable.
Besides this, in accordance with Regulation No.34 of the State Tax Service of the Russian Federation (STS) issued on June 16th 1994 on «Taxation of income of foreign juridical person» (STS letter edition 29-12-95 ? B-36-06/672), «1.5. A foreign juridical person is regarded as having a permanent representation if they perform business activities in the RF via a Russian organisation or a natural person, who represents their interest in the RF and acts on behalf of that foreign juridical person». However, if this Russian organisation or a natural person acts within the framework of its main or usual occupation, then this organisation or natural person is not regarded as a permanent representation of a foreign juridical person. If a Russian organisation or a natural person acts not only within the framework of its main or usual occupation, but also as a person entitled to sign contracts and represent the interests of a foreign juridical person in Russia, then it is regarded as permanent representation of the foreigner. Thus, Cyprus firms are becoming promising in the secondary securities market when operating via a Russian licensed broker.
However, according to the Russian Ministry of Finance, tax privileges for foreign juridical persons are provided only after following statutory procedures. These procedures are established by the above-mentioned Regulation No.34. Thus, according to Article 5.1, income paid to foreigners from sources in the Russian Federation are taxable. All proceeds go to the state budget. Tax exemption occurs under the following conditions:
- if a person has the fourth duplicate of the tax exemption declaration (form 1013 DT);
- in case of short-term payment by a foreign bank to a Russian bank, if they are included in Article 6.3 of the Regulation;
- if a person has the third duplicate of the foreign juridical person’s income statement in the Russian Federation (form 1011 FE) with the note of the corresponding taxation body on receiving the first duplicate of the tax exemption declaration;
- if a tax agent by the date the taxes are due does not present the above-mentioned documents then the taxes will be withheld in accordance with the corresponding Russian legislation.
If the money is not transferred to the state budget in accordance with the established regulations, they will be withheld by the State Tax Service, while conducting the revision of documents. The above-mentioned regime is established after a letter from the State Tax Service, Article 7 of the Law of the Russian Soviet Federate Socialist Republic drafted 21st March 1991 ? 943-1 (as amended), Article 14, Paragraph 2 of the Law of the Russian Federation «On the Principles of the Taxation System in the Russian Federation» drafted 27th December 1991 ? 2118-1 (as amended). If all the statutory procedures are followed, these revisions can be both ordinary and extraordinary.
Article 10 of the Law of the Russian Federation "On Taxes Levied on the Incomes of Enterprises and Organisations» drafted 27th December 1991 ? 2116-1, and Paragraph 6.2 of Regulation No.34 of the State Tax Service of the Russian Federation drafted 16th June 1995 "On Taxation of Income of Foreign Juridical Persons" say that tax return declarations filed one year or more after the income was received will not be considered. This time limit creates certain problems for foreign juridical person doing business in Russia. However inconvenient it may be for foreign business people, this issue is Russia’s internal affair and can be discussed only at legislative level.
A long time ago it was well-known that "a person who would like to achieve something in this world looks for a way to do it, but a person who does not want to achieve whatever it might happen to be finds a reason for not doing it." Of course the market is cruel to those who became lucky through the ignorance of certain unlucky people who were alas unable to quickly adjust to the real financial world. So what should one do? Keep up with the times? This would be a disaster. Take a deep breath, hope for the best and sit back and do nothing? This is of course the fastest method to achieve a catastrophe. What one should do is to make the international legislation work to one’s advantage. This is what all intelligent business people do. George Sanderland, who is a member of the Supreme Court of the US, once said that taxpayers have the right to use every legal possibility to avoid paying taxes.
What we are talking about here is, first of all, employing financial planning to minimise your taxes. If you want your plans to succeed, you have got to include the off-shore structures in your plans, It’s no secret, that it’s exactly these off-shore structures which ease the burden of the rich. All around the world schemes which include such companies allow their users to relax. Western methods bear fruit in Russia too. First these structures were used by those Russian business people whose occupation had close ties with the world market exporters, importers, and financiers. Soon after that came the time for contractors, construction workers and insurance agents. The rest followed shortly afterwards. Nowadays, it is only the Russian real estate market which does not seem to see the practical advantage of off-shore structures.
The use of foreign companies gives one the opportunity to legitimately use financial resources in Russia. The presidents of such companies have an opportunity to declare their incomes in the RF and do not have to pay taxes. According to the Law of the Russian Federation on income tax received from natural persons (December 7th, 1991, ? 1998-1), an aggregate income earned by actual persons during the period of taxation can be reduced by the amount spent by these people to buy a house, a flat, or begin some kind of a construction. This can be done only on the territory of the Russian Federation upon a written declaration by the natural person. The amount must not exceed the total sum of 5,000 min wage. Today this sum is about $75,000. An official registration and purchase of a flat by three family members allows to accumulate around $230,000. If we consider the deposit of the same family over a period of 3 years (which is acceptable by the above-mentioned law as a minimum period), it can reach up to $690,000. Thus, the amount of investment may vary considerably.
In this case, there is an opportunity to show the real price (not the nominal) of the deal, since no taxes are paid under these circumstances. This means that should anything unforeseen happen, you may sue for the full price. The only additional expenses involved in realisation of this scheme is a rather round sum of money that will have to be paid to a lawyer during the process of the official registration of the sales-purchase deal.
Your housing can be financed by either a foreign company directly, or by a loan received as a bank credit from a foreign bank on the secured basis. Nowadays, foreign companies can own real estate in Russia. What makes the transfer of property easy is the fact that a foreign juridical person can register it. If a foreign company has acquired real estate, then the change of owners does not require re-registration in Russia. All that is needed is an official delegation of powers and rights.
The same schemes apply to you if you own real estate abroad. Real estate tax, in a number of countries, is lower for juridical persons than for natural ones. Repeated sale of real estate is taxable. The amount of tax may hit 18 per cent. This depends on the period of time a person owned a property. If you want to own a foreign company, a mere delegation of ownership rights will allow a reduction of taxes.
In many countries (among them Cyprus, France, Portugal) the real estate market operations without co-operation of off-shore companies is out of the question. As a matter of fact, it does look as if Russia will have to catch up with the rest of the world. One Russian saying tells:«The Russians harness a horse slowly but ride fast». Who knows, may be one day, hopefully in the not too distant future, Russia might present the world a couple of financial schemes of their own. Has anyone deprived us of our talents in so many fields? The answer time and time again is "no".
