The crisis of 2013 has proved to be a stimulus to reform and prosperity. Cyprus has become a fully compliant jurisdiction and has introduced a number of incentives to encourage foreigners to bring their business to the country. The Emergency Loan has been repaid and banks are again lending. There has been considerable inward investment.
Cyprus has adapted to the new world of transparency. It is distinguished by its simple and straightforward tax system and its low rates. It is one of the preferred jurisdictions for the establishment of a business base for both individuals and corporations and enjoys a large treaty network, with comparative cost advantages and favourable treatment for executive remuneration. The notional interest deduction on new equity reduces the taxable profit whilst at the same time safeguarding the beneficial ownership of income test at the level of the income recipient. The corporate tax rate is 12.5%, but there are various important tax exemptions, which, along with the notional interest deduction and the absence of withholding tax or outgoing dividends, result in a very low effective tax rate in practice. A Cyprus company may function as an investment fund, manufacturer, bank, finance company, IT licensing company, real estate investor etc. Alternative structures that can be used include an English-registered company resident in Cyprus, free of UK tax and with minimal taxation in Cyprus, or the Cyprus-registered company resident in Malta, which, for operations of a passive nature, can be free of tax in both countries.
The key to successful tax planning for families with US family members is co-operation between advisers in the jurisdictions concerned. It is presently unclear whether President Trump will succeed in abolishing estate tax, but we have to focus on the present situation. Estate tax, gift tax and generation-skipping tax apply to citizens and domiciled persons on their worldwide assets. Non-resident individuals are subject to transfer tax only on US-sited assets, and US Treasuries are treated as not sired in the United States: non-residents should buy US real property through a trust or foreign company. Citizens and domiciliaries get a $5.49 million exemption from gift and estate tax taken together; non-resident aliens a mere $60,000 at death only. The full marital tax exemption applies only if the surviving party is a citizen; a special kind of trust (a “QDOT”) can be used to defer tax. Problems in this area can be ameliorated by life insurance.
Trusts are widely used in the United States. The revocable grantor trust settled by a non-US person and holding non-US assets is effectively free of US taxes. A similar exemption is enjoyed where the NRI settlor retains a life interest. Where the grantor is Canadian-resident, it is best to fund the trust from his estate to avoid double taxation.
Countries are required by the CRS to cause banks to collect and return information from reporting financial institutions, which is then exchanged with other jurisdictions. The rules can be seen as invading the individual’s right to respect for private life. In one case, a Portuguese resident was the founder and beneficiary of an Austrian private foundation. The foundation was a passive NFE, and the “controlling persons” were the founder and board members. In the second case, an Austrian resident took out a life insurance policy with the Austrian branch of a Luxembourg insurance company and no reporting was required. In the third case, an Austrian individual was a non-discretional beneficiary of a Jersey trust. The beneficiary and the protector were reportable. In the fourth case, an Austrian resident set up a Liechtenstein foundation, which was transparent for Austrian tax. The foundation had to treat the founder’s interest as a reportable account.
In some cases, onshore jurisdictions can offer much of the tax benefit of offshore trusts. The privacy of the trust is also a consideration. The New Zealand foreign trust takes advantage of what was originally an anti-avoidance provision: it and exempts trusts with foreign settlors and under some treaties is treated as New Zealand resident, but an Act of 2017 requires registration of full information, initially and annually, and this information may be exchanged with other tax authorities. Ireland treats a settlement made by a non-resident settlor with professional trustees as non-resident for capital gains tax. The Czech trust is treated as a corporate body, taxable at 19%; it is about to be relieved of tax on dividends, but will require registration on a register partially available to public authorities.
The fourth AML Directive requires the enactment of legislation providing for registration of corporate entities and trusts, but limiting access to trust information. It is currently proposed that access be limited to persons with a legitimate interest, but the European Parliament would like to go further. There have been some ECJ decisions indicating that full disclosure infringes the right to private life, and similar views have been expressed by the French Constitutional Court, and Germany, the Czech Republic, Ireland, Liechtenstein and Singapore are variously reacting to this conflict between law enforcement and privacy. In the United States, the US “foreign trust” offers tax advantages, and private trusts will not be governed by the CDD rules for US financial intermediaries.
The tax, legal and regulatory infrastructure have been the basis of the country’s premier position in the international financial world. Cyprus has now introduced a special tax regime for individuals not domiciled in the country. The concept of domicile was given statutory form in colonial days. Since July 2015, non-domiciled resident individuals have been exempt from tax on dividends and interest and on the first €19,000 of employment income (€100,000 for new residents) and also exempt on certain other kinds of income and gains.
In 2012, Cyprus introduced a reduced VAT scheme for yachts: different rates apply to motor and sailing boats and vary according to the length of the boat. The lowest available rate is approximately 2.4%. The lease must comply with prescribed conditions, but the scheme is available regardless of the flag flown by the boat. The reduced rate applies to purchases as well as leases.
The promise of a referendum on membership of the EU featured in the Conservative party memorandum before the last election. When the referendum took place, the “leavers” were = unexpectedly – successful. The Great Reform Act provided for the embodiment of EU law in domestic law, but it is contemplated that many of the provisions will be repealed. The Brexit terms are yet to be negotiated; various options are being canvased – the Turkey option, for example. It seems unlikely that the EU will give free access to its market without free movement of people. The UK is planning to leave the customs union and negotiate a separate deal with the EU and other countries. It is expected that VAT will remain substantially unchanged as far as domestic transactions are concerned. Many of the EU Directives are expected to cease to have effect in the United Kingdom. The EU rules on State Aid may also go – at any rate to some extent. The UK as a base for holding companies is expected to survive. The “non-dom” rules and the tax treaties will remain, but the status of EU nationals living in the United Kingdom, and of UK citizens living in EU countries, is uncertain. Everything will of course depend of negotiations now in progress, but it seems likely that the UK will not get a better deal than that enjoyed by EU members.
The establishment of the European Customs Union in 1968 was a very significant step. It has an internal and external aspect. So too does direct tax policy. The internal aspect of the direct tax policy includes the Anti-Tax Avoidance Directive, containing a general anti-avoidance rule and other things. The policy aims at transparency – including the automatic exchange tax rulings so as to avoid State Aid. Terms of settlement of litigation can be exchanged, for the same reason. There are provisions relating to tax avoidance and enablers. The Code of Conduct in Business Taxation (the “CCTB”) was first promoted in 2011: it provides for consolidation and apportionment which deal with such matters as transfer pricing. It aims to tax profits where they arise. This is an easy statement, but not a simple concept. There is also a new Directive on resolution of tax treaty disputes and a proposal to deal with hybrid mismatches. The external strategy for effective taxation involves listing countries which do not have good tax governance – transparency. exchange of information, absence of State Aid. “Fairness” in tax competition requires no harmful tax measures and compliance with the CCBT (presently under review), which is hostile to uncontrolled tax competition. The Apple litigation relating to State Aid shows that the European Union accepts territoriality but requires an arm’s length transfer pricing provision in each country’s law. As can be seen, the internal aspect has important external implications.
There is always a high demand for investment migration, which has an organisation of its own – the Investment Migration Council. There is a long tradition of awarding citizenship to the rich or deserving – in ancient Rome, in England, in France and elsewhere. Investors seeking citizenship are prepared to accept lower returns and greater risk. Member States of the EU have control over their own citizenship, even though it confers EU rights. In Europe, citizens by investment are only 0.01% of the total number of new citizens of over 800,000 per year. There are arguments in favour and against such programmes, but well-run programmes undoubtedly have a beneficial effect. Cyprus requires an investment of €2,000,000 but has a processing time of as little as three months. It is thought that the EU does not favour citizenship by investment, but nevertheless approved the first such programme in Malta. There are five programmes in the Caribbean. Montenegro and other countries are following, and more countries are expected to introduce such programmes in the future.