Joint Ventures
As illustrated in our article “Shareholders’ Agreements: Contractual Rights & the Articles of Association” of 22 October 2020, Joint Ventures are the business arrangement that lead to Shareholders’ Agreements.
Cyprus Joint Ventures (“JVs”) are a common business form due to the attractiveness of the jurisdiction in the structuring of overseas investments into CIS and other emerging markets, consequently, and due to Cyprus’ impressive treaty network JVs play an important role for investors who wish to initiate or participate in such investments.
Definition
Cyprus law does not provide any legal definition of a corporate JV, although, a JV could be defined as an arrangement by which two or more persons or entities) agree to initiate or participate or co-operate in a commercial venture, specific project or business investment and agree to achieve their business objective through the medium of a “JV” company.
Benefits of a Cypriot JV Company to Achieve a Common Business Objective
The use of a Cypriot company in the capacity of a holding company in a JV provides benefits relating to business certainty, limited liability, separate legal personality, versatility in financing and tax flexibility.
The Companies Law, Chapter 113 of the statute laws of Cyprus (“CAP.113”) contains a mature body of statutory principles, supported by an established commercial practice. Consequently, the legal regime is defined by certainty regarding the JV parties’ legal position between themselves and in relation to the company or third parties.
The Cypriot company has a separate legal personality to its members and shareholder liability is limited to the amount of capital that the members respectively contributed to the company and into the business. The company has the capacity to initiate legal actions and the right to own property and contract in its own right.
The separate legal personality makes a JV particularly appropriate to a business where continuity is essential to JV parties.
A JV in Cyprus can be versatile and able to cope with complex arrangements in terms of funding the Business (in relation to both equity and loan) and in terms of returns and earnings on such funding. The loan financing can be secured in various ways including the granting of fixed and floating charges over some or all of the JV company’s assets.
Equally, the separate taxation of the JV allows the JV parties a high degree of flexibility in planning their own and their venture’s tax position.
Why a Cyprus JV?
➢ Full Member of the European Union 2004 | Eurozone 2008 – Access to and application of the benefits from EU Directives.
➢ Low Uniform Corporate Tax Rate – 12.5% – Corporation Tax is levied only on net profits. Profits from overseas permanent establishments are exempt from corporation tax. Non-resident entities are only taxed on income sourced in Cyprus.
➢ 0% Tax on Dividends Received – Dividends received by Cypriot tax resident companies are exempt from Cyprus tax (subject to minor exceptions). The extensive network of Double Tax Treaties (“DTTs”) allows beneficial treatment in respect of withholding taxes (“WHTs”) in the source country. ➢ 0% Withholding Tax on Dividend Payments – Dividends paid by a Cyprus tax resident company to its non-Cyprus resident shareholder(s) are not subject to any withholding tax in Cyprus. Thus the non-Cyprus resident shareholder of a Cyprus tax resident company receives the dividends free of any WHT.
➢ 0% Tax on trading/sale of titles or shares – The disposal or transfer of titles is exempt from all taxes. Titles are described as shares, bonds, debentures and similar titles as well as rights thereon (options, futures etc). Cyprus is, therefore, the jurisdiction of choice in respect to M&A transactions. ➢ 0% Capital Gains Tax is paid in Cyprus on the transfer of immovable property owned by a Cyprus tax resident company outside Cyprus. Equally, there is no Capital Gains tax on the sale of securities. ➢ 0% Estate Duty is payable on the inheritance/transmission of shares in case of the death of a shareholder.
➢ 0% Inheritance Tax
➢ 0% Net Wealth Tax
➢ 0% Property Tax
➢ 0% Luxury Tax
➢ 0% Tax on Reduction of Share Capital & Reduction of Share Premium Account
➢ 0% Withholding Taxes on Interest and Royalties – There are no WHTs on interest payments made by a Cyprus tax resident company. There is also no WHT on royalties arising from sources outside Cyprus.
➢ 0% Tax on Profits generated by International Cyprus Trusts (“CIT”) – CITs may be established to hold the shares of Cyprus companies or simply used as an effective means of Asset Protection | International Succession | Estate Planning – CITs do not pay any taxation on their profits. Amendments to Cyprus’ Trust Law have restored the CIT as one of the most effective instruments available today.
➢ Unilateral Tax Credit Relief – Unilateral tax credits are granted on any tax paid abroad to any foreign country, irrespective of whether Cyprus has a DTT or not. In such a case the income is not taxed twice but only once.
➢ 64 Double Tax Treaties (“DTTs”) – Cyprus has an impressive and continually growing network of DTTs, a Cyprus company can benefit from the EU Directives to eliminate WHTs when collecting income from the EU. Unilateral tax credit on foreign taxes withheld at source is also available.
➢ Losses can be carried forward and set off against future profits for the next five years.
➢ Group Relief – setting off the loss of one company with the profit of another is allowed provided both companies of the group are tax resident in Cyprus.
➢ No Thin Capitalisation Rules – there are no provisions in the Law requiring companies to maintain a particular debt to equity ratio. Consequently, a Cyprus holding company may be capitalised with loans without any risk that interest paid at arms’ length to the parent company will not be deductible. ➢ 0% VAT for Holding Companies – holding activities fall outside the scope of the VAT in Cyprus and the Cyprus holding company engaged exclusively in holding activities is not entitled or obliged to register for VAT purposes.
➢ 0% Tax on Liquidation – A Cypriot holding company held by non-resident shareholders can cease operations in Cyprus and distribute assets to its shareholders in any form (dividends etc.) without any tax cost to the shareholders.
➢ 2.5% Corporation Tax under the “IP Box” regime where effectively a Cyprus company receives a deduction of up to 80% of the income received from qualifying assets. These qualifying assets are patents as defined in the Patents Law, computer software or other IP assets which are legally protected and specifically defined in the legislation.
– There are certain rules applying to be able to enjoy the 80% deduction. Such rules apply to all countries applying the IP Box since these are based on the OECD BEPS Action 5 which the countries have to apply.
– The effective tax rate in Cyprus for companies meeting the IP Box criteria and are therefore eligible for the complete 80% deduction is below 2.5%.
➢ Advance Tax Rulings – In line with certainty created by Cyprus’ progressive and simple tax and legislative framework the tax authorities are investor friendly thereby allowing advance tax rulings.
➢ Notional Interest Deduction – This measure, which is fully aligned with EU Directives, supports the promotion of economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing thereby encouraging the creation of business substance by offering attractive advantages to individuals, supported and reinforced by;
➢ Strategically located at the crossroads of 3 continents – Cyprus has acted as the bridge for trade and international business between Europe, Africa and Asia for over 10,000 years.
➢ Non-Domicile Cyprus Tax Residency – Foreign nationals relocating to Cyprus (minimum 60 days) will obtain the status of a Non-Domiciled individual, with significant tax benefits:
– 0% Tax on dividends received
– 0% Tax on dividends paid by the individual in Cyprus
– 0% Tax on interest in fixed deposits/savings in Cyprus
– Individual will only be taxed in Cyprus on their worldwide income
– Reduced tax on rental income
The synergy created by Cyprus’ modern, simple and attractive tax regime coupled with its stable, developed and flexible English Common Law legal system create a world class efficient, effective and, certain tax and legal regime that is ideal for any business venture.
