BVI-Cyprus Companies – Tax Comparison
The recent revelations in the Panama and Paradise Papers illustrated the need for companies to make a shift towards more responsible fiscal behaviour and tax responsibilities. International guidelines such as the OECD guidelines and the 4th EU AML Directive have made it clear that evasive fiscal practices will not remain forever in the shadows.
Companies should revise their priorities and take a more pro-active stance by becoming more transparent about their fiscal activities and where they choose to incorporate as well as operate from.
Furthermore, fiscal transparency is merely the first step towards more responsible behaviour. In this article, an attempt is made to analyse the implications on some of the most established corporate structure vehicles, British Virgin Islands (BVI) business companies and Cyprus companies, by outlining their key characteristics and evaluating how each jurisdiction is adhering to stricter international compliance standards.
Cyprus limited liability companies benefit from the simple and transparent tax system which offers one of the lowest corporate tax rates in the EU. Also they operate in a reputable international financial and business centre, with a stable political system and a common law legal system.
The main characteristics of the Cyprus corporate and tax legal system are outlined below:
- A flat corporate income tax rate of 12.5%;
- An extensive double tax treaty network with over 60 countries;
- Full member of the EU;
- OECD guidelines compliant;
- Dividend participation exemption (subject to certain conditions);
- Exemption from tax on gains from the disposal of securities (e.g. shares, bonds);
- There is no withholding taxes on interest and dividends;
- No taxation of capital gains (except for disposal of real estate in Cyprus or shares of company holding real estate in Cyprus);
- No succession taxes are applicable under the Cyprus Tax Code;
- No Controlled Foreign Company (CFC) rules;
- Foreign tax relief on income subject to both Cypriot and overseas tax;
- Exemption on profits of foreign permanent establishments (subject to conditions);
- The EU Mergers Directive allows for tax-neutral group restructuring;
- Attractive Intellectual Property regime in line with “modified nexus approach” (OECD Action 5);
- No exit tax rules.
British Virgin Islands (BVI)
A member of the British commonwealth and governed by English Common Law, the BVI have been established as a premier jurisdiction for corporate structuring and funds registration due to its attractive tax regime. The most important characteristics are listed below:
- No Capital Gains Tax, Gift Tax, Profit Tax, Inheritance/Estate tax, No Corporate tax;
- Legal and judicial system based on English common law with ultimate appeal to the Privy Council in England;
- Flexible and compliant regulatory framework in line with international standards;
- Proven judicial system and creditor-friendly insolvency legislation;
- Efficient company incorporation;
- Exemption from all local taxes and stamp duty;
- Asset protection and financial privacy (certain information may become public in the future);
- Ability to transfer domicile;
- No annual general meeting required; and
- No disclosure or minimum capital requirements.
Transparency and regulatory compliance over tax benefits
Both Cyprus and the BVI are similar in the way that both apply versions of the UK Companies’ Act, both are based on a common law legal system and have both enjoyed stability and a reliable Court system. However a notable difference is that Cyprus is a full EU member state.
When it comes to trust settlement and administration, both jurisdictions have modern and efficient trust legislation that can efficiently facilitate the establishment and operation of international trusts and in combination with Cyprus or BVI company structures, offer efficient and comprehensive estate planning and asset protection.
In addition, both jurisdictions enjoy a number of Avoidance of Double Taxation Treaties (DTTs) with a number of states.
A structure involving a BVI company will enjoy the advantages of a favourable tax regimeand their use has been put to the test numerous times as they are efficient and reliable to run.
However is this enough? Investors and businesses are starting to appreciate that in certain cases, tax efficiency is not enough when structuring a business vehicle that will be put under scrutiny by certain jurisdictions that have become protective against such aggressive tax avoidance practices. Also nil tax jurisdictions are nowadays not preferred by international clients due to the OECD’s base erosion and profit shifting initiative (BEPS) which forces multinational enterprises to establish a transfer pricing policy.
As certain high profile EU cases such as Amazon and Apple in Luxembourg and Ireland respectively have recently demonstrated, international trends now favour transparency and appropriate tax-sharing burdens over aggressive tax planning by corporations and individuals.
Cyprus is a full member of the EU since 2004 and benefits from all EU treaties, regulations and directives, as well as freedom in movement of capital. It does offers an advantageous tax system that retains some tax characteristics of an offshore jurisdiction (such as a low tax and an advanced trust legislation) whilst remaining in full compliance with the EU legislation. It has introduced strict AML regulations and the local legislative framework is in full compliance with EU guidelines.
Cyprus has embodied the arm’s length principle in section 33 of the Income Tax Law which is the cornerstone of the transfer pricing regulations. Such regulations govern intercompany pricing for services, royalties, goods and loans between entities in a multinational level. Cyprus has also introduced transfer pricing requirements in relation to intra group financing. Therefore it follows the transfer pricing guidelines of the BEPS initiative.
In addition, as more jurisdictions require companies to have “substance” in their presence in a jurisdiction, and not merely a registered office. Cyprus, building on its reputation as an established ship management centre, attracts international companies that relocate their headquarters, employees, operations and management staff to fulfil substance criteria to the island under new incentives that attract legal entities and HNWI to Cyprus.
Cyprus’ advanced infrastructure, highly skilled workforce and high quality of life make relocating to Cyprus a stable and long-term choice for many organisations and individuals.
The BVI, seeking to ensure compliance and prevent unfair tax evasion have sought to facilitate beneficial ownership information for those holding structures in the BVI by introducing a new Beneficial Ownership Regime whereby registered agents are now required to maintain a database of corporate and legal entities for which they act as registered agents which will be private but will be searchable by BVI authorities in order to enable an efficient and secure transfer of information to foreign tax authorities when required.
Both jurisdictions are fast moving away from the “tax heaven” model of tax benefits, secrecy and fast incorporation, to a more responsible and sustainable approach.