East European Focus: Cyprus – Gateway for Russian and CIS Companies to the London Capital Markets

by Cleo Papadopoulou, Tax Partner, PricewaterhouseCoopers Cyprus

Strategically located at the crossroads of three continents (Europe, Asia and Africa), Cyprus has always played a major role as an international business and financial services centre. Following its accession to the European Union (EU), in May 2004, this position has been enhanced further.

The implementation of wide ranging structural and legal reforms has provided more credibility and transparency to Cyprus and has strengthened its relevance in the European, and more specifically to the London, capital markets scene. With its strategic location, favourable tax regime and business environment, well-developed commercial infrastructure, strong banking sector and multilingual and highly skilled workforce, Cyprus has rightly emerged as one of the most favoured holding company jurisdictions worldwide.

Russian and CIS companies traditionally reap these benefits by selecting Cyprus to host their investment holding company. The next step is to use it as a gateway to efficiently and effectively access the European capital markets, especially London, the most important and lucrative one. This is even more relevant and feasible now with the integration and harmonisation of the European capital markets of which Cyprus is an integral part.

The main characteristics of Cyprus that establish it as a gateway for Russian and CIS companies to the London capital markets are outlined below.

An excellent tax regime for holding companies

As a holding company location, Cyprus is a natural choice since it is possible for income to be collected by a Cyprus company tax-free. In addition Cyprus offers a very effective and quick tax-free exit route to investors.

The Cyprus tax system offers full participation exemption on dividend income and on gains on disposal of shares without the imposition of any conditions.

An investor can therefore invest in Russia and the CIS through a Cyprus holding company. Profits can be distributed to the Cyprus company from the Russian and CIS subsidiaries with the very low withholding taxes permitted under the beneficial bilateral tax treaties. In Cyprus dividend income will be exempt from taxation and repatriation from Cyprus to the EU investor will be tax-free as Cyprus does not levy withholding taxes on distributions to any persons outside Cyprus. The reverse is also possible: a non EU investor wishing to invest in the European market, taking advantage of the EU Parent Subsidiary Directive to eliminate withholding taxes from the EU subsidiaries on dividend payments to the Cyprus holding company.

In summary the main benefits of the Cypriot tax system include:

• Lowest corporate tax rate in the EU – 10%;

• Full tax exemption of disposal of titles (shares, bonds, debentures etc) and rights thereon (options, futures etc);

• Full participation exemption on dividends and profits from permanent establishments outside Cyprus;

• No thin capitalisation rules (companies can be funded by 100% debt) and no Controlled Foreign Corporation rules (CFC rules);

• Unilateral tax relief for foreign tax credits (and possibly underlying tax);

• Losses carried forward indefinitely;

• Group relief available (companies that are part of a group can consolidate their results, thus allowing losses of one company to be set off against profit of another company);

• Mergers, acquisitions and spin-offs can be effected  without tax cost;

• Zero withholding taxes to non-residents;

• No exit costs;

• Fully compliant with EU and OECD rules;

• Application of all the EU Directives; and

• A wide network of double tax treaties with countries in the CIS region as well as some favourable treaties with Eastern European countries.

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A transparent and reputable financial centre

Tax legislation is fully EU and OECD compliant and anti money laundering legislation, data protection laws and competition laws are in line with EU law. Cyprus is on the OECD list of countries that fully implement the internationally agreed tax standard published on 2 April 2009.

Cyprus’ economy and infrastructure

Economy
The existence of a healthy economy and public finances always reduces the pressure on any government to increase taxes. Cyprus enjoys a healthy and robust economy displaying comparatively better economic indicators than the EU average.

In 2008, Cyprus’s real GDP growth was 3.7%, compared to the EU average of 0.8% (Source: Eurostat). Despite the global economic downturn, Cyprus is expected to continue to show real GDP growth in 2009 at 0.3%, compared to the expected contraction of the EU average by 4% (Source: Eurostat).

Despite applying a lower uniform tax rate of 10% in 2003, Cyprus has managed to gradually decrease the Central Government Deficit, which stood at €763 million (6.5% of GDP) in 2003, even achieving a surplus of €537m in 2007 and €167m in 2008. Cyprus also boasts low unemployment, which at 5.4%, as at June 2009, is below the EU average of 9.4% (Source: Eurostat). The main economic indicators for Cyprus are shown in the table below (see Table 1).

Transportation
Currently Cyprus is served by 33 international airlines offering over 1,100 scheduled flights per week, not including charter flights. This will increase in the near future with the opening of the new airport in Larnaca in November 2009. There are daily direct flights to a number of major international destinations including London, Moscow and Dubai.

Telecommunications
Being served by a number of advanced technology submarine cables and seven satellite earth stations, Cyprus is connected globally with an advanced and reliable communications network. This allows businesses located on the island to pursue their everyday international activities with ease.

Foreign Direct Investment (“FDI”)
Cyprus has developed into a major player in relation to FDI into countries of the CIS region and Eastern Europe. As at 2008, Cyprus was the number one investor in Russia and Ukraine with 22% of total FDI in both countries. Statistics relating to 2009 show that Cyprus maintains its position in terms of being the number one investor in Russia and Ukraine. Cyprus also ranks high in terms of FDI in countries like Belarus (4th), Bulgaria (6th) and Slovakia (7th).

Financial reporting
International Financial Reporting Standards (“IFRS”) have been the Generally Accepted Accounting Principles (“GAAP”) in Cyprus for over three decades and there is substantial local expertise in this area. In addition, the preparation of financial statements in the English language is common practice. This provides more transparency and efficiencies to international users of the financial statements. The recent developments requiring all public listed European entities to prepare their financial statements in accordance with IFRS give an advantage to Cyprus registered entities since:

• Cyprus holding companies can list their shares in any European stock exchange without any conversion work, which is usually costly and creates delays; and

• Cyprus subsidiaries of listed entities are not required to keep two sets of records (one in local GAAP and one in IFRS).

In addition to the above, many accounting professionals in Cyprus are UK-trained and members of either the Institute of Chartered Accountants of England and Wales or the Association of Chartered Certified Accountants.

Auditing
Auditors in Cyprus apply the International Standards on Auditing (ISAs) in carrying out audits of financial statements. Similarly to IFRS, ISAs have been the auditing standards in Cyprus for over three decades and substantial local expertise has been accumulated over the years.
On a note specifically relating to the London capital markets scene, local accounting professionals are familiar with the Standards for Investment Reporting used in the London capital markets.

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Favourable legal and regulatory environment
The Cypriot legal system has been structured on its English counterpart and is based on common law. English case law can be used as precedent in Cypriot courts where they have persuasive effect, especially in areas of law where there have not been any previous decisions made by Cypriot courts.

Cyprus company law and all statutes regulating business matters and procedures are based essentially on English laws. In addition a significant number of legal professionals who practice law in Cyprus are UK-trained, providing an insight and deep understanding of the UK legal regime.

The application of EU laws and regulations, known as the Acquis Communautaire, as well as the harmonisation of the European Capital Markets regime provide great additional prospects for Cyprus by giving it credibility as an international business centre and the opportunity to act as a gateway to the European capital markets.

Cyprus’ capital markets legislation is fully in line with the EU framework due to the adoption of the relevant EU Directives, such as the Transparency, the Market Abuse, and the Prospectus Directives. The Cyprus regulator, the Cyprus Securities and Exchange Commission, is a member of the Committee of European Securities Regulators (CESR) and follows all of CESR recommendations on the application of the Prospectus Directive.

European Court of Justice decisions are binding in Cyprus and local laws are in line with Data Protection, Competition and Anti-Money Laundering laws and regulations of the EU.

These facts and the changes that have occurred in the Cyprus legal and regulatory environment since the accession of the island to the EU in 2004, have provided more credibility and transparency to the local legal system which is now at par with its EU counterpart.

Cyprus companies listed on London capital markets
In recent years, a number of Cyprus companies have successfully listed on the London Stock Exchange (LSE) and Alternative Investment Market (AIM) in London. This trend is expected to continue and even be enhanced in the future. The table above illustrates examples of Russian and CIS companies, incorporated in Cyprus, that have listed on LSE and AIM in recent years (see Table 2).

Conclusion
Since its accession to the EU in 2004, Cyprus has matured as an International Financial Centre. With greater credibility and transparency Cyprus provides a gateway for international businesses investing in Russia and the CIS, and for Russian and CIS companies accessing the international capital markets.   

For further advice on evaluating or implementing investment in Russia and the CIS region, contact Nick Page, Pricewaterhousecoopers LLP (UK) [email protected]