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 clarify that evasive fiscal practices will be disclosed. This article

analyses 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

The main characteristics of the Cyprus corporate and tax legal system are:

corporate income tax rate of 12.5%;

double tax treaty network with over 60 countries;

since 2004;

guidelines compliant;

participation exemption (subject to certain conditions);

tax on gains from the disposal of securities (e.g. shares, bonds);

taxes on interest and dividends;

capital gains (except for disposal of real estate in Cyprus or shares of

company holding real estate in Cyprus);

taxes are applicable under the Cyprus Tax Code;

Foreign Company (CFC) rules;

relief on income subject to both Cypriot and overseas tax;

profits of foreign permanent establishments (subject to conditions);

Directive allows for tax-neutral group restructuring; 

Intellectual Property regime in line with “modified nexus approach” (OECD

Action 5);

rules.

British Virgin Islands (BVI)

No

Capital Gains Tax, Gift Tax, Profit Tax, Inheritance/Estate tax, No Corporate

tax;

and judicial system based on English common law with ultimate appeal to the

Privy Council in England;

and compliant regulatory framework in line with international standards;

judicial system and creditor-friendly insolvency legislation;

company incorporation;

from all local taxes and stamp duty;

protection and financial privacy (certain information may become public in the

future);

to transfer domicile;

annual general meeting required; and

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.

A

structure involving a BVI company will enjoy the advantages of a favourable tax

regime However, investorsand businesses appreciate that in certain cases, tax

efficiency is inadequate when structuring a business vehicle to 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.

Cyprus benefits from all EU

treaties, regulations and directives, and freedom in capital movement. It

offers an advantageous tax system that retains some tax characteristics of an

offshore jurisdiction, whilst remaining in full compliance with the strict EU

legislation and guidelines. Cyprus has embodied the arm’s length principle (Income

Tax Law, section 33), which is the cornerstone of the transfer pricing

regulations that govern intercompany pricing for services, royalties, goods and

loans between entities in a multinational level. Cyprus further introduced

transfer pricing requirements in relation to intra group financing. Therefore

it follows the transfer pricing guidelines of the BEPS initiative.

Both

jurisdictions are fast moving away from the “tax heaven” model, secrecy and

fast incorporation, to a more responsible and sustainable approach.