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The Warsaw Voice » Real Estate » September 24, 2008
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Doing Business in Poland Through Cyprus
September 24, 2008   
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Increasing numbers of entrepreneurs are deciding to structure their business operations conducted in Poland through Cyprus, instead of involving the Netherlands or other jurisdictions.

Since Cyprus joined the EU on May 1, 2004, its tax and legal system offer competitive advantages and better solutions than many other countries. Cyprus offers great opportunities for both individual and company investors who can either benefit from its enormously efficient tax system or hide behind trust agreements in Cyprus and the British Virgin Islands. Trusted legal advisors both in Cyprus and in Poland play a crucial role in ensuring that tax expenses are kept to the minimum without triggering any risk and that business transactions are in the form and content required by generally binding regulations. A business oriented approach and strict confidentiality are major factors when providing tax and legal advisory services.

Corporate Income Tax
At 10 percent, the corporate tax on trading profits of Cypriot companies are the lowest in Europe. Local tax authorities have a flexible approach to the treatment of expenses as tax deductible and thus it is possible to reduce the tax base. What's more, expenses are typically recognized on an accrual basis, which means that you can deduct them even if they have not been paid for.

One of the major advantages of the Cypriot tax system is the tax exemption of dividends received from subsidiaries. One could claim that the same benefits arise from the Parent-Subsidiary Directive, but tax exemption in Cyprus is wider and does not provide for any time limitations with respect to the holding of shares. Moreover, to apply this exemption the Cypriot company only needs a minimum 1 percent stake in the share capital of the subsidiary.

On top of that there are no thin capitalization rules or withholding taxes on payments to non-resident persons (individuals or companies) in respect of dividends and interest. And there are preferential rules regarding the carrying forward of losses and the unilateral tax credit given in Cyprus for taxes withheld or paid in other countries where there is no Double Tax Treaty in force.

Capital Gains Tax
Capital gains tax exemption is commonly held to be the biggest advantage of the Cypriot tax system. In short, any profit generated on the disposal of shares in subsidiaries is not subject to taxation in Cyprus. Moreover, in contrast to Dutch tax law for instance, there are no special conditions to fulfill to be able to benefit from the exemption.

No tax holding structures through Cyprus
In some countries the tax system allows for the sheltering or deferring of certain types of income by establishing companies in no-tax jurisdictions, for example the British Virgin Islands, the Cayman Islands and the Bahamas. The most common reason for setting up a no-tax company is that this company can act as an intermediary between a Cypriot company and a contractor, reducing income taxes in one-time transactions or in regular holding structures. The profit generated by such an intermediary can subsequently be transferred tax free to a Cypriot company in the form of a dividend.

Trust structures
Trust or foundation structures are commonly used for the top entity in a private or corporate investment holding structure. Shareholders in major companies worldwide, including in Poland, are hidden behind nominee shareholders. Beneficiaries run the company business, acting through their trusted legal advisors providing instructions to local lawyers and executives in Cypriot companies.

What is in it for Polish entrepreneurs?
The Cypriot tax system and the wording of the Double Tax Treaty between Poland and Cyprus allow for significant optimization of the tax burden resulting from operations. Based upon my experience, Polish investors are lured to business structures involving Cyprus by the following: (i) capital tax exemption for share purchase transactions, (ii) tax sparing on dividends, and (iii) preferential tax treatment of directors' fees.

On the other hand, year on year there are increasing numbers of both corporate and individual investors who would like to remain unrevealed and who decide to conduct their operations through new business entities for transparency and tax optimization purposes. In light of the flexibility of the common law system in Cyprus, one can easily enter into transactions with only low-level local requirements as to form or content. No wonder doing business in Poland through Cyprus is becoming popular and creating new opportunities for trustworthy and business-oriented lawyers.

Marcin Tofel
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