A Practical Approach to Security in Cross Border Transactions with Cypriot Companies

By Chrysthia Papacleovoulou

Cyprus offers tax benefits, tax efficiency, and administrative ease for companies doing business in and with the country. These attributes make Cyprus an attractive and favorable jurisdiction for cross border transactions. This analysis highlights and clarifies a related and key issue that troubles practitioners and counsels: the issue of providing meaningful security in cross-border transactions involving Cyprus companies.

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The fundamental advantages that the jurisdiction of Cyprus offers to investors, businesses, and corporations involved in cross border transactions cannot be overstated. These advantages are encapsulated in the security and stability of the legal system and the administrative ease of cross border transactions. Most importantly, companies benefit from Cyprus' tax efficiency: tax and corporate planning, combined with tax and foreign direct investment incentives, and particularly the 10 per cent corporation tax, which is one of the lowest corporate tax rates in the European Union (EU), make Cyprus a very logical choice. Additionally, Cyprus's double taxation treaty network allows international transactions to be structured in a number of tax-efficient ways, especially when combined with a Cypriot holding company.

A Cypriot corporate structure may beneficially be used:

• as an intermediary for joint venture or other participatory ventures to avoid or reduce withholding tax;
• to finance joint ventures or other acquisitions in order to reduce or eliminate withholding tax and extract profits that would otherwise be subject to foreign tax;
• as a holding company with exempt income, subject to the passive dividend rules;
• as an operating company claiming treaty protection to avoid the creation of a permanent establishment in a foreign country;
• as a Cypriot international trust enjoying the benefit of treaty protection; and to operate shipping companies from Cyprus with treaty protection.

Considering these advantages, it is no surprise that Cypriot corporate vehicles are often used in corporate planning and tax planning structures. A common practice is that a corporate group is owned by, and/or the transaction will be guaranteed by, a Cypriot holding company. This is particularly true in cross border transactions involving groups of companies that have business or roots in Eastern Europe.

Practitioners are frequently asked how secure are the contractual arrangements with counterparties in cross border transactions, and to offer guidance on the structures and risks for ensuring their security. These concerns should, indeed, be the same as for any other jurisdictions. Cyprus has a secure and stable legal system, based in many respects on the English common law system. Moreover, as an EU member state since 1 May 2004, the Cypriot legal system guarantees the EU law freedom of movement and establishment for persons, capital, and services.

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Dr. Chrysthia Papacleovoulou is the senior partner in the litigation department of LCNP Law Chambers Nicos Papacleovoulou. She practices corporate and commercial, intellectual property, and contract law, and specializes in the conveyancing and acquisition of immovable property in Cyprus, as well as in wills and probate. Ms. Papacleovoulou serves on boards of directors for Cypriot limited liability companies, and heads committees for corporate governance and reporting. She is a Fellow of the Centre of Comparative Legal Studies, and has lectured on British constitutional law and company law, Cypriot legal systems, and international business law at the University of London and at Cypriot Universities. She has written extensively on business and consumer law, and real estate matters.