"The End of International Tax Planning?" - The pressing issue was dealt with by FinExpertiza Network
A seminar was held to get answers to the main questions emerging due to transition to the “New tax era” in Moscow on November 14. The seminar was attended by representatives of Russian companies operating on international markets as well. The key speakers of the meeting included Michael Hadjihannas, the General Director of FinExpertiza Cyprus, and George Tsamourlidis, senior tax consultant of FinExpertiza Cyprus.
"It is time to review our relationships with international banks. They are getting ever stricter with their clients. When it comes, for example, cash transfer – they request for the source of funds and the aim of transfer. When opening new accounts, banks strengthen due diligence procedures, Know Your Client (KYC) requirements and so on. That means, banks will not open accounts any longer without any substantive reason or purpose", - Michael Hadjihannas said.
Also, the Head of FinExpertiza Cyprus pointed out to other headwinds making things for international taxpayers more difficult. Thus, "the Common Reporting Standard " (CRS), developed in response to the G20 request and approved by the OECD Council in 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
Besides, over 100 countries and jurisdictions are collaborating to implement the BEPS measures (Base erosion and profit shifting), aimed to minimize tax evasion attempts and profit shifts among companies that have no substance and are registered in low tax jurisdictions.
Finally, Controlled Foreign Corporation (CFC) rules are designed to limit artificial deferral of income tax payments by using offshore low taxed entities.
In this environment, substance becomes a key concept. International groups and companies may operate globally in many jurisdictions, on condition that they have actual substance in these jurisdictions: real companies having offices, bank accounts, utility bills and competent personnel. In 2017, the trend became obvious: the amount of companies within groups was reducing, companies registered in well-known offshore jurisdictions were liquidated.
It would be natural to ask: should an international company status be preserved? is it worthwhile? If so, what should an international holding company do to not only comply with the applicable regulations but also to remain within its operating field?
Michael Hadjihannas spoke on today’s most promising jurisdictions (the Cayman Islands, Cyprus, Hong-Kong, Malta, Singapore, UAE) and presented to listeners’ attention a kind of a checklist to prove the substance of a firm on Cyprus:
- The Company needs to have sufficient personnel (Cyprus Tax Resident employees) and pay monthly social insurance contribution.
- The Company needs to own/rent an office in Cyprus.
- The use of ‘professional’ Directors should be limited, though it could be justified on the grounds of continuity, experience and administrative convenience
- Caution should be given when a Tax Resident of the Russian Federation is a Director of a Cyprus Company.
- Russian Federation Tax Resident may be appointed as a Director of a Cyprus Company in order to ensure that the crucial decisions for the management of the Cyprus Company and the Group are made within the scope of the Group’s overall strategy.
- Key management decisions in relation to day-to-day activities of a Cyprus Company must be made in Cyprus and must be properly documented.
- Company website should be considered.
- The majority of the Board of Directors should consist of individuals who are Tax Residents in Cyprus and the proposed ratio should be as follows: 2 Cyprus Tax Residents and 1 Russian Federation Tax Resident, or 3 Cyprus Tax Residents and 2 Russian Federation Tax Residents.
- At least one Cyprus-Tax-Resident Executive Director should be appointed.
- Sufficient qualifications and professional expertise are required in order to perform the functions of the Director. It is recommended to review the CV of potential Directors prior to professional appointment.
- The Director’s liability against claims from third parties in his role as a Director of a Cyprus Company may be formally insured.
George Tsamourlidis, the senior tax consultant of FinExpertiza Cyprus, spoke on recent changes in transfer pricing for intra-group financing, as well as on current trends of restructuring on Cyprus. "Important changes in tax environment are related to pricing in accordance with the Arm's Length Pricing principle directly influencing intra-group transactions between related parties. For example, since July 1, 2017, Cyprus companies have to substantiate margin and interest rates payable on intra-group funding transactions by means of preparation of transfer pricing reports that may be requested by tax authorities", - George Tsamourlidis notes.