International Trade/Offshore Manufacturing/Sourcing/Export/Import/Consulting Cyprus Offshore Entity Eases E. Europe Entry By Stavros Clerides Vladymir Bruneko left Hungary 15 years ago with his parents at the age of 9 to go to the U.S. in search of a better future. His father was Ukrainian and his mother Hungarian. He always had a longing to return to his home country and start his own business. When the recent changes in the former USSR began taking place, he saw the potential for big business there and believed there would be a large demand for brand name consumer clothing. Bruneko teamed up with some local partners and opened his first store in Russia. Over the past five years, he has expanded his operations to include stores in Hungary, Poland and the Ukraine. By any standards, Bruneko has been successful, but he owes much of his success to careful planning and the effective use of an offshore company. In the beginning, Bruneko was paying 40 percent of every dollar he made in Russia, and in Hungary he was paying 18 percent on his profits and then an additional 20 percent on his distributions as a shareholder. He also had difficulty in transferring funds from one country to another. Repatriating funds and converting money into hard currency was a time-consuming and stressful task. On top of these problems, as an American citizen Bruneko had to pay additional taxes on his income in the U.S. All of this changed after Bruneko spoke with an international tax specialist and established his offshore company. Now, he enjoys significantly reduced taxes and unrestricted transfer of funds worldwide. This year, he and his partners plan to open another 12 stores in Eastern Europe, a feat that would have been difficult to achieve without the use of his offshore company. Offshore business is today big business. More than half of the world's financial transactions are estimated today to go directly or indirectly through offshore centers. There are many good reasons for this: There are usually no or very low taxes payable on offshore profits in the offshore center. There is an absence of exchange controls and controls on the movement of capital. There is a high level of confidentiality as to the identity of the owners of the offshore company or trust. Some offshore centers also offer double tax treaties, enabling investors and business people to extract profits and money from high tax countries at low or even zero withholding tax rates. Cyprus is an example of an offshore business and financial center combining all of these benefits. Located at the crossroads of three continents, in a convenient time zone, Cyprus offers an internationally recognized gateway to and from Western and Eastern Europe, the Middle East and beyond. The island has an open market economy based on the free enterprise system, with the role of the government limited to regulation. The country offers an extensive set of laws modeled after the Anglo-Saxon system, efforts to harmonize them with those of the European Union, a network of 26 double tax treaties (including the former CIS countries and Hungary), tax incentives offered for offshore business, an excellent legal and professional infrastructure, and one of the lowest crime rates in the world. Over the past 10 years, more than 27,000 permits have been issued for the registration of offshore entities, of which more than 13,000 were issued in the past three years. More than 60 percent of these companies originated from Central and Eastern Europe. What is a COE? A COE (Cyprus offshore entity) is a legal entity established in Cyprus, which belongs to foreign individuals or entities, and whose business activities are conducted and their income is derived from sources outside of Cyprus. The COE can prove to be an efficient tool to reduce the tax liabilities of a business, safeguard the assets from political risks and protect the business from restrictions imposed by governments on the movement of capital and foreign exchange. It can also provide the necessary flexibility for dealing with custom and excise taxes by serving as a vehicle for centralized inter-company pricing. By structuring their business activities to go through an offshore entity, owners and their expatriate personnel enjoy generous tax benefits, which include the following: Net profits of offshore companies are taxed at a rate of only 4.25 percent. In certain cases, this tax may be significantly reduced and sometimes become nil. There is no withholding tax on dividends or on the distribution of profits to their beneficial owners. Profits of offshore partnerships and branches, which are established and controlled from abroad, are totally exempt from tax. There is full exemption from estate duty on inheritance of shares in an offshore company, and no capital gains tax on the disposal of shares or on the disposal of property of a COE. Expatriate employees working for offshore companies are either tax-exempt or are taxed at reduced rates, depending on where they work and reside and how they are paid. Cyprus is an example of a "treaty haven" country. In simple terms, this means the COE not only pays low taxes on income declared in Cyprus but it also may be used to reduce the taxes due on income earned from operations in countries with which Cyprus has concluded double tax treaties. To do this, profits from high tax countries are transferred to the COE through charges such as management charges, royalties, interest, and re-invoicing, thus reducing the taxable profits and hence taxes in the high tax countries. Protection will then be sought to the relevant double tax treaty to minimize withholding taxes on the transfer of income between the various countries involved. At present, Cyprus has concluded treaties with 26 countries, including Hungary and most Central and East European countries. Other COE Benefits Confidentiality. Where anonymity and confidentiality as to the identity of the beneficial owners of a COE are desired, these can be easily achieved by using nominee shareholders and local directors. By law, the Central Bank of Cyprus maintains absolute confidentiality as to the identity of the beneficial owners. Exchange Controls. Complete exemption from exchange controls and restrictions on the movement of capital. Respectability. Cyprus is a vibrant commercial center with a well-established infrastructure for the conduct of international trade, and with long-established links to East Europe and America. As a result, companies conducting their business through a COE do not lose their respectability. Tax authorities of other countries do not subject them to tax screening requirements usually relevant to tax havens and low tax countries. Uses of COEs. Investors and businesspeople can use their COEs for a broad range of activities. Some of the most common uses for COEs include: Trading companies can establish a COE to intermediate between the supplier and the importer or the exporter and the client. Through re-invoicing, some of the profits of the exporter or the importer will be transferred to the COE and taxed at low rates in Cyprus. Investing companies that receive dividends or profit from stock exchange transactions can use the COE to enter into transactions and minimize their taxes and maintain confidentiality. Companies who invest abroad or invest in Ukraine through the transfer of capital, technology or equipment can create a COE for the purpose of repatriating profit from the foreign countries in the form of royalty fees, paying the minimum possible tax in the other countries by using CyprusÕ network of double tax treaties. Other uses: Holding companies, real estate/property companies, professional services, insurance and captive insurance, and financial services companies can also realize significant benefits from using COEs. Offshore operations can offer significant financial flexibility and tax efficiency to investors and businessmen. Vladymir Bruneko's success using a Cyprus offshore company is not unique. Whether it be a small business or a multinational company, using an offshore company can offer tremendous tax and other advantages. When this article was first published, Stavros Clerides was the general manager of Ergoserve Consulting Ltd., a Cyprus-based firm specializing in international tax planning and formation of offshore companies in Cyprus and other jurisdictions. Advertise on this site Put your company on this site!