Cyprus is over as an international banking center, which the Financial Times reports was one of Berlin’s objectives for its rescue. However, the business press (and yours truly following them) has referred to Cyprus as a tax haven. That description is part of the PR campaign to justify punishing the island.
By reader Claudius, hoisted from comments
There’s been a general meme in many of the ‘Cyprus comments’ that intimate if not outright discriminate Cyprus’ Financial Center status as a bastion of money laundering and international corruption. This is then used to reason a justification for why Cyprus is simply getting its comeuppance. To be clear, I am neither an apologist for Cyprus’s present predicament nor a belligerent activist against tax havens, such as the Cayman Islands or Isle of Man.
Cyprus is a low-tax jurisdiction, not a tax haven. Cyprus is on the OECD’s ‘white list’ of jurisdictions complying with the global standard for tax co-operation and exchange of information. Its fiscal and regulatory regimes are fully aligned with the acquis communautaire and the Code of Conduct for Business Taxation of the EU and the requirements of the OECD, the FATF, and the FSF. However the Cayman Islands’ maintains only 12 bilateral tax information arrangements; and The Isle of Man, 14. Cyprus an arrangement with all of its OECD bilateral (double-taxation treaty) partners – 46 fully, 6 being ratified.
Within these 52 countries, Cyprus has double-taxation treaties with about every country in the EU, and includes China, the US, Russia and, practically, every Middle East country. All the double-taxation treaties concluded by Cyprus were drafted on the basis of the Organization of Economic Co-operation and Development (OECD) model treaty.
The primary objectives being:
1.) Clarify and determine the taxing rights of each contracting state;
2.) Reduce or avoid the impact of international juridical double taxation; and
3.) Introduce anti-avoidance provisions and mechanisms to prevent tax evasion.
Cyprus is an exemplar of an OECD ‘low-tax jurisdiction’ country (one that the US constantly, it seems, want to emulate) since it combines a low-tax regime with an extensive network of double-taxation treaties (which neither the Cayman’s nor the Isle of Man does).
One of the most powerful ‘tools’ used by entities such as the Cayman Island and the Isle of Man is the (internationally accepted) ‘Passive Dividend Rules’ – where the foreign participation tax exemption applies to foreign dividends onshore.
‘Passive Dividend Rules’ apply, typically, when (the numbers differ):
1.) Investment income, direct or indirect, is less than (say) ‘50 percent’ of the paying company’s activities;
2.) The foreign tax burden on the income of the paying company is not substantially lower than the tax burden on the resident parent company (the shell).
3.) The taxable funds are held by the company within jurisdiction for a period of time (say, 50 days).
So, of course tax avoidance funds/profits are washed through the Cayman’s and Isle of Mann which ‘facilitates’ (in too many ways) nominally, declared high company tax and with zero resident tax and allow ‘bed and breakfasting of funds’ (period end off-shoring at night, back in the morning).
However, Cyprus’ ‘The foreign Participation Tax’ almost wholly mollifies (in that there is a substantive article of tax) the “tax haven-ish” parts of the ‘Passive Dividend Rules’, which it applies to any capital gains realized by a Cyprus-resident company on a sale of shares in a foreign subsidiary, regardless. And to further button it down, ‘Investment income’ is defined as any income which is not derived or does not accrue from any business, employment, pension, or annuity paid by reason or in connection with past employment. None of which is the case with ‘The foreign Participation Tax’ used in the Cayman’s and Isle of Man.
Cyprus’ ‘Foreign Participation Tax’ and use of Passive Dividend Rules are, explicitly, intended to prevent non-resident companies, over which domestic taxpayers have a controlling or substantial interest, from converting passive income into exempt dividend income, while adhering to the principle that anti-avoidance measures should be used only to maintain the equity and neutrality of national and international tax laws.
Additionally, Cyprus’ targets only passive income not derived from genuine business activities. They do not extend to activities such as production, normal rendering of services, or trading by companies engaged in real industrial or commercial activity, and they are not applicable to countries in which the taxation is comparable to that of the country of residence of the taxpayer; it’s not until the subsidiaries start to distribute dividends, that any exemptions become available’. Again, in tax havens, passive dividends are, typically exempt from tax before distribution.
I am sure there are many tax accountants who could, no doubt, find loophole and issues with Cyprus’ tax methodology (or this summary); there always will be – it’s their job. But, the point is intent, and Cyprus intends it not too easy to be seen or used as a tax haven; other Sovereigns boast quite the opposite.
As mentioned before (in another post), I am sure that Cyprus has its own fair share of Banking, AML, Mafia, Drug Smugglers, non-paying dog license owner’s etc. issues. You may not like tax treaties, or tax havens or even Cyprus itself (fine let’s discuss that in general terms for all countries), but, to equate the blatant money laundering and tax evasion of the Cayman’s, Isle of Man or Chinese pawn shops that Romney, GE, Apple, Siemens, and their directors have so effectively used to evade tax, to the vastly more transparent inter-mediation of Cyprus Banks is ill-informed and abusive.