Located in the Eastern Mediterranean, the island of Cyprus is one of the most favorable jurisdictions to consider for corporate restructuring, business expansion and relocation. There are many benefits to restructuring or expanding a private company into a Cyprus company including tax optimization and business environment advantages.
The Aspen Trust Group examines the reasons behind most corporate relocation efforts and the tax-efficient advantages of formation as a Cyprus company.
Business Expansion and Relocation Options
Named as one of Forbes’s Best Countries for Doing Business in 2019 and with over 12% of the resident population active in start-up enterprises, Cyprus remains one of the best jurisdictions for business expansion and relocation, even for small business owners.
The options of company structures in Cyprus include a private limited liability company (Private Cyprus Ltd.), a public limited liability company (Public Cyprus Ltd.), and a sole proprietorship. With the current incentives for company formation, most business owners are opting for a Private Cyprus Ltd with an established and transparent ultimate beneficial owner in order to maximize the advantages of the Cyprus jurisdiction and EU membership.
Under the new Cyprus immigration rules for 2022, business expansion and relocation will be made easier and faster as well as offer more support for company formation with the Business Facilitation Unit. Support services include registration of a company, social insurance, employees, and tax-related registries; residence and employment permit for foreign nationals employed by companies; and guidance mechanisms for company establishment and operation in Cyprus.
In addition, companies interested in business expansion and relocation to the jurisdiction may qualify to bring foreign employees, their families, and support staff along with them, while they are also offered residence and work permits valid for a period of 3 years. The new initiatives aim to improve the acceleration of the process to as little as 1 month for permit obtainment.
Another modern aspect of the immigration scheme pertains to digital nomads, or self-employed foreign nationals, who may be granted residence and work permits by meeting certain income criteria. Through this, digital nomads of the program may relocate to Cyprus and find a favorable business environment for establishing their own Cyprus company to better optimize their quality of life and tax status
What is Corporate Restructuring?
When making the choice to expand and relocate a business, many companies find it the perfect time to work with financial consultants to also restructure their organization to improve efficiency and financial considerations. The term ‘restructuring’ is used to describe a wide variety of business activities that ultimately lead to the reorganization of an enterprise and is an effective optimization strategy for business expansion and relocation.
Established by Eurofound in 2001, the European Monitoring Centre on Change (EMCC) designates eight different types of restructuring activities.
- Relocation;
- Outsourcing;
- Delocalization;
- Bankruptcy;
- Merger and acquisition;
- Internal restructuring;
- Business expansion; and
- Those that don’t fit the previously listed activities.
The goal of the EMCC is to promote greater understanding on the changes of work, employment and restructuring.
Since the European economic and financial crisis in 2008, the concepts of restructuring and reorganization have become increasingly pertinent with the distinct rise in corporate reorganization cases.
Corporate Restructuring in the EU
On November 18, 2019, the European Council adopted a new directive in order to facilitate cross-border conversions, mergers, and divisions of limited liability companies within the EU. The directive went into force on January 1 2020 and must be implemented in the local laws of EU member countries by January 31, 2023. While the directive is focused on cross-border mergers, anticipation is high that more harmonious options for corporate restructuring are on the rise.
Back in 2005, another directive covering cross-border mergers was adopted by the European Council, which prompted the issue of procedure into domestic legislation in each member state.
Aiming to understand the economic crisis in Europe, the European Commission began conversations with EU-level partners back in January 2002 under Article 138(2) EC, now Article 154, of the Treaty on the Functioning of the European Union (TFEU) to better anticipate and navigate social effects on corporate restructuring.
As tangible action has been slow by social partners, the Commission relaunched a political debate that centered on discussions focused on change and corporate restructuring. The hope is that these conversations will lead to measures to promote employment, growth and international competitiveness.
As companies look for ways to deal with the economic challenges brought on by the COVID-19 pandemic, corporate restructuring is an attractive option. Beyond cross-border mergers, corporate restructuring is available for companies looking into business expansion and relocation to gain financial advantages such as tax optimization, like those found when restructuring an established entity as a Cyprus company.
What Prompts an Existing Business to Restructure or Relocate?
There are several reasons for an existing business to begin looking at restructuring or relocating options.
Tax Incentives
Often, the most important reason for restructuring for business expansion or relocation is tax optimization. Tax regimes in various jurisdictions attract existing and new business enterprises with low-tax benefits and treaties with multiple countries to avoid double taxation.
Limited or Slow Economic Recovery
Financial pressures on businesses to reduce the costs of operations throughout regional and global recessions can lead to considerations about restructuring a foreign company in another jurisdiction. Centralizing different functions of business while relocating can alter the financial burdens on existing businesses and also lead to more economic benefits.
Issues on Compliance
Existing businesses may find increasingly complex compliance regulations too difficult and controlling. On the other hand, some jurisdictions may have too little compliance regulations that in turn lead to lower protections. Restructuring to an EU-member state offers a chance to become part of a regulated, unified market economy while ensuring that compliance is straightforward and uniform with access to protections and key benefits.
Globalization
Growth between emerging, developing, and mature markets continue to show disparities. Globalization is speeding up the process of acquiring capital, goods, and markets around the world, including an expansion in the number of international employees eager to relocate or join these business ventures.
Competitiveness
As jurisdictions begin to offer more incentives for foreign companies looking for new markets, existing companies can use restructuring as a means of more effective business expansion or relocation strategies with the aim of maximizing value while minimizing taxes and other financial, employee, and rental costs. This strategy provides them with a competitive advantage over other companies.
Intellectual Protections (IP) and Liability Concerns
Jurisdictions attractive to foreign companies not only offer financial benefits but also maintain options for IP protections and management or have created noteworthy protections concerning liabilities, both personal and corporate. Usually, the governments of these jurisdictions are actively working to promote international company formation within their borders in order to continue strengthening regional industries and markets.
Access to employment markets with qualified staff at lower costs
With companies permanently looking to reduce employee costs they always seek to relocate to jurisdictions where the employee market is mature. There are plenty of qualified-multilingual individuals to employ and their average salaries are lower than the jurisdiction of origin.
The Importance of Economic Substance and the Right Jurisdiction
The establishment of economic substance for a company is increasingly more significant for compliance and transparency when operating globally. As more jurisdictions and international organizations such as the European Union are requiring economic substance for companies, the decision where to base that substance is as important as ever.
Some of the requirements to establish economic substance, in particular for EU businesses, include:
- Permanent office real estate
- Demonstration of real economic activity in-jurisdiction
- In-country management
- Physical decision-making within headquarters
- In-house employee standards relating to the completion of normal business operations
- Retention of legal documents and company-related paperwork in headquarters
- Balance of outsourcing and in-house work
- Establishment of a local presence
When exploring business expansion and relocation options, foreign companies and their owners must decide the most advantageous jurisdiction that allows for meeting the demands of economic substance requirements while keeping costs low and work products of high quality.
The results are not only compliance and trustworthiness within international business environments but also more productive financial balancing between costs and incentives during site selection. Cyprus as a business formation jurisdiction is an attractive center for making the most of EU membership status, connection to other major economic regions, and worthwhile financial optimization approaches to forming and maintaining business operations.
Other Jurisdiction Considerations for Business Expansion and Relocation
A few other jurisdictions have caught the attention of international business owners who are looking for ways to utilize business expansion and relocation to increase their prospects. Some major business relocation destinations include Hong Kong, Singapore, Malta, Greece, and Cyprus.
Hong Kong
Hong Kong is another option for business expansion and relocation that boasts a fairly straightforward process of company formation and registration. It is also well-connected to other international business and financial hubs as well as more central to the large population of Chinese consumers.
If IP protections are a concern for businesses, the jurisdiction offers guaranteed protection of IP products and a specialized department known as the Intellectual Property Depart of Hong Kong to ensure their safekeeping.
Another financial consideration is the lack of taxes imposed in the jurisdiction, with only 3 direct taxes (profits, salaries, and property) and in-country income tax. The corporate tax rate is higher than Cyprus’s at 16.5%, but the first HK$2 million is only taxed at 8.25%. However, with the political changes over the last several years, the business and policy stability of the jurisdiction is still unsure.
Singapore
Singapore has also been a sought-after business expansion and relocation jurisdiction for foreign business owners, especially with The Port of Singapore becoming the busiest transshipment port globally.
Private limited companies only pay corporate tax on taxable income, exempting owners and shareholders from taxation, at rates between 0% and 17%. As a single-tier system, business income is only taxed at the corporate level. However, there are no tax exemptions for limited liability partnerships and sole proprietorship. Newly registered private limited companies may receive full tax exemption for income up to S$1 million for this first three-year period.
One disadvantage is that foreign nationals will need a director that is either a Singapore permanent resident or citizen.
Denmark
The jurisdiction of Denmark gets high marks for doing business and economic stability; however, the country often challenges business owners with lengthy processes, multiple-step registration and permit obtainment, and at least 10 corporate tax payment requirements annually. While the jurisdiction is well-connected to the rest of Europe, the navigation of business operations and guidelines can be slow and oftentimes confusing. In addition, the corporate tax rate is 22%, nearly 10% higher than jurisdictions such as Cyprus and Malta.
New Zealand
New Zealand also has advantages as a business destination for foreign nationals, especially as many film production enterprises see the jurisdiction as a valuable filming destination. In comparison, film production incentives in Cyprus are providing better financial options with greater tax incentives and lower operating costs than the growing economy of New Zealand as the corporate tax rate is 28%.
The jurisdiction also requires company formation with a director that is a resident of either New Zealand or Australia. Given the location of New Zealand, international companies may be better suited to choose jurisdictions that are much more central to Europe, Asia, the Middle East, and Africa.
Sweden
With some of the highest standards of living and strong governmental regulations, the economic landscape of Sweden has long been a destination for business expansion and relocation. The jurisdiction has maintained a steady, although more modest, economic growth and is very stable. Foreign business owners find the jurisdiction easy to register in and complete daily business activities. However, the cost of doing business, daily living and office expenses, and taxes are must higher than in other European jurisdictions. For instance, VAT is 25% on top of other tax burdens such as the 21.5% corporate tax rate.
The Cyprus Company Advantage
With one of the lowest corporate tax rates in the European Union (12.5%), Cyprus is one of the most attractive jurisdictions to consider for business expansion and relocation. In comparison, other sought-after jurisdictions such as Belgium (33.99%) and Malta (35%) have relatively high taxation.
Another consideration is that a Cyprus company does not have to pay capital gains or withholding taxes. The Netherlands, another favored restructuring destination, does not have a capital gains tax but a domestic withholding tax of 15% is applied on domestic dividends.
Furthermore, over 60 countries have signed double taxation treaties with Cyprus, making it a low-tax jurisdiction for foreign companies. In addition, a Cyprus company can be completely foreign-owned. In Switzerland, for instance, a limited liability company must have at least one Swiss resident board member or director.
A Cyprus company also enjoys the protections, benefits, and market access to the EU. Many non-EU companies invest in the country for its strategic geopolitical location which gives it unique access to markets in Europe, Russia, Africa, Asia, and the Middle East, not to mention its major shipping industry, one of the largest in the world. When considering other international restructuring jurisdictions, access to shipping avenues or the possibility of being located in a land-locked country may limit a business’s reach.
In terms of registering a business and opening a bank account, both processes in Cyprus are hassle-free and do not have many complex local requirements to overcome.
A Cyprus company also comes with strong IP protections through its IP Box Regime incentives. Other EU countries, such as Germany and Greece, do not have special IP regimes or advantageous tax benefits for IP incomes.
Extending beyond IP incentives, Cyprus is the next ideal location for filming and production needs as well as a range of services surrounding the industry. Its film tax incentives are competitively putting Cyprus among the ranks of Malta, Ireland, Germany, and New Zealand.
Cyprus has one of the highest percentages of university degree holders in the world in comparison to its population.
The Cyprus employment market is mature and rich in content. It consists of multilingual, degree or post-graduate degree holders, not to mention the professional qualification holders, who have a thirst to work hard and succeed. The many accountants, lawyers, engineers, IT specialists, doctors not to mention analysts and actuaries are willing to be employed at lower salaries than their counterparts in Europe giving the relocating companies options of staff at competitive rates.
In all, a Cyprus company can provide benefits beyond just tax considerations that make business expansion or relocation to the jurisdiction a smart move for a host of business concerns. When compared to other favored EU destinations, Cyprus competes across the board.
The Takeaway: Business expansion and relocation
Forming a Cyprus company comes with a plethora of benefits for existing companies that know that business expansion and relocation are the paths towards financial optimization. The jurisdiction of Cyprus not only provides relief from a high tax burden but also has many protections and regulations in place to make conducting business with transparency and compliance simple and straightforward.
Restructuring as a Cyprus company also provides ample opportunities to invest in new markets and maintain a global competitive edge.
The professionals at The Aspen Trust Group can assist your business with becoming a Cyprus company through restructuring plans, facilitation, and management. Consult with the team today and move financially forward with a tailor-made business expansion and relocation action plan.
