Investing in the Foreign Real Estate Market through Cyprus · Bulgarian company, Bulgaria has a right to tax the sale of the shares (including shares held in “Property Rich” companies)

Investing in the Foreign Real Estate Market through Cyprus

A summary of the proposed structures for holding foreign

real estate through Cyprus

February 2016

FEBRUARY 2016 / INVESTING IN REAL ESTATE THROUGH CYPRUS / 2

Contents

Contents 2

Cyprus: General Corporate Tax Provision 3

Country 1: Bulgaria 4

Country 2: Czech Republic 6

Country 3: France 8

Country 4: Germany 11

Country 5: Greece 13

Country 6: India 15

Country 7: Poland 17

Country 8: Romania 19

Country 9: Russia 21

Country 10: Serbia 23

Country 11: Switzerland 25

Country 12: Ukraine 27

Country 13: United Kingdom 29


Cyprus: General Corporate Tax Provision

Tax residency

A company is considered to be tax resident in

Cyprus if the “management and control” is

exercised in Cyprus.

Notional Interest Deduction (NID)

As of 1st January 2015, a NID will be granted

for new capital introduced in a Cyprus tax

resident company and used in the business.

The deemed tax deduction is equal to the

amount of the new equity multiplied by a

reference interest rate

Taxation of rental income

Rental income is subject to both Corporation

Tax (CT) and Special Defence Contribution

Tax (SDC).

The net rental income will be included in the

taxable base of the Cyprus company and will

be taxed at the corporate tax rate of 12,5%.

The rate of SDC on rents is 3% and it is

imposed on the gross rental income reduced

by 25%.

Dividends received from abroad

As from 1st January 2016, foreign dividends

received by a Cyprus tax resident company will

not be exempt from corporation tax in Cyprus,

provided that such dividend payments are

allowed as a tax deduction in the country of

residency of the dividend paying company.

Dividends received from abroad are exempt

from SDC at the rate of 17% if one of the

following conditions is satisfied:

a) The company paying the dividend does not

engage directly or indirectly more than

50% in activities which lead to passive

income OR

b) The foreign tax burden on the income of

the company paying the dividend is not

substantially lower than the tax burden in

Cyprus.

Tax credit available

A tax credit will be afforded according to the

Double Taxation Agreements concluded by

Cyprus. In the absence of a Double Taxation

Agreement, Cyprus unilaterally affords a credit

for the foreign tax paid on the same income.

For dividends received from other EU Member

States the underlying tax credit is also

available. Furthermore, a number of Double

Tax Treaties concluded by Cyprus also allow

for the availance of an underlying tax credit

(e.g. Russia).

Withholding taxes

There are no withholding taxes on payments to

non tax resident persons (companies or

individuals) in respect of dividends, interest

and royalties. (Royalties sourced in Cyprus

have a 10% withholding tax subject to DTT

provisions)

Capital Gains Tax (CGT)

Capital gains in Cyprus are not included in the

pool of ordinary trading profits of a business

but instead are taxed separately under the

Capital Gains Tax Law (CGT).

Capital gains tax is only imposed on the

disposal of immovable property situated in

Cyprus as well as the disposal/redemption of

shares in companies (other than quoted

shares) in which the underlying asset (either

directly or indirectly) is immovable property

situated in Cyprus. Capital gains tax is

imposed on the profit at a flat rate of twenty

percent (20%) after allowing for indexation.

Capital Gains that arise from the disposal of

immovable property held outside Cyprus or

shares in companies which may have as an

underlying asset immovable property situated

outside Cyprus, are completely exempt from

capital gains tax.

Inheritance or Estate Taxes

There are no inheritance or estate taxes.

Wealth Taxes

Cyprus imposes no tax on wealth.


Country 1: Bulgaria

Description of the structure

The establishment of a Cyprus holding

company whose shares will be held by the

non-resident investor.

The Cyprus company may receive funding in

the form of debt and/or equity from its

shareholder in order to invest in the share

capital of a Bulgarian company which in turn

will be the holder/owner of immovable property

situated in Bulgaria.

Tax considerations/benefits:

Capital gains from the sale of the shares of

foreign property companies will be exempt

from taxation in Cyprus (no participation

threshold and no minimum holding period

requirements exist);

Reduced or zero withholding tax on dividend

payments based on Cyprus-Bulgaria DTT or

EU Parent-Subsidiary Directive;

Full exemption on incoming dividends based

on the Cyprus participation regime. (no

participation threshold and no minimum holding

period requirements exist);

No withholding tax in Cyprus on profit

repatriation.

Profits parked at the level of the Cyprus

company for further reinvestment as the non-

resident investor wishes;

Cyprus is a common law jurisdiction and its

legal framework is based on the UK law

system.

Taxation of rental income in Bulgaria

Rental income is regarded as part of the

Bulgarian company’s ordinary taxable income.

The rental income derived by the Bulgarian

company following the deduction of any related

expenses, will be subject to corporate income

tax rate of 10%.

Withholding tax in Bulgaria on dividend

payments

Dividends paid by the Bulgarian subsidiary to

the Cyprus company will be subject to

witholding tax in Bulgaria at the following rates:

Zero withholding tax as per the EU

Parent-Subsidiary Directive (no

participation threshold and no

minimum holding period requirements

exist);

10% or 5% (minimum holding of 25%)

withholding tax as per the Cyprus-

Bulgaria DTT.

Taxation of dividend income in Cyprus

Dividend income received by the Cyprus

company from the Bulgarian company will be

exempt from taxation in Cyprus (subject to

relaxed conditions).

Taxation of gains from the disposal of shares

connected to immovable property situated in

Bulgaria

Based on the Double Tax Treaty (DTT)

between Cyprus and Bulgaria, in the instance


where a Cyprus company sells the shares of a

Bulgarian company, Bulgaria has a right to tax

the sale of the shares (including shares held in

“Property Rich” companies).

As per Bulgaria’s local tax legislation, any gains

derived from the disposal of the shares of a

company in Bulgaria that owns immovable

property situated in Bulgaria will be subject to

taxation at a rate of 10%, unless the Bulgarian

company is listed in an approved stock

exchange in Bulgaria or another European

Economic Area (EEA) country.

Repatriation of profits from Cyprus

Any dividend payments made by the Cyprus

company to its non-resident shareholders will

not be subject to any withholding tax in Cyprus.

Exit Route

There are no exit taxes on the sale or during

the liquidation of the Cyprus company and no

withholding tax on distribution of the proceeds

to the non-resident investors.


Country 2: Czech Republic








capital of a Czech company which in turn will

be the holder/owner of the immovable property

situated in the Czech Republic.


Capital gains should not be taxable in Cyprus

or in the Czech Republic;


payments based on Cyprus-Czech Republic

DTT or EU Parent-Subsidiary Directive;






repatriation.


company for further utilisation as the non-




system.

Taxation of rental income in the Czech Republic

Rental income is regarded as part of the Czech

Republic company’s ordinary taxable income.

The rental income derived by the Czech

Republic company following the deduction of

any related expenses, will be subject to the

corporate income tax rate of 19%.

Withholding tax in the Czech Republic on

dividend payments

Dividends paid by the Czech Republic

company to the Cyprus company will be

subject to witholding tax in the Czech Republic

at the following rates:

Zero withholding tax (minimum holding

of 10% for a continuous period of 2

years) as per the EU Parent-

Subsidiary Directive;

5% or 0% (minimum holding of 10%

for a continuous period of at leat 12

months) withholding tax as per the

Cyprus-Czech Repuclic DTT.



company from the Czech Republic company

will be exempt from taxation in Cyprus (subject

to relaxed conditions).



the Czech Republic

“Property-Rich” clause is included in the

Cyprus-Czech Republic DTT.

Therefore, the sale of the shares of the

“Property-Rich” Czech subsidiary by the


Cyprus company may be taxed in the Czech

Republic.

As per the Czech Republic’s local tax

legislation, any gains derived from the disposal

of shares of a company in the Czech Republic

that owns immovable property situated in the

Czech Republic will be exempt from taxation in

the Czech Republic subject to the local

participation exemption conditions (minimum

holding of 10% for a continuous period of 12

months).

As per the Cyprus local tax legislation, gains

derived from the disposal of the shares

connected to immovable property situated

outside of Cyprus are exempt from taxation in

Cyprus.

Therefore, the sale of the Czech company’s

shares by the Cyprus company will be exempt

from taxation in Cyprus and the Czech

Republic.





Exit Route






Country 3: France

Structure 1:

Description of structure 1

The establishment of a French limited liability

company-société à responsabilité limitée

(SARL) that will own and use the immovable

property in France for commercial purposes.




capital of the French subsidiary.





holding threshold and no minimum holding



payments based on Cyprus-France DTT or EU

Parent-Subsidiary Directive;






repatriation.






system.

Taxation of rental income in France


French company’s taxable ordinary income.

The rental income derived by the French


expenses, will be subject to the standard

corporate income tax at a rate of 33,3%.

Withholding tax in France on dividend

payments

Dividends paid by the French company to the

Cyprus company will be subject to withholding

tax in France at the following rates:





15% or 10% (minimum holding of

10%) withholding tax as per the

Cyprus-France DTT.



company from the French company will be





France


Cyprus-France DTT.


“Property-Rich” French subsidiary by the

Cyprus company may be taxed in France.


As per the French local tax legislation, any

gains derived from the disposal of shares of a

French company whose assets consist of more

than 50% of immovable property situated in

France will be subject to a withholding tax of

33,3%.





Cyprus.



company to its non-resident shareholders will not

be subject to any withholding tax in Cyprus.

Exit Route






Structure 2:

Description of structure 2

The establishment of a French partnership

such as a Société Civile Immobilière (SCI) that

will own the immovable property in France and

used by the investor for private purposes only.

The SCI should have at least two members

who may be the investor and a Cyprus holding

company.

The SCIs are considered as pass-through

entities for corporate tax purposes and are not

personally liable to corporate income tax. The

earnings of the SCI are deemed to pass

through to the members of the SCI and are

subject to French personal income tax (if the

receipient member is individual) and to French

corporate income tax (if the receipient member

is a company), according to their pro-rata

share on the income of the French SCI.

Wealth tax in France

Wealth tax may be applicable in France on the

fair market value of the SCI’s shares every

year, wchich can be determined by the fair

market value of the SCI’s assets less the SCI’s

debts exsisting on the same date (i.e

mortgage).

Taxation of gains from the disposal of the

shares of the SCI

The capital gains arising from the sale of the

shares of the SCI by the Cyprus company and

the non-resident investor will be taxed in

France at the general rate of 33,3% for which

the members will be liable.





Cyprus.


Country 4: Germany








capital of a German company which in turn will

be the holder/owner of the immovable property

situated in Germany.








payments based on Cyprus-Germany DTT or

EU Parent-Subsidiary Directive (subject to

certain requirements);






repatriation.






system.

Taxation of rental income in Germany


German company’s ordinary taxable income.

The rental income derived by the German


expenses, will be subject to an effective tax

rate of 15,83% (Corporate tax rate: 15,5% and

Solidarity charge rate: 5,5%), provided that the

requirements for the exemption from German

trade tax (between 7% and 17%, depending on

the municipality where the German company is

located) are met.

Withholding tax in Germany on dividend

payments

Dividends paid by the German company to the


tax in Germany at the following rates:



months) as per the EU Parent-


15% or 5% (minimum holding of 10%)


Germany DTT.



company from the German company will be






Germany


Cyprus-Germany DTT.


“Property-Rich” German subsidiary by the

Cyprus company may be taxed in Germany.

As per the German tax legislation, any gains

derived from the disposal of the shares of a

German company that owns immovable

property in Germany will be 95% exempted

from taxation.

The remaining gains of 5% will be subject to

taxation in Germany at an effective tax rate of

15,83% (i.e. effectively 0,08% of the capital

gains).

The transfer of shares can result in a partial

(>25%) or entire (>50%) forfeiture of tax losses

at the level of the German company under the

German change-of-control rules.

Please note that the transfer of shares of

companies that own real estate assets situated

in Germany are generally subject to Real

Estate Transfer Tax (RETT) (3,5% up to 6,5%

depending on the state where the real estate is

located).


from disposal of shares connected to

immovable property situated outside of Cyprus

are exempt from tax in Cyprus.





Exit Route






Country 5: Greece








capital of a Greek company which in turn will

be the holder/owner of immovable property

situated in Greece.


Capital gains should not be taxable in Cyprus

or in Greece;

Zero withholding tax on the dividend payments

based on the EU Parent-Subsidiary Directive;






repatriation.






system.

Taxation of rental income in Greece

Rental income is regarded as part of the Greek

company’s ordinary taxable income.

The rental income derived by the Greek


expenses, will be subject to a corporate tax

rate of 26%.

Withholding tax in Greece on dividend

payments

Dividends paid by the Greek company to the


tax in Greece at the following rates:





10% withholding tax as per the Greek

tax legislation (Cyprus-Greece DTT

25%);



company from the Greek company will be



Special tax on immovable property

Please note that special annual tax is imposed

at the rate of 15%, based on the objective

value of the immovable property held by non-

resident entities.

This tax will not be applied however, if the

identity of the ultimate beneficial shareholder is

disclosed to the Greek Tax authorities and the

individual obtains a Greek Tax Identification

Number.




Greece

No “Property-Rich” clause is included in the

Cyprus-Greece DTT.

Gains derived from the sale of the shares of the

Greek company will be taxable in the country of

residence of the seller (i.e. Cyprus).




outside of Cyprus are exempt from tax in

Cyprus.

Therefore, the sale of the Greek company’s


from taxation in Cyprus and Greece.





Exit Route






Country 6: India








capital of an Indian company which in turn will


situated in India.







Dividends paid from the Indian company to the

Cyprus company should be subject to zero

withholding tax in India according to the

Cyprus-India DTT;






repatriation.




Cyprus is a common law jurisdiction and its legal framework is based on the UK law system.

Taxation of rental income in India

Rental income is regarded as part of the Indian


The rental income derived by the Indian



rate of 30% plus surcharges.

Withholding tax in India on dividend payments

Dividends paid by the Indian company to the

Cyprus company will be subject to the local

Dividend Distribution Tax at an effective rate of

16,995%.

After the payment of the DDT in India,

dividends can be distributed to the Cyprus

company free from any further taxation.



company from the Indian company will be





India


Cyprus-India DTT.


Indian company will be taxable in the country of

residence of the seller of the shares (i.e.

Cyprus).






Cyprus.

Therefore, the sale of the Indian company’s


from taxation in Cyprus and India.





Exit Route






Country 7: Poland








capital of a Polish company which in turn will


situated in Poland.


Capital gains should neither be taxable in

Cyprus nor in Poland;


payments based on Cyprus-Poland DTT or EU

Parent-Subsidiary Directive;






repatriation;


company for further reinvestment as the non-



Taxation of rental income in Poland

Rental income is regarded as part of the Polish


The rental income derived by the Polish



rate of 19%.

Withholding tax in Poland on dividend

payments

Dividends paid by the Polish company to the


tax in Poland at the following rates:





5% or zero (minimum holding of 10%

for a continuous period of 24 months)


Poland DTT.



company from the Polish company will be





Poland


Cyprus-Poland DTT.


Polish company will be taxable in the country of

residence of the seller (i.e. Cyprus).






Cyprus.

Therefore, the sale of the Polish company’s


from taxation in Cyprus and Poland.





Exit Route






Country 8: Romania








capital of a Romanian company which in turn

will be the holder/owner of immovable property

situated in Romania.

Tax benefits by structuring through Cyprus


Cyprus nor in Romania;


paments based on the Cyprus-Romania DTT

or EU Parent-Subsidiary Directive;






repatriation;





Taxation of rental income in Romania

Rental income is included as part of the

Romanian company’s ordinary taxable income.

The rental income derived by the Romanian



rate of 16%.

Withholding tax in Romania on dividend

payments

Dividends paid by the Romania company to the


tax in Romania at the following rates:





10% withholding tax as per the

Cyprus-Romania DTT.



company from the Romanian company will be





Romania


Cyprus-Romania DTT.


Romanian company will be taxable in the

country of residence of the seller (i.e. Cyprus).






Cyprus.

Therefore, the sale of the Romanian company’s


from taxation in Cyprus and Romania.





Exit Route






Country 9: Russia








capital of a Russian company which in turn will


situated in Russia.



Cyprus nor in Russia until 31 December 2016;

Reduced withholding tax on dividend payments

based on Cyprus-Russia DTT;






repatriation;






system.

Taxation of rental income in Russia


Russian company’s ordinary taxable income.

The rental income derived by the Russian



rate of 20%.

Withholding tax in Russia on dividend

payments

Dividends paid by the Russian company to the


tax in Russia at the following rates:

10% or 5% (direct investment of

€100.000 or equivalent) withholding

tax as per the Cyprus-Russia DTT.



company from the Russian company will be





Russia


renegotiated Cyprus-Russia DTT.

Sale of Russian company’s shares by the Cyprus

company prior to 1st January 2017


Russian company will be taxable in the country

of residence of the seller of the shares (i.e.

Cyprus).





outside Cyprus are exempt from tax in Cyprus.

Therefore, the sale of the Russian company’s


from taxation in Cyprus and Russia.

Sale of Russian company’s shares by the

Cyprus company after to 1st January 2017

The sale of the shares of the “Property-Rich”

Russian subsidiary by the Cyprus company

may be taxed in Russia.

As per the Russian local tax legislation, any

capital gains from the disposal of shares of a

Russian company whose assets consist of

more than 50% of immovable property situated

in Russia will be subject to a withholding tax of

20%.





Cyprus.





Exit Route






Country 10: Serbia








capital of a Serbian company which in turn will


situated in Serbia.



Cyprus nor in Romania;

Reduced withholding tax on dividend paments

based on the Cyprus-Serbia DTT;






repatriation;





Taxation of rental income in Serbia


Romanian company’s ordinary taxable income.

The rental income derived by the Serbian



rate of 15%.

Withholding tax in Serbia on dividend payments

Dividends paid by the Serbian company to the


tax in Serbia at a 10% withholding tax as per

the Cyprus-Serbia DTT.



company from the Serbian company will be





Serbia


Cyprus-Serbia DTT.


Serbian company will be taxable in the country

of residence of the seller (i.e. Cyprus).





Cyprus.

Therefore, the sale of the Serbian company’s


from taxation in Cyprus and Serbia.






Exit Route






Country 11: Switzerland








capital of a Swiss company which in turn will


situated in Switzerland.



paments based on the Cyprus-Switzerland

DTT;






repatriation;





Taxation of rental income in Switzerland


Switzerland company’s ordinary taxable

income.

The rental income derived by the Swiss


expenses, will be subject to federal taxation

(8,5%) plus cantonal taxes (effective rates

range from 9% to 20%).

Withholding tax in Switzerland on dividend

payments

Dividends paid by the Swiss company to the


tax in Switzerland at the following rates:

10% or 0% (if the Cyprus company

holds at least 10% in the Swiss

company for an uninterrupted period

of 1 year) withholding tax as per the

Cyprus-Switzerland DTT.



company from the Swiss company will be





Switzerland


Cyprus-Switzerland DTT.


“Property-Rich” Swiss subsidiary by the Cyprus

company may be taxed in Switzerland.

As per the Swiss tax legislation, gains from the

disposal of shares which derived their value

either directly or indirectly from immovable


property situated in Switzernad, will be subject

to federal taxation (8,5%) plus cantonal taxes

(effective rates range from 9% to 20%).





Cyprus.





Exit Route






Country 12: Ukraine








capital of a Ukrainian company which in turn

will be the holder/owner of the immovable

property situated in Ukraine.



Cyprus nor in Ukraine;

Reduced withholding tax on dividend payments

based on the Cyprus-Ukraine DTT;






repatriation;






system.

Taxation of rental income in Ukraine


Ukrainian company’s ordinary taxable income.

The rental income derived by the Ukrainian



rate of 18%.

Withholding tax in Ukraine on dividend

payments

Dividends paid by the Ukranian company to the


tax in Ukraine at the following rates:

15% or 5% (minimum holding of 20%

or an investment of at least €100.000

or equivalent) withholding tax as per

the Cyprus-Ukraine DTT.



company from the Ukrainian company will be





Ukraine


Cyprus-Ukraine DTT.


Ukrainian company will be taxable in the

country of residence of the seller of the shares

(i.e. Cyprus).






Cyprus.

Therefore, the sale of the Ukrainian company’s


from any taxation in Cyprus and Ukraine.





Exit Route






Country 13: United Kingdom







shareholder in order to directly invest in

immovable properties (residential or

commercial) situated in the United Kingdom

(UK).

The Cyprus company will derive rental income

and income from the sale of the investment

property.


Capital gains arsing for the Cyprus company

from the sale of commercial property, held for

investment purposes will be exempt from

capital gains tax in the UK.

Capital gains arising from the sale of property

situated outside of Cyprus will be exempt from

taxation in Cyprus;


repatriation;






system.

Taxation of rental income in the UK

Commercial Property

The Cyprus company will be subject to UK

income tax at the basic rate (currently 20%) on

its net rental profits.

Taxable profits are arrived at by deducting from

the UK rental income expenses which have

been incurred wholly and exclusively for the

purposes of the UK property business.

Residential Property

The same tax analysis as set out for

commercial properties applies for the rental

income derived from residential properties

situated in the UK.

Please note that the HMRC have introduced an

annual tax (Annual Tax on Enveloped

Dwellings-ATED) applicable to non-UK

resident entities that hold high value residential

properties in the UK.

ATED is only applicable to residential

properties.

ATED is currently payable for residential

properties that are valued over £1m.

Furthermore, with effect from 1st April 2016

residential properties that are worth more than

£500k but less than £1m will also fall within the

ATED regime.

Taxation of rental income in Cyprus

The net rental profits (commercial or

residential) will be included in the taxable base

of the Cyprus company and will be taxed at the

corporate income tax rate of 12,5%.

The Cyprus company is eligible to claim a NID

provided that the funds introduced in the

Cyprus company were used for the acquisition

of the UK property.


Further, 75% of the gross rental income is also

subject to Special Defence Contribution (SDC)

at a rate of 3% (effective tax rate of 2,25%).

Taxation of the gains from the disposal of the

UK property

Commercial Property

Capital gains arising for the Cyprus company

from the disposal of the UK commercial

property which is held for investment purposes,

will not be subject to UK tax.


from the disposal of the UK commercial

property which is held for trading purposes, will

be subject to UK tax at the rate of 20%.

Capital gains arising from the disposal of


are exempt from taxation in Cyprus.

Residential Property


from the disposal of the UK residential property

which is held for either trading or investment

purposes will be subject to UK tax at the rate of

20%.

The ATED charge will only apply to the gain

which accrues after 5 April 2013 in relation to

the period in which the property was subject to

the ATED charge. Therefore, a valuation on or

about April 2013 will be recommended.

Capital gains arising from the disposal of


are exempt from taxation in Cyprus.

Withholding tax in Cyprus on dividend

payments




Exit Route





www.kpmg.com ©2016 KPMG Limited, a Cyprus limited liability company and a member firm of the KPMG network of independent member firms affiliated with

KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Cyprus.

KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International") a Swiss entity.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is

received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a

thorough examination of the particular situation.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International

Cooperative (“KPMG International”) or KPMG member firms.

Documents

Investing in the Foreign Real Estate Market through Cyprus · Bulgarian company, Bulgaria has a right to tax the sale of the shares (including shares held in “Property Rich” companies)