To those considering moving their corporate or fiduciary structures from Cyprus, Malta and Luxembourg both offer attractive solutions, explain Herman Troskie and Mel Roberts of Maitland. Maitland offers offshore legal and tax advisory services to private and corporate clients.
Before its recent economic meltdown and subsequent bailout, Cyprus had proved to be an attractive destination for the corporate and fiduciary structuring market. Its low-cost, efficient and well-regulated financial environment was popular among the island’s existing corporates and those contemplating establishing a structure there.
However, in the wake of recent events, the country’s continued attractiveness is under question. The island’s revenue raising powers are subject to speculation, particularly as the corporate tax rate will soon rise from 10% to 12.5%. The belief that the fiscal stimulus will rely on corporate tax rates among other measures appears to be fairly widespread.
Migration of structures
There is merit in looking for an alternative solution. Contrary to speculation, neither Malta nor Luxembourg is likely to follow in Cyprus’ footsteps. In fact both jurisdictions can offer specific advantages.
Companies considering a change face two possible options. The first is to migrate Cypriot structures to a new jurisdiction. The second is to sell all the assets of the Cypriot company to a newly created company in the new jurisdiction and then liquidate the original company.
Both are time-intensive, since they are subject to numerous national and international statutes, treaties, laws and protocols. Furthermore, the costs resulting from any errors are likely to be high. Meticulous planning is required in both cases and advisers must be crystal clear on the steps to be taken to secure the best possible outcome for their clients.
In both cases there are several stages to the process of moving structures from Cyprus. Shareholders must approve the move, the statutory documents of the company must comply with the new jurisdiction and various filings must be made with the Cypriot Registrar of Companies. This last stage includes proof that the company has no pending litigation, is solvent and has paid all taxes and fees owing. The planned move must also be published in two separate newspapers in Cyprus.
Assuming there are no objections to the move from creditors or other interested parties, companies then face a three-month waiting period before consent is given by the Cypriot Registrar of Companies.
Key factors in the migration of Cypriot structures
A key consideration for migrating to Malta is that, under local law, companies are able to migrate without being liquidated. An incorporation fee, worked out on a sliding scale, applies and the Maltese Registrar of Companies requires various filings. These consist of: proof that the company is able to move from its existing jurisdiction and that its existing jurisdiction has been informed of the move; that the move has the approval of shareholders; that all statutory documents are compliant with Maltese law; and that it is solvent with no pending legal claims against it.
As in Malta, company law in Luxembourg also allows companies that are incorporated in other jurisdictions to continue their business as a locally registered company. There are two primary forms of corporate structure: the "société anonyme" a public limited liability company which has a minimum capital requirement of €31,000; or a "société à responsabilité limitée" a private limited liability company with minimum capital of €12,500. An SA requires at least 25% of the minimum capital to be paid up front.
In order to approve migration, ensure organisational documents are compliant with Luxembourg law and appoint directors – or managers in the case of an SARL – an extraordinary general meeting of the company’s shareholders must be held in front of a Luxembourg public notary. Shareholders are also required to adopt an opening balance sheet for the company, which is supported by a Luxembourg auditor’s report (in the case of an SA).
In the case of an SA the auditor confirms the net asset value of the company as reflected in the opening balance sheet. For an SARL, the net asset value must be confirmed by a management certificate in support of the balance sheet. At least 50% of the issued share capital must be present, or represented, at the extraordinary general meeting and two-thirds of those must vote in favour of transferring the registered office to Luxembourg to confirm the move.
The time taken to migrate a company depends firstly on how long it takes to prepare – and audit in Luxembourg if necessary – its opening balance sheet and secondly on the steps to be taken in Cyprus. Once all the necessary documentation is prepared, arranging the notarial deed for the Luxembourg meeting is relatively straightforward. The majority of companies complete the migration process in approximately four to six months, with the waiting period in Cyprus taking up most of that time.
Key factors in an asset sale
If planned correctly, the tax consequences of selling the assets of a Cypriot company before liquidation should be the same as migrating the Cypriot structure. The key differences stem from the fact that, in corporate terms, migration enables the continuation of the Cypriot company whereas the sale and liquidation means it will cease to exist.
The process for liquidating a Cypriot company will depend on the method used to wind up its affairs. This depends on whether the Cypriot company has any assets and liabilities, and whether it has been dormant.
To dissolve a solvent Cypriot company voluntarily, two methods are available:
• Members’ voluntary liquidation: this takes between six and eight months from the date of application for a tax clearance certificate from the Cypriot authority.
• ‘Strike off’ of the Cypriot company from the Cypriot register: this can take up to three years and can be objected to by any organisation, authority or creditors with an interest in the company’s affairs up to 20 years from the date of it being struck off. Should this happen, the various liabilities of the company’s directors, shareholders and secretary will continue and may be enforced as if the strike off had not taken place.
The double taxation treaty between Luxembourg and Russia
Double Taxation treaties are a critical factor when determining the most appropriate jurisdiction for a migrating company or fiduciary structure. In fact, Luxembourg and Russia have signed a protocol to their existing double taxation treaty, which should make Luxembourg an even more attractive place for structuring Russian investments.
This protocol results in treatment, which will essentially be on par with the current double taxation treaty between Cyprus and Russia and is expected to enter into force on 1 January 2014. The major change concerns the minimum withholding tax rate on dividends, which is reduced from 10% to 5%. Dividend recipients must hold at least 10% of the company paying the dividends and must have invested at least €80,000. No minimum shareholding period is required. The protocol also broadens the definition of dividends, which will be very useful for the Luxembourg investment fund industry.
Success in detail
As alternatives to Cyprus, both Malta and Luxembourg offer numerous advantages. However, achieving a successful migration involves a journey through elaborate worlds of legal requirements, caveats and qualifications. Each system should be considered on its own merits, with its particular goals, tax regime, running costs, and macroeconomic factors taken into account. Above all, expert advice should be sought from advisers who are prepared to "sweat the details".