At PARPARINOS & HADJIPANAYIS LLC, we constantly strive to be ahead of times and follow all regulatory, tax, banking and legislative developments across EU, worldwide and Cyprus to be in position to best advice interested parties while providing turnkey solutions, tailor-made to their business needs.
Recently it has become evident that more and more investors are looking into Cyprus for tax optimization purposes vis a vis crypto-assets. This informative article focuses on the domiciliary and taxation rules currently in force and directly related to crypto-assets for tax optimization purposes.
The necessity to acquire a specific regulatory license to trade crypto currencies other than for own account (i.e for retail / professional clients) and provide services such as reception and transmission, investment advice, execution of orders, market makers etc., depends on whether the particular nature of the crypto asset falls under the category of financial instruments (according to article 4 Annex C of MiFID 2) which will require a Cyprus Investment Firm (CIF) license regulated under the Cyprus Securities and Exchange Commission (CySEC) or under the e-money Directive 2009/110/EC (article 2) in which case they would be considered as electronic money and will require an Electronic Money Institution (EMI) license, supervised by the Central Bank of Cyprus (CBC).
Due to the fact that Cyprus has no specific legislation yet in place to deal with crypto-assets and in anticipation of the upcoming European Commission’s Regulation MiCA (Markets in Crypto Assets), still in development since 2018, it is vital to understand that currently any Cyprus corporate entity that in its core deals with such trading activities, will be subject to corporation tax of 12,5% on an annual basis on proceeds of sale whether generated abroad or in Cyprus. Physical persons who are not Cyprus tax residents will further take advantage of the zero deemed dividend distribution tax and withholding tax (government’s incentives for attracting foreign investors) when the company issues dividends either on a yearly basis or by law once every two years. Additionally non-doms will not be subject to the SDC (Special Defence Contribution) tax. SDC generally applies on dividends, rents and interest. As SDC tax does not apply in the case of Cyprus tax resident individuals who are non-domiciled in Cyprus, dividend and interest earned by such persons will now be completely tax exempt in Cyprus. It is noted that the main income of high net worth individuals is generally dividends and interest.
In regards to securities such as bonds, debentures, founders’ shares, ordinary and preference shares, options on titles etc., such securities are exempt from Cyprus Income Tax. When it comes to Capital Gains Tax (CGT), if the company whose securities are disposed does not at the time of disposal hold any immovable property directly or indirectly in Cyprus, then the proceeds from disposal will be exempt from CGT as well. Crypto assets that are identified as shares, hence seen as titles, will also fall under the current rule. For a specific opinion on these matters, it is vital to acquire a tax ruling from the Tax Authorities to identity the tax treatment prior to any type of engagement.
Individuals can also acquire tax residency in Cyprus under the 60 day rule or the 183 day rule of domicile. Each type of permit provides a tax residence however the criteria for qualifying under each rule vary. When an individual becomes a Cyprus tax resident, he will be eligible to the same tax advantages for a full tax exemption on deemed dividend distribution tax granted to the non-domiciles for the first 17 (out of 20) years of residence. The only taxation which cannot be evaded for both domiciles and non-doms is the GeSY (General Healthcare System) taxation, currently at 2,65% when issuing dividends either annually or once every two years required by the applicable law.
Another main challenge that concerns proceeds from crypto-trading, is the banking sector. Currently and according to guidelines provided by the CBC, banking institutions treat proceeds from crypto trading conservatively and proceed with caution due to the lack of transparency on the source of funds linked to such transactions. It will of course become relevant if the client’s portfolio consists of mixed funds (stocks, bonds, derivatives and other type of equity) in conjunction with crypto assets when asserting the client’s business structure for opening a corporate bank account. Alternatively, a Cyprus company may open a bank account abroad for dealing with the crypto part of the portfolio and be taxed in Cyprus, however corporate substance might come into play, which in turn will require expert advice on corporate structuring for tax planning purposes. Reporting arrangements for cross border transactions of this type of trading activities will also require compliance with DAC 6 (Directive 2018/822) to be inline with the base erosion and profit shifting (BEPS) rules set by OECD.
Physical persons who become tax residents in Cyprus will take advantage of the favorable tax regime when declaring their personal income and can also choose to declare all of their worldwide assets in Cyprus to be solely taxed in Cyprus (under the Double Taxation Treaties currently in force between Cyprus and 65 countries worldwide http://mof.gov.cy/en/taxation-investment-policy/double-taxation-agreements/double-taxation-treeties. Interested parties should be aware that when receiving money from employment, they may need to pay income tax and contributions to the social insurance fund. How much tax they will be called to pay depends on their earnings, tax exemptions, allowable deductions and the applicable tax rates.
For more information on this topic, please contact its author, Mr. Paris Hadjipanayis at [email protected].