Anti-offshore changes that might come into force in 2016

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Anti-offshore changes that might come into force in 2016

On the basis of the existing Directive, the subsidiaries are exempt from paying taxes on profits and dividends paid on receipt by parent company. This approach is beneficial from an economic point of view as to minimize taxation of corporate structures within the EU and legally get around national legislation of the other member countries of the European Union.

Suppose that the Russian (or Ukrainian) beneficial owner (the person who receives income) is in the possession of the company, executed through a European holding company and related offshore company over him. Accordingly, paying dividends from the European states (in this case, Luxembourg, the Netherlands and Latvia) to offshore, the company faces a tax rate of 15 percent. To avoid this, experts suggest to put on top of the European company holding registered in Cyprus, that is where the dividends are not taxed.

anti-offshore-changes-2016In order to prevent such actions, this January, the EU Council of Economic and Finance Ministers (ECOFIN) had announced changes to the EU Parent-Subsidiary Directive, which take effect in the event that the corporate structure will be recognized as an “unreal”, namely, if the tax benefit is the sole purpose of its creation.

It is worth noting that not only the whole structure, but also parts of it, can be acknowledged as “unreal”. Besides the EU member states have the right to modify or add new conditions to the payment of taxes by the end of this year.

From all of the above, we can conclude that in 2016 the dividend exemption from taxation in Cyprus will be impossible if the company will not be able to confirm its real activities. The Netherlands has already actively engaged in the fight against “unreal” enterprises and the EU is waiting for action from other countries as well.

The following changes have been added into the Directive:

  • European states should not provide benefits to companies whose sole purpose is to reduce taxes
  • In the event that the company has no other business purposes, it should be recognised as “unreal”
  • Governments may take additional measures to protect against fraud and tax evasion

How to protect yourself?

  1. Demonstrate real economic activity in your holding company: rent an office, employ staff that will take on some tasks, hold meetings and sign agreements in that office; in other words, prove the economic benefit of having a Cyprus (in this example) holding company in your structure.
    Of course, this option is not the cheapest. However, it is not as expensive as it may seem. OLIESERVE prepared a comparison table on the “Business Move” options that you may consider for putting some substance in your Cyprus companies.
  1. Simplify complex multi-level structures. There is not much point in making your structure too multi-layered; in the eyes of an experienced tax agent it will be quickly revealed anyway. Use an advice of a professional tax specialist, who will help you to optimize your structure without overpaying for numerous layers of companies.

These are the two most apparent ways to protect yourself after the new Directive will entry into force.