Monday, 19 September, 2016

Cyprus Gateway Into Post-Sanction Iran

Iran’s position in the Middle East is an extra ordinary one. Like Cyprus, Iran benefits considerably from its geographical location. The strategic location makes sure that the country has easy access to the Middle East, Central Asia and other neighboring regions. It goes without saying that this makes it an attractive place for doing business in the region. If we look at the composition of the population of approximately 80 million people, it immediately catches the eye that almost 65% of these people are under the age of 35 – many of whom are highly educated. Combine that with; the country’s huge natural resources; the fact that Iran (despite the sanctions) is already the second largest economy in the region, with vast investment opportunities in almost all economic sectors; sophisticated manufacturing infrastructure capabilities; the scaling down of the sanctions etc, and you have the perfect recipe for a country with potential to quickly become the region's largest economy. Due to the lifting of the sanctions and a more business-oriented environment the real GDP growth is projected to reach 4.2 percent and 4.6% in 2016 and 2017, respectively going up to 7% to 8% in the following years. Iran may therefore be one of the fastest growing economies in the region over the next five years as investments flow into the country following the removal of sanctions.

Having said that, according to various research projects it seems that cross-investment relations between Iran and the EU investors are not being established directly due to various financial, political and strategic concerns. Both sides are at present urgently looking for convenient gateways and ways to secure their investments.

Immediately Cyprus comes to mind as hub. Cyprus shares a long history of good relations with Iran, including various bilateral agreements dating decades back. Among them are agreements on the promotion and protection of investment, merchant shipping, medical science, culture, education and tourism. This combined with the simple and flexible tax features of Cyprus made the Island in the past and going forward a unique jurisdiction and choice number one to use as perfect gateway to the EU and to other countries with which Cyprus concluded Double Tax Treaties, such as Iran.

In general Cyprus offers many benefits as a location for setting up a business. With its highly-educated population, it is an amicable, neutral and multicultural eastern Mediterranean location with one of the lowest crime rates in Europe and the region. Boasting one of the lowest corporate tax rates in the European Union (EU) – at only 12.5% – the island is an ideal jurisdiction for Holding and Finance Companies. Dividend income is exempt from Income Tax*. Dividends paid to foreign resident shareholders are free from Withholding taxes or any other taxes. Capital gains exemption: Profits from the disposal of shares, bonds and other securities are exempt*. Worthwhile mentioning is that gains accruing from the disposal of shares listed on any recognized stock exchange are exempted from tax. The Tehran Stock Exchange is a recognized stock exchange in Cyprus. Interest paid to a non-resident company is exempt from withholding taxes and no withholding taxes on outgoing royalties. Add to this the extensive network of double tax treaties, which allow businesses to avoid being taxed twice on income earned from dividends, interest and royalties. Also of interest is the country’s status as one of the world’s top 40 economies for investor protection.

Latest achievement evidencing the excellent relations between the two countries is the signing of the first double tax agreement between Iran and Cyprus on August the 4th, 2015 and the activation of the same on January 2016 and in March 2016 respectively. The treaty complies with the form of the Organisation for Economic Cooperation and Development (OECD) Model Convention for the Avoidance of Double Taxation on Income and Capital. The key provisions are as follows:

  1. Capital gains tax arises only in the country of tax residency of the person making the disposal (with the exception of real estate). On this basis, a Cyprus investor should not be subject to Iranian capital gains taxes
  2. Dividend payments to a Cyprus company from Iran are subject to a maximum withholding tax rate of 10%, which may be reduced to 5% in the event that the Cyprus company holds at least 25% of the underlying Iranian company's capital
  3. Interest paid to a Cyprus company by an Iranian entity is subject to a maximum withholding tax rate of 5%
  4. Royalties paid to a Cyprus investor are subject to a maximum withholding tax rate in Iran of 6%; and The risk of double tax on income is reduced through the OECD's 'credit method', whereby credit is given by the Cyprus tax authorities to a Cyprus tax resident in respect of any Iranian income tax paid by the Cyprus tax resident


* subject to conditions




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