Foreigner with a Gibraltar company in Cyprus - tax free?

[pastet89]

I am reading through PWC and I found something which seems too good to be true so I'd like to double-check it here.

Suppose the following scenario:

- crypto trading (one man business, proprietary trading for myself only)
- it is done via a Gibraltar incorporated company
- with a Nominee Director somewhere outside Cyprus
- Company income is <= 750K per year
- Bulgarian Company owner, becoming a resident of Cyprus.

Then:

- The company is not managed from Cyprus (due to the Nominee Director being elsewhere) AND due to <=750K revenue it is CFC-rules exempt, so, no Corporate tax applies.
- The Company owner, who does not have 17+ years of Cyprus residency and is not born in Cyprus, is SDC-exempt on the dividend. So dividends are distributed tax-free and everything is tax-free.

Again, too good to be true. What am I missing here?

 

[mok]

While it is true that the company might not be considered tax resident in either Gibraltar or Cyprus, what about the country where the director is resident?

That country will most likely have tax jurisdiction over the company since the director (management and control) is there.

However, there are some countries that do not exercise tax rights based on management and control, such as Thailand.

With a Thai director, you can have a case of double-non-taxation where the country where the company is registered won't tax it since it taxes based on management and control, and Thailand won't tax it since it taxes based on where the company is registered.

Now, the problem with a setup like this is banking. It's very hard to find a decent bank (or even EMI) that will bank a structure with a Thai director and possibly a Gibraltar company.

For this, I would recommend either a Maltese or Hungarian company with a local director. Avoids the hassle and keeps the money within the EU.

 

[pastet89]

The director is supposed to be Filipino. Also tax-free, as the Philippines tax foreign persons only on local income, confirmed with a Filipino lawyer already.

The company is already incorporated in Gibraltar.

Malta and Hungary have DTAs with my own country (should be the same logic with Cyprus) and ruin the zero corporate tax due to PE rules.

It's virtually impossible to open a bank account for a crypto company anyway, I have accepted that for now, can operate in crypto only. On a later stage Turicum bank in Gibraltar should be able to open for 200K deposit, I heard.

So I am not concerned about the director tax or the bank, I was just asking about the Cyprus side of things, is it really supposed to work this way?

 

[mok]

The dividends in Cyprus would be taxed at ~2% because of the GESY contribution. If you don't want a bank account, then it should be an ok setup. BVI with nominees could be another simpler option.

 

[pastet89]

The dividends in Cyprus would be taxed at ~2% because of the GESY contribution. If you don't want a bank account, then it should be an ok setup. BVI with nominees could be another simpler option.

2% sounds great, thanks.

How about CFC rules, in terms of tax resident owners, do they cover companies or natural persons as well? If they don't cover natural persons I guess I don't need to worry even about the 750K threshold?

 

[Sols]

Again, too good to be true. What am I missing here?

Taxation based on UBO residence upon determining that the director is just a nominee and not a bona fide director. Happens all the time.

Whether it's through CRS, public records, your own (accidental) admission, or some form of data leak, good structures are planned with a zero-secrecy event in mind. Imagine your local tax authority having all the data available to them. Would they accept it, or would they presume you to be not just a passive shareholder but in fact be exercising effective day to day management of the company?

As for Cyprus, the company is tax resident in Cyprus unless tax residence is established somewhere else. You are relying on non-enforcement rather than on solid legal grounds. Cyprus is unlikely to question the director, though. I'm not sure if you're expected to show proof of tax residence (for example a Philippine TIN for your company) or if it's enough to state that the directors are abroad.

 

[khinkali]

Would either of these two solutions make the difference?

1. What if the passive shareholder lives in Cyprus and the Gibraltar trading company outsources the work (managing and paying for hosting, passing KYC/ALM with exchanges, running crypto trading bots, algo development, etc.) to an IT company with an actual working employee in the other country (e.g. Philippines). The IT company bills cost + 20% so generates some small taxable profit in PH. The trader in PH or wherever makes day to day decisions, but can consult with the owner regarding the trading approach.

2. What if the Gibraltar company is established as a Private Fund (which has very few restrictions and doesn't require local presence)? Instead of a nominee director, there would be an offshore fund manager. I guess this might need some regulatory compliance for the fund manager.

 

[pastet89]

Would either of these two solutions make the difference?

1. What if the passive shareholder lives in Cyprus and the Gibraltar trading company outsources the work (managing and paying for hosting, passing KYC/ALM with exchanges, running crypto trading bots, algo development, etc.) to an IT company with an actual working employee in the other country (e.g. Philippines). The IT company bills cost + 20% so generates some small taxable profit in PH. The trader in PH or wherever makes day to day decisions, but can consult with the owner regarding the trading approach.

2. What if the Gibraltar company is established as a Private Fund (which has very few restrictions and doesn't require local presence)? Instead of a nominee director, there would be an offshore fund manager. I guess this might need some regulatory compliance for the fund manager.

Thanks but thatt's incredibly complex and involves PH registration which I don't want to do.

Taxation based on UBO residence upon determining that the director is just a nominee and not a bona fide director. Happens all the time.

Whether it's through CRS, public records, your own (accidental) admission, or some form of data leak, good structures are planned with a zero-secrecy event in mind. Imagine your local tax authority having all the data available to them. Would they accept it, or would they presume you to be not just a passive shareholder but in fact be exercising effective day to day management of the company?

You just killed my dreams but thanks for doing it on such an early phase.


Ironically, I am from Bulgaria and the described setup works 100% flawlessly here. Confirmed with lawyers multiple times.


But I don't want to live in Bulgaria. Rather just to keep it as my default tax residency.

For this, I could go into nomadic mode the next 2-3 years, (when I plan to sell at the top of the next bull run) and keep paying taxes in Bulgaria (5% dividend in total).

But traveling is a bit exhausting so I was looking for some other place to settle in which would tax me at the same way.

Alternatively, there are very few options in the EU where you can live from summer to summer (183+183) in two tax years, one year in total, without becoming a resident from having a rented home: Poland, Cyprus, Estonia and probably 1-2 more. One year is one year but still need to think about moving out again.

 

[khinkali]

Thanks but thatt's incredibly complex and involves PH registration which I don't want to do.

I understand your lack of keenness to incorporate in an extra country. My concern about things being "incredibly complex" crops up when I see the words "Nominee Director" involving a trading business that pretends not to be in its genuine location. People do it all the time of course and many are never caught, often because the jurisdiction doesn't care enough to do anything about it.

 

[pastet89]

I understand your lack of keenness to incorporate in an extra country. My concern about things being "incredibly complex" crops up when I see the words "Nominee Director" involving a trading business that pretends not to be in its genuine location. People do it all the time of course and many are never caught, often because the jurisdiction doesn't care enough to do anything about it.

Exactly, I was going to ask about this point you are bringing up, also @Sols

I guess it depends on the country, for example in Bulgaria my lawyer went that far that told me that even if I was the director the tax authorities would not figure that out. He also said there is not a single case in the court decisions which has ever ruled an offshore company to be deemed resident due to a shareholder using a Power of Attorney from a Nominee Director - something for which I was told that, for example, in the UK they would immediately claim residency.

So it seems things really vary but for me the most interesting question is: how do they find out if they want to dig further? Because, if there is no DTA with the offshore jurisdiction, at least in Bulgaria (and I assumed elsewhere as well), the offshore company is literally a black box for them. They have zero authority to even ask you to show them the offshore corporate documents. They can not do a revision of the offshore company and look at its books. The most they can do it is to try the semi-public paid searches to see who is a director - and if you have a remote Nominee, they will see a person from another country.

So I was wondering, from your experience, how "Nominees stop working"? Based on what arguments the tax authorities say: "We won't accept that this is the real director, we will deem you as a director - where based on all documents, the director is not you" (you can not show them the PoA if you don't want to)? And what distinguishes a Nominee Director from a Real Director - it's the same as per documents, there is no title "Nominee Director" it's just a regular "Director" as per the company records.

 

[khinkali]

I think that your concerns are more realistic. It's not likely to be a legal grey area if you run a trading business in one country, where you live, and try to be taxed elsewhere based on a nominee. So it's all about not getting caught, which is much easier if you pick a jurisdiction where they simply don't care.

I have no experience being caught for abusing nominees, fortunately and I am trying to avoid such problems. (I'm currently discussing with a lawyer to take on the trading job in his country, but of course the actual trading work is just to enter a target return and some risk parameters, and press "go"). A lot of the time, people get in trouble for one thing, because of another thing. You can go without scrutiny for years, then for some reason you attract the interest of the government and now it's up to you to prove everything. This kind of situation is very unpleasant if you live in Dubai, for example...

Given that your tax issues don't look like they would be in Gibraltar of Philipines, I think you would benefit from some very specific advice from experienced Cyprus based professionals. I see your point, our concerns are just different. I feel it's simpler (and maybe a lot cheaper) to hire someone to be the actual substance somewhere.