LLC/IBC offshore entity with Cyprus tax residency

[mickey]

Hello,
a friend of mine asked me about two of my old threads where I described the current substance and taxation situation of LLCs and IBCs located in offshore jurisdictions. Unfortunately I'm not so familiar with Cyprus taxations of foreign revenue, so this would be the setup:

He wants to combine a LLC/IBC of an offshore jurisdiction with a Cyprus tax-residence while he would live in Cyprus as well.

LLC/IBC (Offshore) => LLC/IBC and himself Tax resident (Cyprus)

All revenue would be generated by capital gains from abroad due all contracts with brokers would be signed with the offshore LLC/IBC, how would be the taxation? The best case would be a taxation which would take place when he is paying his salary (to himself as director) and capital gains to his investors. The LLC/IBC entity itself should be taxed as low as possible.


Now some people would ask themselves: "Why he likes to own an offshore LLC/IBC when a Cyprus Ltd has better reputation" ... he wants to operate a Hedge Fund which needs a license which is cheaper and easier to obtain in other offshore jurisdictions than Cyprus. Another point is the possibility to own a Cyprus Bank Account and a Bank Account of the particular offshore jurisdiction for diversification purposes (to prevent losses like the 2013 Banking-Crisis of Cyprus).

 

[JohnLocke]

You may tag our specialists around here directly in your post to get better answers, I will do it for you

@CyprusLaw @CyprusLawyer101 @CyprusBusiness

 

[CyprusBusiness]

Hi @mickey

I will only discuss tax matters below and avoid discussing licencing issues and operating an unregulated HF as this needs deep consultation.

Please see below:

A US LLC is considered a tax transparent vehicle and permanent establishment abroad. This means that the income tax law consoders the US LLC as an extension of the Cyprus company if assuming the Cyprus company will be a single member to the LLC. If your friend does nkt want to form a CY company and reside in Cyprus this may not be possible (we need to review his status first whether he is an EU-nonEU national and check permit eligibilities)

Although, there is a specific caluse under income tax law in Cyprus that profits from permannet establishment abroad are exempt. This would not be the case here due to hubrid mismatches rules

The structure needs to be reviewed from both US and Cyprus side.

In order for the LLC to be considered a disregarded entity must not be ETBUS (engaged in a trade or business in the United States)

Please see a simple strategy:

1) Setup the Cyprus Ltd and arrange for it to become the single member of the US LLC
2) Manage the operations from the Cyprus Ltd’s office, creating a place of effective management of the LLC in Cyprus.
3) Create an economic substance in Cyprus for the Cyprus Ltd, by having real office space and employees.
4) The US LLC is using U.S. brokers to produce revenue,
but does not have employees, office, or presence in the U.S. In that case, your company is deemed to be “engaged in a
trade or business in the United States (ETBUS)” and have generated “Effectively Connected Income (ECI)”.
5) However, as there is a double tax treaty between Cyprus and the US, the PE rules take precedence, and the US LLC is considered a disregarded entity, hence tax exempt in the US. Please refer to Article 9 (1-3).
6) Distribution from US LLC will be deemed as income from permanent establishment abroad and such income is exempt in Cyprus (subject to some anti-avoidance rules) as such losses will be tax exempt as well. There is an irrevocable election to be subject to tax but careful cosnideration must be taken beforehand. You need to consider this carefulluly with the US laws as if it is treated as disregarded entity the PE rules may change. However, the PE rules in Cyprus state that whereas a diregarded PE due to Hybrid mismatch, then the Cyprus Co would need to declare it as taxable income in its return
7) A foreign company with a PE in Cyprus (the LLC) would be liable to pay the standard CIT of 12.5% as a separate entity even though it's a subsidiary of a Cyprus LTD parent due to hybrid mismatches rule. This requires proper books and records to be
kept (under International financial Reporting Standards) of the US LLC.
8) Nothing would be taxable on the LLC side, all profit would be taxable on the LTD side, benefiting from the 12.5%corporation tax or even lower if the nature of income concerns tax exempt activity (stock trading etc)
9) No withholding taxes exist on dividend distribution on Cyprus level. The client will pay NHS at 2.65% with a cap on income at 180k euro.

I would be happy to PM for more info

 

[mickey]

Hi @mickey

I will only discuss tax matters below and avoid discussing licencing issues and operating an unregulated HF as this needs deep consultation.

Please see below:

A US LLC is considered a tax transparent vehicle and permanent establishment abroad. This means that the income tax law consoders the US LLC as an extension of the Cyprus company if assuming the Cyprus company will be a single member to the LLC. If your friend does nkt want to form a CY company and reside in Cyprus this may not be possible (we need to review his status first whether he is an EU-nonEU national and check permit eligibilities)

Although, there is a specific caluse under income tax law in Cyprus that profits from permannet establishment abroad are exempt. This would not be the case here due to hubrid mismatches rules

The structure needs to be reviewed from both US and Cyprus side.

In order for the LLC to be considered a disregarded entity must not be ETBUS (engaged in a trade or business in the United States)

Please see a simple strategy:

1) Setup the Cyprus Ltd and arrange for it to become the single member of the US LLC
2) Manage the operations from the Cyprus Ltd’s office, creating a place of effective management of the LLC in Cyprus.
3) Create an economic substance in Cyprus for the Cyprus Ltd, by having real office space and employees.
4) The US LLC is using U.S. brokers to produce revenue,
but does not have employees, office, or presence in the U.S. In that case, your company is deemed to be “engaged in a
trade or business in the United States (ETBUS)” and have generated “Effectively Connected Income (ECI)”.
5) However, as there is a double tax treaty between Cyprus and the US, the PE rules take precedence, and the US LLC is considered a disregarded entity, hence tax exempt in the US. Please refer to Article 9 (1-3).
6) Distribution from US LLC will be deemed as income from permanent establishment abroad and such income is exempt in Cyprus (subject to some anti-avoidance rules) as such losses will be tax exempt as well. There is an irrevocable election to be subject to tax but careful cosnideration must be taken beforehand. You need to consider this carefulluly with the US laws as if it is treated as disregarded entity the PE rules may change. However, the PE rules in Cyprus state that whereas a diregarded PE due to Hybrid mismatch, then the Cyprus Co would need to declare it as taxable income in its return
7) A foreign company with a PE in Cyprus (the LLC) would be liable to pay the standard CIT of 12.5% as a separate entity even though it's a subsidiary of a Cyprus LTD parent due to hybrid mismatches rule. This requires proper books and records to be
kept (under International financial Reporting Standards) of the US LLC.
8) Nothing would be taxable on the LLC side, all profit would be taxable on the LTD side, benefiting from the 12.5%corporation tax or even lower if the nature of income concerns tax exempt activity (stock trading etc)
9) No withholding taxes exist on dividend distribution on Cyprus level. The client will pay NHS at 2.65% with a cap on income at 180k euro.

I would be happy to PM for more info

Hello, thanks for your long and competent answer and I have to apologize. US LLCs are not an option for Hedge Funds in general and I did NOT mentioned that fact in my first message of this thread, I'm very sorry.

The reasons are as follows:

1. Hedge Funds located in the US are supervised by the SEC and they are the most strict security authority in the world.
   1. They prohibit the publication of performance figures, so it's Impossible for new investors to compare the performance between certain hedge funds.
   2. They prohibit all derivatives like CFDs, Warrants and only allow Options and Futures. Unfortunately is the liquidity of these instruments only sufficient for US-Stocks. European or Asian stocks mostly do not have any Options, so warrants would be an alternative but these are prohibited of course.
   3. The SEC collects the contact details of all investors multiple times per year and force the Fund to kick out certain investors who have the "wrong" citizenship.
2. Almost all Brokers outside of the US do not accept US-Clients due the American Tax-System FACTA
3. US-Lawyers are very expensive and always required while dealing with the SEC

That's why not even US citizens are registering their Funds in the US. The current widely used structure is as follows.

1. A fund is registered in an offshore jurisdiction lets say British Virgin Islands
2. The Feeders will be setup. They will feed the funds and capital gains of the certain investors to the BVI-Fund
   1. A LLC-US-Feeder-Fund located in Delaware. Which feeds the funds of US-investors to the BVI-Fund. When a payout take place, the capital gains will be taxed between the investor and the LLC-US-Feeder-Fund. The reaons for this structure is to bypass the complex FACTA-Tax filings between the US-Investor and the BVI-Fund.
   2. A EU-Feeder-Fund which can be located somewhere in the EU. Which feeds the funds of EU-investors to the BVI-Fund. When a payout takes place, the capital gains will be taxed between the investor and the EU-Feeder-Fund. The Feeder-Fund is NOT mandatory due EU and other Countries (except US) have something like FACTA but it seems more serious when EU-Investors sign their contracts with an EU-Entity.

The same is explained here:

 

[I'mRobot]

What's the alternative to the US Hedge fund in the scenario?

 

[mickey]

There would be plenty alternatives like:
BVI/Cayman islands/Bahamas/Belize etc. but it's possible to control such an entity out of Cyprus and how would it be taxed?

 

[FantomOffshore]

There would be plenty alternatives like:
BVI/Cayman islands/Bahamas/Belize etc. but it's possible to control such an entity out of Cyprus and how would it be taxed?

I am interested in this as well, having an offshore company in Delaware while living in Cyprus, declaring the dividend income as Cyprus-sourced and paying the relevant taxes but avoiding starting a Cypriot company.

 

[5K1PP3R]

I would gladly dump my Cyprus LTD with its accounting, audit and secretary if I could replace it with a US LLC. I am non dom and 60 days tax resident in Cyprus. I am currently getting paid by a UK LTD. Is there a solution that I can apply? The one that Cyprus tax authorities won't go after?

 

[Don]

I would gladly dump my Cyprus LTD with its accounting, audit and secretary if I could replace it with a US LLC. I am non dom and 60 days tax resident in Cyprus. I am currently getting paid by a UK LTD. Is there a solution that I can apply? The one that Cyprus tax authorities won't go after?

In such a case, you would need to create a branch/PE in Cyprus for this company, which will be taxed as a Cypriot company.

In my opinion compared to Cyprus, a better option would be to use an EU-based entity for this purpose, like Estonia:

• Profits from Cyprus can be redistributed to you tax-free
• even though you can remain a Cypriot tax resident, it is worth noting that Estonian residency is far easier to maintain (no physical presence is required), and you save on the Ghesy 2.65% tax
• 0% on undistributed profits (for the profits that arise from Estonian activities)
• no audit
• you can get an exemption from submitting financial statements to Cyprus - see below:
• if structured right, you can set up an entity that doesn't require any filing of financial statements at all

 

[Onassis]

Estonian residency

Yes but Estonia has 20% PIT on dividends whereas as a Cyprus non-dom you only pay 2.65% for GeSY.

 

[5K1PP3R]

you actually pay 2.65% up to 180k dividends paid out and 0% after that

what are grey solutions for non dom 60days guys like me? not 100% legal but safe atm

 

[Don]

Yes but Estonia has 20% PIT on dividends whereas as a Cyprus non-dom you only pay 2.65% for GeSY.

Yes, but dividends received from resident companies are exempt from tax.

EE company with a PE in CY can redistribute the profits of the PE to the shareholders tax-free. And in the case of trading securities, there is no capital gains tax in Cyprus, so the overall tax will be 0%.

+there are tons of other exemptions. Should probably start a thread about it sometime.

 

[5K1PP3R]

Yes, but dividends received from resident companies are exempt from tax.

EE company with a PE in CY can redistribute the profits of the PE to the shareholders tax-free. And in the case of trading securities, there is no capital gains tax in Cyprus, so the overall tax will be 0%.

+there are tons of other exemptions. Should probably start a thread about it sometime.

what are requirements for PE in Cyprus? an address or a real office with employees?

 

[Onassis]

EE company with a PE in CY can redistribute the profits of the PE to the shareholders tax-free. And in the case of trading securities, there is no capital gains tax in Cyprus, so the overall tax will be 0%.

What about Estonian corporate CFC rules?

A foreign PE of an Estonian company is also considered to be a CFC.

In order for the tax obligation to be triggered, the following conditions will have to be met:

• The underlying transaction or chain of transactions generating the profit of the CFC was fictitious.
• The principal aim of the underlying transaction or chain of transactions was gaining a tax advantage.
• The CFC is effectively managed by key employees of the shareholder of the controlling company that created the opportunity to make a profit.

So a PE in Cyprus which exists just on paper will probably not survive an audit from Estonian tax authorities.

 

[Don]

What about Estonian corporate CFC rules?

up to EUR 750k/year is exempt.

what are requirements for PE in Cyprus? an address or a real office with employees?

A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term permanent establishment includes a place of management, a branch, an office, a factory and a workshop.

In other words, an address should suffice (depending on exact circumstances)

 

[Onassis]

In other words, an address should suffice (depending on exact circumstances)

There is exactly zero chance this would survive an audit from the Estonian tax authorities, especially if you (as an Estonian tax resident) are the one doing trades on behalf of the Cyprus PE. Or am I wrong?

 

[5K1PP3R]

up to EUR 750k/year is exempt.

In other words all this works if you don't exceed 750k EUR. I guess you can do two EE companies if you want more?

There is exactly zero chance this would survive an audit from the Estonian tax authorities, especially if you (as an Estonian tax resident) are the one doing trades on behalf of the Cyprus PE. Or am I wrong?

I am actually Cyprus non dom 60 days resident, I have nothing to do with Estonia.

 

[Don]

There is exactly zero chance this would survive an audit from the Estonian tax authorities, especially if you (as an Estonian tax resident) are the one doing trades on behalf of the Cyprus PE. Or am I wrong?

well if you can prove that you are trading from Cyprus, there is nothing wrong with it - you are just following the laws.
In fact, you could even pay yourself from the EE company tax-free allowances for business trips and cover the costs of travelling to Cyprus tax-free.
You might want to have a part-time employee in Cyprus who is clicking the button for you for trades though.

The truth is Estonia will not even want to know how much tax you are paying in Cyprus. You only need to declare the amount of profits repatriated to Estonia from Cyprus, to be able to redistribute them tax-free. This particular exemption is available for EU companies only. For other country PE-s you would need to declare the amount of tax paid abroad.

In other words all this works if you don't exceed 750k EUR. I guess you can do two EE companies if you want more?

yea, or invoice the company or spend your money to shift the profits out so the accounting profits are reduced

 

[offshore8]

In such a case, you would need to create a branch/PE in Cyprus for this company, which will be taxed as a Cypriot company.

In my opinion compared to Cyprus, a better option would be to use an EU-based entity for this purpose, like Estonia:

• Profits from Cyprus can be redistributed to you tax-free
• even though you can remain a Cypriot tax resident, it is worth noting that Estonian residency is far easier to maintain (no physical presence is required), and you save on the Ghesy 2.65% tax
• 0% on undistributed profits (for the profits that arise from Estonian activities)
• no audit
• you can get an exemption from submitting financial statements to Cyprus - see below:
• if structured right, you can set up an entity that doesn't require any filing of financial statements at all

View attachment 5491

I have Estonian OU company and US LLC disregarded entity single member and I’m Slovak resident. What would be the best way to structure it? Do I need to get a different residency? I don’t live in Slovakia or EU in general. Most of the year I’m in SEA. Thanks

 

[Don]

I have Estonian OU company and US LLC disregarded entity single member and I’m Slovak resident. What would be the best way to structure it? Do I need to get a different residency? I don’t live in Slovakia or EU in general. Most of the year I’m in SEA. Thanks

Your statement seems to contradict itself - you say you are a Slovak resident but do not live in Slovakia. Can you elaborate further?
The word "resident" is commonly understood as a person who lives somewhere permanently or on a long-term basis, and depending on the context can mean either legal resident or tax resident.