UK LTD + Cyprus residency + interest payments

[qwjwqieajs]

I'm considering the following arrangement:

- a UK LTD with an owner and director residing in Cyprus
- the LTD's corporate tax rate will be somewhere between 19 and 25% as of next year
- the owner will be receiving dividends from the LTD
- the owner will provide an ample business loan to the company with a standard interest rate somewhere between 10 and 14%
- the director will stay in Cyprus the 60 days in a year to establish the tax residency, the actual work will be outsourced, therefore there will be no permanent establishment in Cyprus and the LTD will not be corp tax liable there

- the interest payments will decrease the LTD's profit and thus the corp tax will be lower in absolute numbers - a part of the would be profit will be received tax free by the owner
- after corp taxation, dividends will also be received tax free
- all previous year's post-tax profit will be paid out as dividends, and the capital will be added to the loan, rinse & repeat
- the loaned capital will be invested by the company, and will grow the revenue, but at the same time every year the loaned capital will grow and so will the interest payments - thus profit and corp tax will remain constant

Seems all legal and compliant to me. And therefore I'm suspicious. Is there any mistake?

I know a Cypriot company has a lower corp tax rate and a non-dom owner can receive dividends tax exempt even from a local entity, but for various reasons I'd prefer it to be an UK entity.

 

[CyprusBusiness]

I would not recommend this structure for the following reasons:

(1) Becoming tax resident of Cyprus using the 60days rule requires that you were not tax resident in any jurisdiction in the prior tax year and also you must have sufficient business ties in Cyprus. This means a Cyprus company setup will be essential to achieve non-dom status and without non-dom no tax free dividend/interest income can be enjoyed

(2) The UK Ltd will be considered to be managed and controlled from Cyprus as you would remain Director of the UK Ltd. Thus, the UK Ltd will be subject to taxation in Cyprus (the DTT of both States shall be reviewed to determined exact tax impact)

(3) Any financing activity needs to be at arms length transaction. There are thin capitalisation rules and interest may be disallowed for tax purporses.

 

[qwjwqieajs]

Well, there goes my dream ...

 

[Marzio]

A lot easier would be to be the owner and director of the UK LTD managing the company from a Cyprus branch.

A branch would allow you to make use of the 60 days rule, branch profits wouldn’t be taxed again in UK so total taxation would be 12.5%

 

[Bill D]

I would not recommend this structure for the following reasons:

(1) Becoming tax resident of Cyprus using the 60days rule requires that you were not tax resident in any jurisdiction in the prior tax year and also you must have sufficient business ties in Cyprus. This means a Cyprus company setup will be essential to achieve non-dom status and without non-dom no tax free dividend/interest income can be enjoyed

I did not see that the 60days rules was taking into account the prior tax year, not just the current tax year ? anyways if he stayed 180+days it will be ok for his non dom status in this case ?

(3) Any financing activity needs to be at arms length transaction. There are thin capitalisation rules and interest may be disallowed for tax purporses.

What does arm length mean there ?
google definition (not cyprus only) : "Under section 251(1) of the Income Tax Act, related persons are deemed not to deal with each other at arm's length. For the purposes of this definition, related persons include: Individuals connected by blood relationship, adoption, marriage or common law partnership."
does it mean you cannot lend to your company to get tax free interest rates ?

also saw that "Cyprus tax legislation does not include thin capitalization rule"
not talking about the reason why op prefer uk ltd, but the same setup with a cyprus llc instead of the UK ltd wouldn't work ?
Its not okay to pay the fair market interest rate and get them tax free in your natural person pocket ?

 

[CyprusBusiness]

I did not see that the 60days rules was taking into account the prior tax year, not just the current tax year ? anyways if he stayed 180+days it will be ok for his non dom status in this case ?

That is correct, staying more than 183 days will be sufficient

What does arm length mean there ?
google definition (not cyprus only) : "Under section 251(1) of the Income Tax Act, related persons are deemed not to deal with each other at arm's length. For the purposes of this definition, related persons include: Individuals connected by blood relationship, adoption, marriage or common law partnership."
does it mean you cannot lend to your company to get tax free interest rates ?

Again this is correct. All loans between related parties must bear a market rate of interest. 'Arms length' means that any transaction shall contain terms that two market participants (non-related) would have agreed as being independent from each other. Thus, no favorable treatment should be agreed between related parties i.e. an interest free loan

 

[Bill D]

Again this is correct. All loans between related parties must bear a market rate of interest. 'Arms length' means that any transaction shall contain terms that two market participants (non-related) would have agreed as being independent from each other. Thus, no favorable treatment should be agreed between related parties i.e. an interest free loan

I was meaning "does it mean you cannot lend to your own company, and get paid, as a natural person interests rates (market level) which will be tax free as a non dom (supposed you already exceed the social 2.65%threeshold)"
It would seem if this work that anyone trading or investing (non eligble to exemptions assets, non stock etc) will never pay tax, out of he outperform the market interests rates

in general you are not allowed to defer interest payment on a loan you make to your own one person LLC in countries which have arm length rule ?

"Can directors charge interest for loans to a company? Yes. The director can agree to make the loan without interest or can agree an interest rate with the company"
https://www.accountsandlegal.co.uk/...st for,director's Self Assessment tax return.