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Benefits of Using Cyprus Firms to Invest in Iran

Benefits of Using Cyprus Firms to Invest in IranBenefits of Using Cyprus Firms to Invest in Iran

On January 16, 2016, the European Union implemented the Joint Comprehensive Plan of Action, which scaled back sanctions on Iran and marked the country’s return to international capital and other markets.

Investment in Iran through Cyprus-based companies and institutions offers international investors unparalleled benefits over other models of foreign direct investment.

Through the Cyprus Securities and Exchange Commission and other competent authorities, the Cyprus government has shown leadership in authorizing EU alternative investment in Iran, most notably through the licensing of the Turquoise Variable Capital Investment Fund PLC (a Cyprus-based investment fund established for investing in Iranian securities) under the Alternative Investment Fund Managers Directive.

The UK-based International Law Office’s website examines some of the principle benefits to FDI in Iran through Cyprus.

  Attitude, Willingness of Cypriot Authorities

The Cyprus government, most notably through CySEC, the Ministry of Finance and the Ministry of Foreign Affairs, has shown willingness to authorize and provide relevant licenses for local firms seeking to undertake business in Iran.

Numerous Cypriot industry associations and trade bodies have organized business delegations to Iran since the implementation of the Joint Comprehensive Plan of Action. The willingness of Cyprus authorities and industry in this regard can be seen as largely consistent with the country’s political heritage as a historically active member of the Non-Aligned Movement.

However, Cyprus is now a full member state of the European Union and the importance of this may be underlined, as local financial institutions have full access to European markets through operation of the European Union’s single market directives, which cover banking, insurance, investment firms and—perhaps most importantly—investment funds.

  Cyprus-Iran Investment Treaty

Cyprus is the only common law jurisdiction (outside of Africa and excluding Pakistan) that benefits from the terms of a bilateral investment treaty with Iran, which was signed on March 2, 2009, and came into force on April 18, 2009.

The BIT establishes the cooperation of the two countries over FDI and provides a solid base on which Cypriot investors and other foreign investors using a Cyprus company can build their investment in Iran.

It guarantees investors from and investing into Iran equal treatment and access to fair recourse, as well as confirmation that investments will be protected and required licenses will be granted if these duly comply with applicable law.

  Cyprus-Iran Double Tax Treaty

On August 4, 2015, Cyprus and Iran signed a tax treaty for the avoidance of double tax, which came into force on January 1 2016 in Cyprus and in March 2016 in Iran. The treaty complies with the form of the Organization for Economic Cooperation and Development Model Convention for the Avoidance of Double Taxation on Income and Capital.

The key provisions are as follows:

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;

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;

Interest paid to a Cyprus company by an Iranian entity is subject to a maximum withholding tax rate of 5%;

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 resident.

  Other Cyprus Tax Considerations

Under Cyprus tax legislation, there is no incidence of capital gains tax on the disposal of an asset held by a Cyprus company unless that asset comprises immovable property situated in Cyprus or shares representing immovable property situated in Cyprus.

Gains accruing from the disposal of shares listed on any recognized stock exchange are exempted from tax. Tehran Stock Exchange is a recognized stock exchange in Cyprus.

Further, the disposal of shares on a foreign exchange such as the Tehran Stock Exchange will not attract income tax in Cyprus. The Income Tax Law exempts any profits or gains from the disposal of titles, which generally includes shares and debentures.

Dividends and redemption payments are also generally excluded from domestic Cyprus taxation.

  Cyprus Alternative Investment Funds

As an EU member state, a company registered in Cyprus is subject to and may take advantage of the acquis communautaire (the EU body of law). This means that Cyprus-based financial institutions may structure investments and business operations using the European Union’s harmonized framework for pan-European investment under the EU single market directives, notably under the AIFM Directive (for fund management and hedge funds or private equity) and the Markets in Financial Instruments Directive, but also in banking and insurance.

For example, a properly regulated Cyprus investment fund or investment firm may offer its services to investors across the European Union by exercising its passport rights under the relevant legislation.

Bearing in mind the willingness of the Cyprus authorities to work with Iran, such passporting facilities make Cyprus an ideal access point for EU-origin investment into Iran and can significantly reduce costs for sponsors by reducing the scope for red tape over solicitation or other barriers to entry in other EU member states.

  Proximity of Cyprus to Iran

At a time where the physical residency of staff managing any vehicle for FDI is becoming increasingly important, the geographical proximity of Cyprus to Iran should not be understated as a relevant consideration to any structuring decision.

Direct flights from Larnaca, Cyprus, to Tehran take less than two hours and Cyprus time is only one-and-a-half hours behind Tehran time. This compares favorably to international centers based in Western Europe.

Financialtribune.com