A Global Guide To M&A – Cyprus by Chris Damianou Contact: [email protected], T. +357 22 699 222 This article in question and answer format is the second in a series provided by Taxand from their Global Guide To M&A 2013 www.taxand.com: "Quality tax advice, globally"

From A Buyer's Perspective 1. What are the main differences among acquisitions made through a share deal versus an asset deal in your country? Share deal In an acquisition of shares, no direct taxes are triggered for the buyer. In situations where the relevant share purchase agreement is found to be subject to stamp duty in Cyprus, the tax obligation rests with the buyer, unless the contract provides otherwise. Of course a contract is exempt from stamp duty when the acquisition is effected as a result of company reorganization. The stamp duty varies from 0.15 to 0.20 percent and is capped at EUR20,000. Asset deal In an acquisition of immovable property, the buyer is liable for a transfer fee. Transfer taxes range from

3 percent to 8 percent depending on the property value. The tax is: 3 percent on amounts up to EUR85,000 of the sale price or market value 5 percent on amounts between EUR85,000 and EUR170,000 8 percent on any amount exceeding EUR170,000 On December 2, 2011 a new law came into effect repealing transfer fees for immovable property owned by individuals. The law is applicable in situations where VAT is not applicable. In these cases the law provides that transfer duties shall be reduced by 50 percent. On the other hand, where a transaction is subject to VAT, an exemption to pay transfer fees is applied. Immovable property situated in Cyprus is taxed on an annual basis on the market value of the property as at January 1, 1980. As of January 1, 2012, the following tax rates apply: 0.60 percent for value between EUR1,00 and EUR40,000* 0.80 percent for value between EUR40,001 and EUR120,000

0.90 percent for value between EUR120,001 and EUR170,000 1.1 percent for value between EUR170,001 and EUR300,000 1.3 percent for value between EUR300,001 and EUR500,000 1.5 percent for value between EUR500,001 and EUR800,000 1.7 percent for value between EUR800,001 and EUR3,000,000 1.9 percent for value above EUR3,000,000 * Property owners with total property value not exceeding EUR12,500 are exempt from immovable property tax. An agreement to acquire property or any other asset may be also be subject to stamp duty in Cyprus. Stamp duty is imposed on contracts relating to things located or to be done in Cyprus. If provisions of a reorganization are applied, as defined under Cypriot law (which is in line with the provisions of the EU Merger Directive), such a purchase would be tax neutral. Depending on the assets' nature, transfer fees may apply. The purchase of a company's assets – unlike the purchase of shares – may be subject to VAT, which is currently rated at 19 percent. In terms of utilization of tax losses, such losses are not allowed in the case of a share deal, given that profits from share sales are generally exempt from tax.

In the case of a taxable sale of immovable property, any losses realized may be offset against similar profits that may arise in the future. The same principle applies to gains and losses resulting from the sale of other assets – where gains are taxable, the deductibility of losses may be allowed. 2. What strategies are in place, if any, to step up the value of the tangible and intangible assets in case of share deals? A re-evaluation of assets can be effected via an independent valuer. Any increase or decrease in the value of assets is reflected accordingly. The increase in value is recorded as a capital reserve. Generally, there is no tax obligation with respect to that reserve. However, depending on the nature of the assets, corporation tax or capital gains tax may be imposed in the case of sale. 3. What are the particular rules of depreciation of goodwill in your country? Goodwill is not subject to depreciation or amortization. Since Cyprus applies International Financial Reporting Standards (IFRS), goodwill is tested for impairment (comparing recoverability with carrying amounts) annually or whenever there is an indication of a possible reduction in value. For impairment testing, goodwill is allocated to the relevant cash-generating unit (the lowest level within the entity for internal management purposes) and this cash-generating unit is tested for impairment.

Impairment loss on goodwill cannot be carried back. Goodwill does not appear on individual statutory statements, only in consolidated financial statements. The goodwill is treated as a fixed asset and as such gains are excluded from tax. 4. Are there any limitations to the deductibility of interest on borrowings? According to Cypriot tax law, expenses may be deducted if they have been incurred wholly and exclusively for the production of taxable income. In line with this, interest paid on a loan that has been used or will be used by the company for trading purposes or for the acquisition of trading fixed assets is fully deductible. Interest paid on borrowings used by a holding company to acquire a fully owned subsidiary is treated as interest used for acquisition of trading fixed assets. Any other interest income not classified as part of trading or related to company's trading activities may not be treated as a deductible expense. Nontrading assets for which interest may not be deductible include: Investments in shares that do not represent stock (as stocks are considered shares used for trading purposes) Passenger cars not used for trading Land that does not represent stock (as stock is considered land used for trading purposes) Buildings that do not generate income.

Since the rules above provide only a general overview, proper advice should be sought on a case-bycase basis. Non-trading assets are considered those that are not readily convertible into cash. No withholding taxes are imposed on interest paid out of Cyprus to non-resident creditors. 5. What are usual strategies to push-down the debt on acquisitions? With a properly designed tax structure, debt pushdown can be easily achieved. Cypriot law has an absolute prohibition on financial assistance given by a company, whether directly or indirectly, for the acquisition of its own shares. It also prohibits the holding company's shares in the case of a subsidiary company. In line with this, in a transaction with multiple dealings, share acquisition financing may not be linked to debt push-down given that this may be treated as an indirect financial assistance. However, express exclusions from the scope of this provision are included in the law. The application of the provisions of EU Merger Directive incorporated into Cypriot law may prove beneficial in achieving debt push-down. An intermediary company may be incorporated in order to acquire the target. The intermediary company can subsequently be merged with the target company. To implement this plan, proper advice should be sought. Generally, if the

structure and the transaction have sufficient underlying substance, any risks of avoiding taxation are effectively minimized. Deferment of the debt (i.e., debt to be carried forward by postponing the payment of future liability) is also possible, allowing allocation of obligations according to annual profits. From a Cypriot perspective, any losses that would have been subject to tax, had they been gains, may be offset against other sources of income in the same tax year. When income is not sufficient, losses may be carried forward and offset against profits in subsequent years. In the case of change of ownership of a company, as well as change in the nature of the activities of a company, previous losses may not be carried forward and used by the new owners. A company may also surrender tax losses to another company from the same group. On the claim by the group company (claimant company), group losses may be offset provided certain following conditions are met: Two companies are considered to belong to the same group for group relief purposes if one is controlled directly or indirectly by the other by at least 75 percent, or both are controlled directly or indirectly by a third party also by at least 75 percent A company will be considered a subsidiary of another company if and so long as not less than 75 percent of its ordinary share capital with voting rights is owned directly by that other company, and that other company is entitled to not less than 75

percent of (i) any profits available for distribution to the equity shareholders and (ii) any assets of the subsidiary company that would be available for distribution to its equity holders on a winding-up Both companies must be Cypriot tax residents Both companies must be members of the same group for the entire year of assessment It is only possible to offset the loss of one company against the profit of another where the loss and profit are attributable to the same year of assessment Any payment for offsetting the tax losses of a group will not be taken into account in the tax computation of the surrendering or claimant company, nor will it be considered to be a dividend or an allowable expense. In the case of reorganization, any of the transferring company's accumulated losses are transferred to the receiving company and the provisions of the Cypriot law relating to the offset and the carryforward of losses apply. 6. Are losses of the target company/ies available after an acquisition is made? Tax losses incurred in any one year that cannot be wholly offset against other income may be carried forward for five years and offset against profits resulting in subsequent years. However, according to the law, losses incurred by a company cannot be carried forward if: Within any three year period there is a change in share ownership of the company and a substantial

change in the nature of the company's business (a significant change can be interpreted as a drastic change in the types of activities offered by a company – i.e., originally sells computers and then stops to commence trading in pharmaceuticals) At any time since the scale of the company's activities has diminished or has become negligible and before any substantial business reactivation, there is a change in ownership of the company's shares.

amount of EUR20,000. In practice it is advisable for the agreement to be sent to the Cyprus stamp duty authority before execution in order to receive a written confirmation on whether it shall need to be stamped.

Losses can be carried forward provided that the reorganization process complies with all legal requirements.

8. Are there any particular issues to consider in the acquisition of foreign companies? Cyprus is renowned as a jurisdiction for holding companies. In the majority of cases its domestic

7. Is there any indirect tax on transfer of shares (stamp duty, transfer tax etc.)? Stamp duty at nominal rates is payable on a variety of legal documents and may also apply in the case of a transfer of shares. We have seen instances where contracts are not disclosed to the stamp duty authorities in an attempt to evade the stamp duty obligations or even sometimes out of pure negligence. We have advised in many instances on how to redress situations like the latter. Generally, stamp duty is imposed on contracts relating to activities and immovable property located in Cyprus. As of March 1, 2013, the applicable rates that are payable on contracts are zero on sums up to EUR5,000, and EUR1.50 for every amount of EUR1,000 or part of the amount of EUR1,000 on contracts with value between EUR5,001 and EUR170,000. On contracts in excess of EUR170,000, the levy is EUR2 for every amount of EUR1,000 or part of the amount of EUR1,000, with a maximum

legislation allows tax-free treatment of incoming dividends from foreign subsidiaries. It also allows distribution of dividends to non-resident shareholders free from withholding taxes.

Contracts are exempt from stamp duty in cases where the transaction falls within the provisions of a corporate reorganization.

Equally from a financing perspective, any interest payments to non-residents can also effectively be free from withholding taxes. In any case, transactions between the Cypriot company and other group companies should follow transfer pricing regulations. In Cyprus, transfer pricing regulations are fairly limited: the arm's length principle applies in line with the provisions of the OECD. To mitigate tax effects in the case of acquisitions, an important parameter that should be taken into consideration is the provisions of a relevant agreement for avoidance of double taxation (if any) between

Cyprus and the country in which the subsidiary will be located. 9. Can the group reorganize after the acquisition in a tax neutral environment? What are the main caveats to consider? Cyprus has implemented the EU Merger Directive provisions in its national income tax legislation, enabling tax neutral reorganizations. According to Cypriot law, the transfer of assets and liabilities in the course of reorganization does not give rise to any taxable profits at the transferring company level. Accumulated losses of the transferring company moved to the receiving company may be offset and relevant provisions for the consolidation of losses are applied. Equally, profits derived at the receiving company level as a result of the cancellation of its participation in the transferring company do not give rise to any taxable obligations. The issue of shares in the receiving company to the transferring company's shareholders in consideration of shares in the transferring company does not give rise to any taxation on gains or losses at the shareholder level. Corporate reorganizations include mergers, divisions, partial divisions, transfers of assets, exchange of shares, and transfer of registered seat. In order to qualify for tax exemption, corporate reorganization should not involve a cash payment exceeding 10 percent of the shares' nominal value. Stamp duty exemption on relevant contracts is also allowed.

In the reorganization process, losses generated at the transferring company level can be carried forward to the receiving company subject to the provisions of the Cypriot law relating to the offset and carrying forward of losses. Any losses of the receiving company are in turn transferable. 10. Is there any particular issue to consider in case of companies whose main assets are real estate? According to Cypriot tax legislation, a capital gains tax at the rate of 20 percent may be triggered by the sale of shares in companies that derive their value from real estate situated in Cyprus. In this case, possible application of a Double Taxation Treaty (DTT) should be considered, especially when the treaty includes favorable provisions for the taxation of capital gains. Capital gains tax will be triggered only when such shares derive their value from real estate situated in Cyprus. The capital gains tax is not extended to immovable property situated outside Cyprus. Therefore, when a Cypriot company acquires a foreign subsidiary owning real estate situated outside Cyprus, and in turn sells the shares of that subsidiary, no taxes should be triggered in Cyprus. In some cases, however, DTTs allow for the taxation of such gains at the subsidiary level. Acquisition of real estate property by non-Cypriot residents, other than those coming from EU countries, requires the approval of the Ministry of Interior, a process that takes between one and four months.

Immovable property situated in Cyprus is taxed on an annual basis on the market value of the property as of January 1, 1980. The rates for legal entities are the same as for individuals and vary from 0.6 percent to 1.9 percent. For properties with value less than EUR12,500, no tax is due. In the case of a transfer of immovable property, applicable transfer taxes are a liability of the buyer. Transfer taxes are rated between 3 percent and 8 percent. 11. Thinking about payment of dividends out of your country and a potential exit, is there any particular country that provides a tax efficient exit route to invest in your country? Cyprus tax legislation offers a number of benefits to foreign investors. One of the most important is that it does not impose any withholding taxes on dividends paid to foreign shareholders. As a result, this favorable regime will be applied irrespective of the existence of a DTT. The benefits of Cyprus's tax regime may be used in the course of various tax structuring, including as a good exit route. Cypriot companies are most commonly used as holding and financing companies. Accordingly, the gains derived from a potential sale of a shareholding in a subsidiary are generally exempt from Cypriot tax. Any available profits can be distributed to the shareholders free from any withholding tax in Cyprus. Interest payments to nonresident creditors are also exempt from withholding tax in Cyprus.

12. How is foreign debt usually structured to finance acquisitions in your country? The lack of thin capitalization rules in the form of debt-to-equity restrictions makes Cyprus a favorable jurisdiction for financing structures. Accordingly, foreign debt-to-finance acquisitions may take the form of a loan. Alternatively it may take other forms of debt instruments such as debentures, convertible or not. Based on the domestic tax legislation of Cyprus, any interest payment to the non-resident creditor would be free from withholding tax. Interest is deductible if it is incurred wholly and exclusively for the production of income. The arm's length principle should also be taken into consideration. In cases of back-to-back financing, the Commissioner of Inland Revenue Department has identified minimum acceptable interest margins based on the loan amount (see below). up to EUR50m from EUR50m to EUR200m over EUR200m

0.35 percent 0.25 percent 0.125 percent

Interest-free loans would be subject to a deemed interest margin of 0.35 percent applicable irrespective of the amount. The above margins are applicable for the tax year 2008 onwards. For the years 2003-2007, the acceptable margin is 0.3 percent irrespective of the amount and whether it is interest bearing.

The above margins are subject to the following conditions: The intermediary company should be a Cyprus resident company The write-off on the loans, either the loans received by the Cyprus company or loans granted by the Cyprus company, should not create any tax liability or benefit for the company. In the case that the Cyprus company also writes off a loan granted, then any interest expense relating to that loan received is not an allowable expense for tax purposes The time elapsed from the date that the company receives a loan and the date it grants the loan should not exceed six months For the purpose of calculating profit margins, any expenses (except exchange differences) relating to acquiring and granting the loans should be deducted. The above rules are applicable if the Cyprus company borrows funds from a bank and it grants the loan to a related company on which the bank holds collateral from other related companies. These rules will also apply if other financial products are used instead of a loan. In this case, prior approval of the tax authorities is required. Since the deductibility of interest is subject to various conditions, seeking expert advice can help reduce the taxable base and the effective tax burden. If interest is not accounted for properly, the Cypriot tax authorities may challenge a deduction.

From A Seller's Perspective 13. What are the main differences between share and asset deals? Share deals Assuming that the seller is a Cypriot resident, the gains from the sale of shares will not give rise to a profit subject to corporate income tax. Also the gains do not trigger capital gains tax, unless the assets of the company whose shares are being disposed of include immovable property situated in Cyprus. Asset deals The gains from the disposal of immovable property situated in Cyprus give rise to capital gains tax in Cyprus at a rate of 20 percent. The imposition of capital gains tax on transfers of immovable property is subject to exceptions including, among others: Gains from the sale of shares in listed companies that are exempt from capital gains tax whether or not they own Cypriot immovable property Gains from the disposal of shares other than those identified above that are exempt from the scope of capital gains tax Gains resulting from qualifying company reorganizations, whether related to share transfers or transfers of ownership. No capital gains tax is imposed in Cyprus on gains from the disposal of immovable property situated outside Cyprus.

Gains deriving from the sale of assets other than immovable property are exempt from capital gains tax. They may, however, be subject to corporate income tax, depending on the nature of the assets. Generally, gains from the sale of trading assets are subject to corporate income tax, while gains from the sale of fixed assets are exempt from tax. Gains from the sale of securities are generally exempt from both capital gains tax and corporate income tax.

14. How are capital gains taxed in your country? Is there any participation exemption regime available? There is no fiscal advantage in Cyprus of reinvesting proceeds from a sale. The proceeds from the sale of shares are generally exempt from tax and, as such, no tax obligations are anticipated to arise. Gains deriving from the sale of assets are taxed accordingly.