Hard Vs Soft BREXIT

28 June 2018
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BREXIT; THREAT OR OPPORTUNITY?

In the financial services sector in UK the word BREXIT is a synonym of uncertainty and risk. Uncertainty combined with a lower risk appetite decreases business investment, hiring new staff, and a re-assessment of the cash and cost control of corporate organisations. 

Foreign direct investment can also be affected as most investors are willing to safeguard their assets within an EU member state rather a non EU one. Increased uncertainty is likely to put pressure on M&A and IPO activity as well.

The International Monetary Fund has cut its growth forecast for the UK economy this year after a weak performance in the first three months of 2017.In its first downgrade for the UK since the EU referendum in June last year, the IMF said it expected the British economy to expand by 1.7% this year, 0.3 points lower than when it last made predictions in April. The IMF left its growth forecast for the UK in 2018 unchanged at 1.5% but said one key risk facing the global economy was that the Brexit talks would end in failure. (https://www.theguardian.com/business/2017/jul/24/imf-cuts-2017-growth-forecasts-uk-us-economy-trump-tax-cuts) 

Close links with Cyprus:

Could Cyprus due to its historical ties with UK be very well positioned to take advantage of the BREXIT situation?

The UK is Cyprus’ second biggest trading recipient, receiving around 7% of Cypriot exports the vast majority of which is in services (approx. 20% of the total amount). Further devaluation of sterling, could possibly make such exports less economical. 

UK-based banks have borrowed in total the equivalent of over 40% of Cypriot GDP and lent to entities in Cyprus an amount equal to more than 30% of GDP. 

Cyprus’ economy is significantly dependent on tourism. Devaluation of sterling will further increase travel costs for British tourists. 

Source: Global Counsel: “BREXIT : the impact on the UK and EU” based on data from Bank of England, IMF WEO, Global Counsel calculations.

However, since triggering of Article 50 sterling has not been affected much, at least not for long periods therefore, opportunities lie where UK based Corporations, Banks and other financial institutions (i.e. Funds) seek to implement their Brexit contingency plans, including seeking to transfer their business or headquarters out of the UK or establish EU subsidiaries/branches which would allow them to continue their EU activities.

This can be done through Cyprus; Why:

Cyprus ranked top for transparency in a recent report by Transparency International, disclosing the most complete set of anti-money laundering (AML) data among 12 countries analysed, including the US, Britain, France, Australia, Luxembourg and Germany.

 

The Cyprus AML Law and the Central Bank of Cyprus directive were revised in December 2013 and largely mirror the EU’s Fourth AML Directive, which the rest of the EU has until July 2017 to implement.

 

Historically close links with the UK

 

Cyprus ranked as one of the fastest growing EU economies (3% growth rate predicted by the Cypriot Ministry of Finance in 2017).

 

English widely spoken

EU member state compliant with EU laws and regulations 

Eurozone member 

Cost-effective setting up and on-going operational services 

Access to an extensive network of double tax treaties allowing for tax efficient structuring of investments (60 double tax treaties).

Incentives and tax benefits for high-earning mangers and high-net-worth individuals coupled with the most attractive corporate tax regime in the EU ensure the most efficient tax structuring 

For individuals (including Fund Managers) becoming tax resident, there is zero tax on dividends and interest income 

Increased flexibility as a number of asset classes can be included in an AIF investment strategy 

One regulator for CIFs and AIFs, the Cyprus Securities Exchange Committee (CySEC) which provides streamlined procedures, reduced bureaucracy and lower regulatory fees 

 

Highly qualified professionals and sophisticated infrastructure 

Extensive range of excellent legal and accounting services 

Full transparency through annual audited reports to CySEC and investors 

Proximity to some key markets like the Middle East and Eastern Europe

 

Key tax incentives within Cyprus:

•        One of the lowest corporation tax rates within the EU at 12.5%

•        0% tax on distribution of dividends to non-tax residents

•        0% tax on dividends received from another company (both local and overseas) under certain conditions

•        0% on profits from the disposal of shares and other qualifying titles

•        0% on profits from a permanent establishment under certain conditions

•        0% capital gains tax on gains arising from non-Cyprus sources

•        0% tax for shipping companies for operations in international waters

•        0% tax on International Trusts or their income in Cyprus

•        0% Inheritance tax

•        The Cyprus Intellectual Property Regime can be fully utilized when trademarks or patents receive income in a Cypriot Resident Company to achieve on profits tax rate as low as 2.5%.

 

Setting up a Branch/Permanent Establishment of the UK Business in Cyprus:

As long as your company’s branch/permanent establishment is managed and controlled in Cyprus it can enjoy all the tax benefits as with any other Cyprus legal entity. The procedure is quick, easy and straight forward. The UK business can take advantage of the E.U Directives and Regulations along with one of the lowest tax rates in the E.U.