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China & Cyprus: Opportunities for Investors
As the world's second largest economy, China is a country which currently offers tremendous amount of business opportunities in many sectors. In 2011 alone, China absorbed foreign investments amounting to USD 116 billion. Foreign investment has played a major role in the development of China since the opening up of its economy in 1978, and over the years there have been various legislative instruments attempting to regulate and even assist foreigners investing into China, such as Circular 30.
Chinese outbound investment, however, to countries such as the USA, Europe, Africa and the Middle East has increased significantly over the last decade. According to a report prepared by the Rhodium Group, it is expected to reach USD 2 trillion by the end of 2020. Chinese outbound investments are important as these create employment and are therefore extremely beneficial in the current economic climate. Furthermore, Chinese outbound investments have already created 45,000 work positions in Europe alone. Taxand Cyprus details the history of this relationship, and what this means for in and outbound investment into either country.
Cyprus and China have long maintained warm relations. China was one of the first countries to recognise the independence of Cyprus and in turn Cyprus supported China's efforts to gain a permanent seat on the United Nations Security Council. Mutual support in international politics has continued to this day. From an economic perspective, Cyprus and China have concluded 18 bilateral agreements in areas such as taxation (DTT), trade, tourism and technology.
Cyprus has concluded various treaties for the avoidance of double taxation (DTTs) therefore ensuring beneficial taxation with many countries. Cyprus offers a beneficial corporate taxation in the EU, with a rate of 10% Corporate Income Tax on the net profits of a company and no or low withholding taxes on interest, dividends and royalties. Foreign or Chinese investors can make the most of these opportunities by using Cyprus.
In the context of the above, a foreign investor wishing to invest in China might decide to proceed through a Cypriot Company to transfer his/her investment to benefit from the low withholding taxes (WHT) of Cyprus. They may even benefit from the Cyprus - China DTT which maintains a 10% rate for dividends, interest and royalty payments. The investment can then be transferred to the relevant Chinese investment entity. The Chinese investment entity usually takes the form of a Joint Sino-Foreign Venture or an exclusively Foreign-Owned Business, the latter being mostly export related. This, however, does not mean that it isn't possible to proceed with smaller scale investments which could have a different form.
On 29 June 2012, the State Administration of Taxation (SAT) of China issued Circular 30 in an attempt to provide guidance and certainty on how a foreign investor can obtain the benefit of the low WHTs on dividends paid out of China in accordance with existing DTTs. Circular 30 is also applicable to the Cyprus - China DTT.
The previous Circular stated that in order for an investor to obtain the DTT benefit for dividends received from China, the recipient of the dividends must actually be the beneficial owner of this income. Circular 30 went further and provided clear cut conditions on how the recipient of the income can qualify as the beneficial owner for the purposes of the Chinese SAT. These are that a company must be a tax resident of the other contracting party (i.e. Cyprus) and also to be listed in that other country (i.e. in Cyprus). The Circular also stipulates that the listing requirement can be waived if the parent of the company is listed in another jurisdiction. The latter situation can thus provide flexibility for large multinationals, often listed, which prefer to obtain treaty benefits through a flexible Special Purpose Vehicle such as a Cypriot Company.
The benefits of Cyprus are not solely designed for foreigners wishing to invest in China. Chinese investors will find Cyprus an accommodating entry point for EU investments and beyond. Business in Cyprus mirrors its geographic location and provides connections with Europe, Africa and Asia. The wide range of DTTs concluded in Cyprus makes it all the more appealing to Chinese Investors, and Cyprus has a proven track record of accommodating Chinese Investments such as the Chinese government owned company, CBMI Construction Co. Ltd.'s Euro 83 million contract for a construction at the Vasilikos cement factory, and the Euro 20 million agreement between Huawei Technologies and MTN Cyprus for a network upgrade project, to name just two.
The current economic climate will reinforce China's importance. Foreign investors will look into investing in China whilst Chinese investors look for investment opportunities in the West and mostly to debt-stricken Europe. In the latter case, Chinese investments are often viewed with suspicion as having political overtones. This is an erroneous approach, since foreign investments create much needed economic growth and employment opportunities. Cyprus has already been used for tax structuring purposes to funnel investments from China and this is expected to increase greatly in the coming years.
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