Introduction

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 (FDI). Further, through the Cyprus Securities and Exchange Commission (CySEC) and other competent authorities, the Cyprus government has shown leadership in authorising 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 (AIFM) Directive (2011/61/EC). This update examines some of the principle benefits to FDI in Iran through Cyprus.

Benefits of investing in Iran via Cyprus

Attitude and willingness of Cyprus competent authorities

The Cyprus government, most notably through CySEC, the Ministry of Finance and the Ministry of Foreign Affairs, has shown its willingness to authorise and provide relevant licences for local firms seeking to undertake business in Iran. Further, numerous Cypriot industry associations and trade bodies have organised business delegations to Iran since the implementation of the Joint Comprehensive Plan of Action. The willingness of the Cyprus authorities and industry in this regard can be seen as largely consistent with the country's political heritage as an 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 (see below).

Cyprus-Iran bilateral 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 (BIT) 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. The BIT 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 licences 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 Organisation for Economic Cooperation and Development (OECD) 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 Cyprus tax resident.

Other Cyprus tax considerations

Under Cyprus tax legislation more generally, there is no incidence of capital gains tax on the disposal of an asset held by a Cyprus company unless that asset is comprised of immoveable property situated in Cyprus or shares representing immoveable property situated in Cyprus. Gains accruing from the disposal of shares listed on any recognised stock exchange are exempted from tax. The Tehran Stock Exchange is a recognised 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 from income tax 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 harmonised 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 (2004/39/EC), 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 favourably to international centres based in Western Europe.

Cyprus corporate and legal regime more generally

Cyprus has adopted the English common law system and English judicial precedent is taken into account by the Cyprus courts. As relevant to Cyprus companies, the principal Cyprus corporate statute – the Companies Law, Cap 113 – is almost identical to the United Kingdom's Companies Act of 1948. On accession to the European Union, the Companies Law was amended to comply with community-wide legislation. Amendments are made on an ongoing basis, including as recently as 2015, to ensure that the legislation remains up to date.

Comment

Cyprus companies and institutions offer the international investment community an opportunity to structure Iranian investments soundly and to international standards.

For further information on this topic please contact Aki Corsoni-Husain or Elina Mantrali at Harneys, Aristodemou Loizides Yiolitis LLC's Limassol office by telephone (+357 25 820020) or email (aki.corsoni-husain@harneys.com or elina.mantrali@harneys.com). The Harneys, Aristodemou Loizides Yiolitis LLC website can be accessed at www.harneys.com.

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