Even though Greece may offer a spectrum of investment opportunities, due to the country’s location, the renewable energy sources (for example, it is estimated that one third of Greece’s energy requirements could be met with solar, the superb wind resources in Greece are among the most attractive in Europe), the development in the tourism sector, and the fact that it has the highest amount of skilled workers in Europe, its political, financial and economic instability have transformed Greece into the “sick man of Europe”.
The new draft tax law represents an example of the above paradox. Indeed, the main changes that the new draft tax law will introduce to the Greek tax system are related mostly to the increase of the tax rates. For example, the corporate tax for the legal entities will increase from 20% to approximately 26%, with additional taxation of dividends at 10%, 20% capital gains tax on the profits from the sale of securities, 15% on the interest on deposits, the elimination of exemptions from income tax and the introduction of new taxes.
Beyond this, the tax system is not the only problem that a foreign investor faces when he decides to invest in Greece. Bureaucracy, corruption and incompetent public administration further examples of the obstacles that must be overcome.
The former explains why Greece ranked 146 (out of 185) in the category “Ease of doing business” in the annual report Doing Business 2013 published by the World Bank and the International Finance Corporation, whilst Cyprus ranked 37 (out of 185).
Cyprus has been transformed to the most attractive solution for foreigners and Greek investors who wish to invest or maintain their business in Greece. It is more tax efficient for a freelancer to incorporate a business in Cyprus, where corporation tax stands at 10%, and offer his services through the former instead of work in Greece as freelancer (the freelancer in Greece will be taxed at the rate of approximately 26% for the first €50.000 without free threshold). For tax compliance, their Greek operation will offer solely services to their Cypriot entity.
Moreover, the economic stability of the Cypriot economy, the fact that the country’s tax system has remained the same over the past years and the incentives (i.e tax system unchanged since 2004, corporate income tax rate 10% for global trading income, no tax imposed for the transfer of the shares, no capital gain tax for foreign assets, no withholding tax on dividends, no thin capitalization rules, extensive network of double tax treaties etc) that the country offers to foreign investors attracts a significant amount of investors year after year.
It is also important to underline that the Double tax treaty between Cyprus and Greece is one of the few DTTs that includes a tax sparing clause. The purpose of this provision is to allow non-residents to obtain a foreign tax credit for the taxes that have been “spared” under the incentive program of the source state or to ensure that these taxes will be taken into account for the purposes of applying certain conditions that may be attached to exemption systems. Even though tax sparing is not always an effective tool to promote economic growth it offers effective incentives to foreign investors in order to invest in Greece through Cyprus.
As discussed, operating in an unstable tax system, such as the Greek tax system, dictates the need for careful and thorough tax planning to mitigate the consequences of potential tax changes. For example, structuring properly the investment through a blend of equity and debt, can lead to significant tax mitigation and by minimum will lead to tax certainty. The use of a group financing entity in a jurisdiction such as Cyprus is strongly recommended. Additionally, there are additional structuring tools, which safeguard the predictability of the tax treatment of the investment. Additionally, it will lead to very significant tax savings in the event of a subsequent sale of the investment, through the sale of the holding entity.
Finally, the existence of a holding entity for Greek investment gives side advantages, which are not obvious to the investor. For example, a holding entity for the Greek business is much more practical and feasible to examine during a due diligence exercise and moreover, for investors from certain jurisdictions, savings of up to 20% can be achieved at the level of dividend distribution.
For all the above reasons, the Greek market has accepted Cyprus as the premier solution for structuring investments into Greece and choosing the appropriate partner, with detailed knowhow in both markets can lead an investment in a tax environment which is significantly more protected and favourable than normal.