Month: September 2023

Winding-up vs Striking-off

Posted on | by Paschalis Paschali

Under the current legal framework, there are various ways by which a company may cease to exist: voluntary winding-up, compulsory winding-up, winding-up under court supervision, striking off. The process and consequences of each of these methods are briefly analysed below. 

Voluntary winding up by members

A voluntary winding up procedure is initiated by the Company’s members and presupposes that the Company is capable of paying all its debts within a period of 12 months from the commencement of winding up. For this purpose, a Declaration of Solvency is prepared by the Directors confirming the above, which is essentially a statement in the form of an affidavit, signed by the majority of the Directors before the court registrar, accompanied by a statement evidencing the Company’s assets and liabilities. In view of this, the auditors of the company need to prepare up-to-date financial statements. The Declaration of Solvency must be made within 5 weeks immediately preceding the passing of the resolution for winding up and be delivered to the Registrar of Companies (“RoC”) for registration before that date.

A voluntary winding up is deemed to commence at the time of passing of a resolution by the members for the company’s winding up. The members also appoint the liquidator, whose appointment is advertised in the Official Gazette within 14 days and relevant forms are filed with the RoC. Upon the appointment of the liquidator, the directors’ powers cease to exist and the liquidator proceeds with liquidation of the company’s assets, repayment/settlement of the company’s financial obligations including tax liabilities and payment of any dividends/surplus to the company’s members. The liquidator presents a statement of the actions performed during liquidation at the final general meeting, notice for which is published in the Official Gazette at least 1 month before the date of the meeting. Within a week following the final meeting, the liquidator files copy of the reports and accounts with the RoC. The company is deemed dissolved after 3 months from such filing.

Voluntary winding up by creditors

If at any stage during a voluntary liquidation by members it appears that the company is unable to pay its debts, then a voluntary liquidation by members is by operation of law transformed to a voluntary liquidation by creditors. Under such circumstances, the company convenes a creditors’ meeting in which a liquidator is nominated for the purposes of winding up the affairs of the company and distributing its assets. If there is a disagreement between the liquidator proposed by the creditors and that of the members, the proposal made by the creditors prevails. Furthermore, in the event that creditors deem appropriate, they may decide to appoint an Inspection Committee consisting of up to 5 persons. Apart from the involvement of creditors, and the liquidator’s duty to convene creditors’ meetings to present an account of the winding up process, the process otherwise resembles voluntary winding up by members. Within a week following the final meeting, the liquidator files copy of the reports and accounts with the RoC. The company is deemed dissolved after 3 months from such filing.

Winding up with the Supervision of Court

At any time after a resolution authorising the voluntary winding up has been passed by the Company, and upon the application of the company’s creditors, contributors or any other person, the Court may issue an order allowing the continuance of the winding up under Court’s Supervision. The court may also order the appointment of an additional liquidator, who may exercise all his powers without the sanction or intervention of the Court, subject to any restrictions imposed by the Court in the same manner as if the company were being wound voluntarily.

Compulsory winding-up

A compulsory winding-up may be ordered by the Court upon filing of a relevant petition by the Company, any creditor, or contributor, on the following grounds:

  • The company has passed a special resolution for winding up by the court;
  • The company has omitted to complete its statutory obligations and/or commitments;
  • The company has not commenced operations within one year from its incorporation or its business has been halted for a whole year;
  • In case of a public company, the number of members is reduced below seven;
  • The company is unable to pay its debts;
  • If in the opinion of the court, it is just and equitable that the company be wound up.

A compulsory winding up is deemed to have commenced at the time of filing of the petition for the winding up (or passing of the special resolution, if applicable).

Upon issuance of a winding-up court order, a copy of the said order, must be delivered to the RoC within 3 working days. The RoC thereafter proceeds with the registration of the order and its publication on the official website of the Registrar of Companies and Official Receiver.

Strike-off

An alternative way for a company to be dissolved, is by the way of its striking-off from the Register of Companies. This is typically a simpler and faster process than liquidation and it may be voluntary or involuntary.

This route is available for non-active or non-operating companies (dormant companies) and/or companies the businesses and/or operations of which have ceased and which have no longer any assets or liabilities and do not intend to carry on any business in the future. Furthermore, companies which have failed to pay annual government fees and/or make statutory filings may be struck off the register by the RoC after the expiration of three (3) months from relevant publication in the Official Gazette.

A dormant company may voluntarily apply for strike off by submitting a relevant request to the RoC. The company in its capacity as the applicant must ensure that it has complied with all of its statutory and ancillary obligations, as provided by the Companies Law and has settled all its affairs including its obligations to corporation taxes, VAT, Social Insurance, creditors and that there is no prohibiting court order against the Company. Once the registrar is satisfied that the company has honoured its relevant obligations, it proceeds with strike-off as requested.

Reinstatement

A company which has been struck off from the register either voluntarily or involuntarily may be reinstated and be regarded as never struck off.

Any interested party (e.g. member/shareholder of the company, creditor or whoever deems that they have been damaged by the actions of the company before its strike off) may request by way of an application to the court for the reinstatement of the company. This application can be made within the period of 20 years from the date of strike-off. If the court is satisfied that the company at the time of its strike off had been conducting business or was still in operation or if it is deemed fair for the company to be reinstated then the court may order the reinstatement of the company.

Provided that the RoC is satisfied that all the requirements of the law are complied with, it proceeds to the reinstatement of the company, the update of the register of the RoC, and to the publication of its reinstatement in the Official Gazette. Upon reinstatement of its name to the register the company is regarded as existing and never struck off before.

Administrative reinstatement of a company

 In case that a company is struck off from the register of companies for non-compliance with the Companies Law (i.e. for failure to submit any document required by the law or for failure to pay the annual government fee or in case a company is struck off from the register because the RoC has reasons to believe that the company is not operating), the said company may be reinstated through the procedure of the administrative reinstatement. In contrast with the procedure described above, in which a court order is required, the procedure of administrative reinstatement does not require the acquisition of a court order and upon company’s reinstatement, the company is deemed to have continued its existence as if it had never been struck off.

Reinstatement can take place with the submission of the relevant statutory form to the RoC together with all ancillary documents within 2 years of the date of strike off.

Submission of the form can be effected by a company director or company member.

If the RoC is satisfied that all legal requirements have been met, they will re-instate the company and issue a certificate of reinstatement with the date it has been re-instated and update the companies register. The re-instatement will be published in the Official Government Gazette.

THE IMPACT OF EU LAW ON THE CYPRUS CORPORATE TAX SYSTEM

Posted on | by Paschalis Paschali

Distinguishing the Concepts from the Misconceptions

For an effective tax planning strategy, businesses in Cyprus need to be fully aware of the concepts of taxation on a European level and how they affect Cyprus at present and how they may affect it going forward. This article aims to give an informed overview as a first step to gaining such an understanding.

There is often a misconception that the EU dictates all Cyprus tax laws. Whilst this is true as regards indirect taxes such as VAT, customs and excise which are largely harmonized, technically, the power to levy direct taxes, including corporate taxes, remains within the exclusive powers of Member States.

However, these powers must be exercised consistently with general EU law, that is, the EU’s fundamental freedoms, the Charter of Fundamental Rights, and the state aid prohibition. This obligation is derived from the supremacy of EU law over domestic law. In terms of tax law this general EU law and the various Directives are considered as “hard law”.

Cyprus’ corporate tax laws are primarily set out in the Income Tax Law (Law 118(I)/2002, as amended) and the Special Contribution for Defence Law (Law 117 (I)/2002, as amended). There are also important provisions in some of Cyprus’ pre-accession general tax instruments: the Capital Gains Tax Legislation of 1980 (Law 52/1980, as amended) and the Assessment and Collection of Taxes Legislation of 1978 (Law 4/1978)

Since Cyprus acceded to the EU, there have been few changes to its corporate tax system which were necessary as a result of EU legislation (usually, Directives).  This was because in anticipation to join the EU in 2004, Cyprus had already overhauled its tax system, including its corporate tax system, to ensure compatibility with the acquis Communautaire.

Accordingly, at the time of accession to the EU, Cyprus had already incorporated in its domestic law the then existing EU corporate tax law concepts: namely, the Parent-Subsidiary Directive, the Interest and Royalties Directive, the Merger Directive, and the Mutual Assistance Directives dealing with recovery of taxes and exchange of information.

Furthermore, pre-accession, Cyprus legislation was assessed under the Code of Conduct on Business Taxation, which is considered as “soft law”. Within the context of taxation although soft law is not, technically speaking, legally binding, nevertheless, it carries important political weight and must be followed. Numerous potential harmful tax measures were therefore identified and repealed at the beginning of 2003.

However, as we all know, law in general, and specifically EU law is not static. Since Cyprus’ accession to the EU, several incorporated Directives have been amended. Obviously, the amendments had to be again incorporated in Cyprus laws, as under EU law, directives (and their subsequent amendments) must be adopted by Member States within the time frame provided, otherwise, they become directly effective.

For example, when the Parent-Subsidiary Directive was amended in order to withdraw the exemption of dividends received when these were deductible in the country of the paying company, this amendment was incorporated into Cyprus tax laws (Art 8(20) of Income Tax legislation). Similarly, when the 1977 Directive on Mutual Assistance (Directive 77/799/EEC) was replaced with the 2011 Directive on Administrative Cooperation (Directive 2011/16/EU), the changes had to be incorporated in Cyprus tax law. In fact, this Directive has been amended several times since 2011 and each time, Cyprus has had to amend its tax laws to ensure compliance with the Directive.

Furthermore, since Cyprus’ accession, new Directives have been adopted – for example, the infamous Anti-Tax Avoidance Directive (ATAD I & II) and the Tax Dispute Resolution Mechanisms Directive. The provisions of ATAD I & II were subsequently incorporated in Cyprus Income Tax Law (Arts 11A, 11B, 11C, Art 11(16)(a), Art 33B and Art 36A as amended by Law 3 of 80(I)/2020). The Tax Dispute Resolution Mechanisms Directive was incorporated in Art 36B, 36C and 36D of the Income Tax Law (as amended by Law 151(I)/2019).

Cyprus is now gearing up to adopt the Directive on Minimum Effective Tax Rate, which was approved in Council in December 2022. Member States were given until the 31 December 2023 to incorporate the provisions of the new Directive into domestic law.

There are also a number of other legislative tax proposals in the pipelines, which have not yet been approved in Council: for example, the proposed “Unshell” Directive, the proposed Directive on Faster and Safer Relief of Excess Withholding Taxes and the (not yet proposed) SAFE Directive which will look at the activity of tax enablers.

Recently, the Commission has also  proposed three very important Directives: the BEFIT Directive (Business in Europe: Framework for Income Taxation), the Transfer Pricing Directive and the Directive on Head Office Tax.

In addition to EU legislative instruments that must be incorporated into domestic legislation, like all Member States, Cyprus needs to closely follow the jurisprudence and the precedents emanating from tax litigation at the Court of Justice. This is necessary so as to ensure that Cyprus domestic law remains compatible with EU primary law (i.e. the fundamental freedoms, the Charter of Fundamental Rights, the state aid prohibition etc). For example, if the tax legislation of another Member State is found to be in breach of freedom of establishment and Cyprus contains similar tax rules, these must be amended. Similarly, if a tax provision or administrative practice of the tax department of another Member State is investigated by the Commission and found to be in breach of the state aid prohibition, if Cyprus has a similar tax provision or administrative practice, this must be repealed.

Failure to do so could lead to an infringement procedure by the Commission. Furthermore, affected taxpayers could also sue the Cyprus government in domestic courts on the basis of the Francovich principle of state liability.

Apart from legislative amendments, Cyprus has had to follow closely the work of the Code of Conduct Group, to ensure compatibility with the Code of Conduct on Business taxation. Although this is soft law, as explained above, it has significant political force. In fact, since 2004, Cyprus’ tax system was formally investigated twice by the Code of Conduct Group.

The first investigation focused on the Cyprus Intellectual Property Regime which provided for a deductible expense for corporate income tax purposes, calculated as 80% of the qualifying profits (Art 9(1)(e) of Income Tax Law). The effective rate on the profits qualifying for the CIPR was 2.5%. This regime was found not to be harmful.

The second investigation focused on the Notional Interest Deduction rule (Art 9B of Income Tax Law). The amended version of the legislation was found in 2020 not to be harmful.

Furthermore, following the Code of Conduct Group’s Guidance on defensive measures in the tax area towards non-cooperative jurisdictions, Cyprus’ has had to introduce withholding taxes to payments of dividends, interest and royalties flowing to countries included in the EU’s list of non-cooperative jurisdictions. In the latest update to this list, Russia was added.

Moreover, there have been important changes as a result of the international tax community’s initiatives. For example, even though Cyprus is not an OECD member country nor included in the Inclusive Framework due to Turkey blocking its membership, nevertheless, Cyprus has been following closely the work of the OECD/G20 and its recommendations. Cyprus has signed up to the Multilateral Instrument. It also updated its Transfer Pricing Regime in light of the OECD’s Transfer Pricing Guidelines.

Whilst Cyprus has been broadly compliant with EU (hard law and soft law) obligations and OECD/G20 standards, it is currently being asked by the EU to revamp aspects of its corporate tax system which are perceived to be facilitating aggressive tax planning. Other Member States such as Luxembourg and Malta have also been asked to amend their tax systems to curb aggressive tax planning.

In the Council’s 2020 country specific recommendations for Cyprus, in paragraph 26 it was reiterated that tackling aggressive tax planning was key to improving the efficiency and fairness of tax systems. Furthermore, in the Cyprus Recovery and Resilience Plan, there is a reform objective to increase the effectiveness, efficiency and fairness of the tax system by combatting tax evasion and aggressive tax planning practices by multinational enterprises (MNEs) by June 2026 (Reform 10 of component 3.5).

In the more recent Commission 2023 Annual Report on Taxation, it is stated that under the Recovery and Resilience Facility “several Member States have committed to address aspects of their tax systems that facilitate [aggressive tax planning], with key milestones (including the establishment of withholding taxes on outbound payments or a similar defensive measure) expected to be completed by the end of 2023 (e.g. HU) and in 2024 (e.g. CY, IE)”. It is expressly stated that country specific recommendations have been put on hold for some Member States, including Cyprus, in order to take account of the progress made in the context of the Recovery and Resilience Facility.

Going forward it should be noted that Cyprus’ corporate tax laws are currently being evaluated and legislative changes are expected in some areas. Broadly, although EU hard law has had a rather limited impact on the Cyprus corporate tax system after the country’s accession to the EU, it would seem that lately, many of the significant constraints or drivers for reform are derived from EU soft law. This is likely to change if the legislative initiatives that are in the pipeline, especially BEFIT, are eventually approved in Council and adopted.

For any information on any of the issues raised in this newsletter in the context of your business strategy and longer term tax planning please get in touch with us.

Cyprus New Pre-Action Protocols: A mere formality or a substantive change of mentality?

Posted on | by Paschalis Paschali

In an attempt to modernize and expediate the legal procedures in our country, new Civil Procedure Rules have come into force since the 1st of September 2023, thus changing drastically our legal system. The just and proportionate as to costs handling of the cases, is placed at the heart of the reforms, as reflected in the overriding objective codified in Part 1 of the new Rules. In fact, the new Rules require the Court to handle all cases proactively by encouraging the parties to cooperate with each other, to identify the issues of dispute at an early stage and to facilitate the use of alternative dispute resolution procedures if necessary. To this end, the new Rules introduce certain Pre-Action Protocols that the parties are expected to follow before the initiation of legal proceedings before the Court.

It is worth noting that up to date, parties in litigation were not obliged to engage to any kind of pre-action conduct, apart from very limited circumstances such as in instances where a creditor of a company was obliged to send a 21-days’ notice of demand before filing a winding-up petition against the debtor company (see Art. 211 and 212, Cap. 113). The establishment therefore, of a formal mechanism which promotes the cooperation of the parties at a pre-action stage is certainly innovative.

The new Pre-Action Protocols aim at enhancing the pre-action communication and exchange of information between the parties, while the ultimate purpose they serve is the effective settlement rather than the adjudication of claim. The parties shall comply with the said protocols in a substantive way. Non- substantive adherence with the protocols’ requirements e.g. by omitting to disclose to the other party adequate information or evidence required by the protocol, may be considered as breach of the same and the Court may impose sanctions to the party in breach. In instances, for example, where, to the judgment of the Court, the non-adherence with the pre-action protocols has led to the initiation of an action, the claim of which could have been settled, the Court may order the party in breach to pay the total or part of the amount of the costs incurred. It is therefore evident that, through the imposition of sanctions, a more pragmatic approach as to the compliance of the protocols is adopted rather than merely a theoretical one.

Certain kinds of claims, such as personal injury claims, require the use of a specific Pre-Action Protocol as provided by the new Rules. It is however remarkable that even for claims for which no specific type of Pre-Action Protocol is required to be used, the Rules provide that the parties must act reasonably regarding the exchange of evidence and information and in a way so as to avoid the filing of an action before the Court. Parties are discharged from the obligation to engage in any sort of pre-action conduct only in instances where their claims are considered to be urgent, in instances where the claim is close to become time-barred or in instances where there are sufficient reasons not to engage to pre-action conduct. In such instances the reasons for the non-engagement must be outlined in the statement of claim.

In light of the above, it is obvious that from 1st September 2023 onwards, parties will be obliged to adhere to some kind of pre-action conduct. Potential omission from their part to do so will have to be accompanied with reasons for their non-compliance, while non-compliance for no good reasons may lead to them being penalized in relation to the legal costs incurred. It is therefore evident, that the new Rules attempt to introduce a  new mechanism which will encourage potential litigation parties to settle their claim in an effective and cooperative way prior to submitting their action before the Court.

This, is believed to be achieved through the exchange of evidence and information at an early stage, contrary to what used to be the case until today where proceedings initiated with the exchange of pleadings, which by default did not include evidence. As a result, parties were unable to assess the strength of their case and therefore, settlement could not easily be reached.

Consequently, the new reforms seem to “push” towards a more settlement-based legal system rather than a more adversarial one. A system that would perhaps place litigation at the top of the pyramid of our legal system and that would render it as a solution of a last resort when it comes to the resolution of a dispute.

What is certainly inarguable is that the application of the new Civil Procedural Rules must be accompanied with a change of culture, mindset and philosophy by all legal representatives who will definitely need to embrace and uphold this freshly-introduced mentality.