The Republic of Cyprus has been one of the largest foreign investors in Ukraine over the past years, bringing over $10 billion to the country between 2011 and 2019, according to the State Statistic Service of Ukraine.
Cyprus accounted for almost a third of foreign direct investment to Ukraine in 2019.
However, much of this money invested in Ukraine might have been Ukrainian in the first place, coming from Ukrainian residents who established their companies in Cyprus.
An attractive tax regime, financial stability, and the stamp of respectability as a European Union member state have made Cyprus an attractive destination for Ukrainians over the years.
For years, Cyprus has served as a popular investment stop for Ukrainians, Dmytro Perevozchykov, a partner at Cyprus-based law firm Michael Kyprianou, which has offices in Kyiv, told Kyiv Post on Feb. 16.
“Traditionally, Cyprus has successfully served foreign investors as a stable go-to destination for investments and transactions in Ukraine,” he said.
Attractive system
Roughly 6,000 Ukrainian companies were registered in Cyprus in 2020, according to YouControl, an open-source register for local firms.
About 30% of all the Cypriot companies are actually Ukrainian with foreign founders, and a staggering 94% of the investment Cyprus had attracted between 2011–2019 came from Ukraine, the data shows.
“The process of creating a company (in Cyprus) is fairly easy and straightforward,” Perevozchykov said.
At least one shareholder must register his office in Cyprus and work with a Cyprus-qualified lawyer. For a compliance check, the beneficial owner has to provide copies of passports, utility bills, a detailed resume, his source of wealth and a business plan.
It takes only a week for the company to be duly registered with the Register of Companies in the Republic of Cyprus and to obtain a company registration number.
The island’s tax regime added to the easy process also explains the popularity of Cyprus among Ukrainian businessmen. Cyprus is not officially considered an offshore jurisdiction, but it has one of the lowest corporate tax rates in the European Union — just 12.5%.
In Ukraine, meanwhile, the corporate tax rate is 18%.
Its business system also allows the creation of non-resident firms with management abroad, free from local taxation. These companies are not required to pay any taxes on profits derived from foreign sources, meaning companies potentially can avoid paying taxes at all.
“Cyprus has an exceptionally attractive tax regime, especially for holding companies,” Perevozchykov said.
Window to Europe
Before getting citizenship, Ukrainian nationals also benefit from the tax system in place, Ukrainian Yevgen Stuzhnyi, who works for a tech company on the island, told Kyiv Post on Feb. 11.
He has a 20% tax deduction on his revenue during his first five years on the island, he said. “It’s good for companies to move their employees to Cyprus,” Stuzhnyi said.
Foreigners working in Cyprus don’t pay taxes on their income at all if they receive under 19,500 euros per year. If they make 19,500–28,000 euros a year, they pay taxes on their income minus 20%, which means they are taxed on a lower wage and can keep the rest.
However, Stuzhnyi said due to low-income taxes, the prices of apartments in Limassol, a city of 100,000 located 85 kilometers from the capital Nicosia, soared to the point he has to live in its outskirts.
A two-bedroom apartment costs 1,200 euros per month for rent, and the city doubled in the last five years.
Limassol is the biggest Russian-speaking city in Cyprus. It is growing due to the influx of Russians, Ukrainian and Belarusians in the city, Franсois Albessard, a Belgian national living in Cyprus and working in the IT sector, told Kyiv Post on Feb. 10.
This is also where Ukrainian businesses settle, he said, especially since Cyprus provides a window to Europe, Albessard said.
“The city is expanding because Cyprus attracted a lot of Ukrainian thanks to its taxes and the opportunity to have a European passport,” he said.
Seven years after paying taxes in Cyprus, a Ukrainian citizen can obtain Cyprus citizenship, an opportunity for many Ukrainian nationals to travel and do business in Europe later on.
The end of secrecy?
Being a member of the EU, Cyprus opens the European market to Ukrainian entrepreneurs, Perevozchykov said.
“A Cyprus company can be used as a vehicle, facilitating business transactions with EU counter-parties, and can be the access point to the EU market for foreign investors,” he said.
The other side of the coin is that Cyprus provides oligarchs with the opportunity to withdraw funds further to other jurisdictions.
Ukrainian oligarchs have been known to be behind some Cypriot-registered companies from Ukraine, like controversial billionaire Igor Kolomoisky and his partner Gennadiy Boholyubov, who allegedly siphoned off $5.5 billion from PrivatBank between 2013 and 2016.
In 2016, the state took over the bank to save it from bankruptcy and protect its 20 million customers. The fall of PrivatBank would have destabilized Ukraine’s economy because it was — and is — Ukraine’s largest bank.
The money was moved through a PrivatBank subsidiary in Cyprus, and the National Bank of Ukraine claims it never detected that cash transferred to Cyprus was leaving Ukraine.
The system allowed billions of dollars to be pumped through the PrivatBank accounts held in Cyprus by offshore companies.
In April 2020, PrivatBank took its claim to a Cypriot court, because Ukrainian laws don’t apply to a Cypriot jurisdiction. The court’s decision hasn’t been announced yet.
However, recent amendments in the Ukrainian law changed the game.
In May 2020, the Ukrainian government passed a law to stop the illegal flow of money out of the country, the so-called “BEPS” law — where BEPS stands for base erosion and profit shifting — aimed to fight offshoring by tracking and taxing profits earned by Ukrainian citizens worldwide.
Since January 2021, Ukrainian business owners have to declare their companies, trusts and partnerships abroad and pay taxes to Ukraine’s budget.
Companies based in Ukraine also have to prove that they do not use foreign companies as empty shells, in compliance with international laws on transparency.
“In such circumstances, the Ukrainian tax resident should be ready to declare the ownership of a foreign company,” Perevozchykov said.
