Case Study: Verona 2015 Matters for Johan and Maria to consider in Cyprus

Mechanism to separate the Group A company can be reorganised via a partial split-up whereby it can transfer a segment of its operations to a new company by means of proportional exchange of shares The Tax Department allows different companies to be considered as segments There is no tax arising from the exchange of shares as long as the share proportions remain the same There are no transfer fees or stamp duty arising from the exchange of shares

Mechanism to separate the Group (Cont’d) The Holding Company (HC) is split into Holding Company 1 (HC1) owning 100% of Factory Company (FC) and Holding Company 2 (HC2) owning 100% of Trading Company (TC). The shareholders of HC1 and HC2 remain the same, Rune (R)-40%, Johan & Maria (JM)-55% and Senior Employee (SE)-5% R exchanges his 40% shares in HC2 for JM+SE 60% shares in HC1 (MV €10.8m); there is no CGT since shares are exchanged at parent company level and not property company level

Mechanism to separate the Group (Cont’d) R ends up with 100% of HC1 which owns 100% of FC (future benefit for avoiding CGT, but might be abolished) JM+SE end up with 100% of HC2 which owns 100% TC The Tax Department can invoke general anti-avoidance provisions, but unlikely, since re-organisation was to separate family assets (valid business case)

Tax consequences from selling investments Sale of shares (any form of equity) in Cyprus are exempt from any form of taxation Sale of shares in companies that hold immovable property inside Cyprus gives rise to Capital Gains Tax (CGT) at 20% Profit arising from sale of investments must be distributed via dividends (70% rule) to the parent company within two years in order to avoid deemed dividend distribution withholding tax of 17% Parent company must also distribute dividends within two years following the receipt of the dividend

Intellectual Property Rights (IPR) reliefs 80% exemption on the net profit from the exploitation of IPR The net profit is calculated after deducting from the licensing of the IPR all direct expenses associated with the production of this income The rate of capital allowances on IPR has been set at 20% of the cost of acquisition Any profit arising from the disposal of IPR will also benefit from the 80% exemption

Structure for further R&D Sale of IPR by Johan (J): Taxable income after IPR tax relief will be 20% of sale price and is the final income in the hands of the recipient taxed at personal tax rates Purchase of IPR by new IPR Company: Taxable income will benefit from R&D expenses and IPR tax relief Dividend must be given to the Holding Company within two years to avoid deemed dividend withholding tax @ 17% Holdings company must distribute after two years, but there will be 17% withholding on dividends paid to shareholders (if they are Cyprus Tax Resident)

Research & Development (R&D) Tax Reliefs 100% tax deductible, despite not being “wholly and exclusively” for creation of income Capitalised assets that would not be entitled to capital allowances as per Income Tax Law, are allowed 20% allowance (5 years) Need to consider also IFRS (IAS38) with regards to capitalising assets More attractive to capitalise assets until there is IPR income to avoid accumulating tax losses (5 year rule)

Acquiring the 5% held by senior employee A private Company cannot acquire its own shares Existing shareholders can offer to buy the shares Existing shareholders that don’t wish to participate in this acquisition must waive their pre-emption rights Company to finance the purchase: Issue dividend to all shareholders and pay 17% withholding tax (provided shareholder is Cyprus Tax Resident) - Rune and Senior Employee will also get the dividend Lend money to Johan & Maria at current market interest rate Advance interest free loan to Johan & Maria and be subject to monthly PAYE (9% of advance amount as annual benefit-in-kind)

Tax Implications from sale of the 5% held by senior employee - Company There are no tax implications for the Company, since the transaction does not involve the Company but the shares of the Company.

Tax Implications from sale of the 5% held by senior employee - Acquirer There are no tax implications for the acquirer, since there are no transfer fees or stamp duty involved

Tax Implications from sale of the 5% held by senior employee - Employee There will be NO Capital Gains Tax (CGT) on sale of the Holding Company (HC) shares, since HC holds shares in Factory Company (FC) that holds immovable property inside Cyprus (exemption soon to be abolished) Once exemption is abolished, the CGT at 20% will be calculated on a pro-rata basis of the market value of the immovable property on the balance sheet The remaining proportion from the sale of shares in the Holding Company is exempt from any form of taxation

Share Option Plans Shares options are considered a benefit-in-kind Shares options are taxed through PAYE depending on their status Non-transferable share options are taxed when exercised on the difference of the market value (Stock Exchange price, if quoted, or generally accepted valuation method) and the exercise price Transferable non-quoted share options are taxed either when exercised or transferred on the difference of the market value and the exercise price

Share Option Plans (Cont’d) Transferable quoted share options are taxed on the average trading price, either when first listed or on the first day of trading in the year of listing. Any subsequent change in price is neither taxed nor tax deductible Gains for selling shares derived from share options are tax exempt Capital Gains Tax (CGT) can arise if the shares are in private companies that hold immovable property inside Cyprus

Transfer of shares to Hans Transfer should be via a donation Transfers to 1st degree relatives (spouse or children) are totally exempt from any form of taxation There is no Capital Gains Tax (CGT), even if shares are in a Company holding immovable property in Cyprus

Thank you for your attention Any Questions?