OFFSHORE PAYROLL - why pay more than you need?

Cyprus has a first rate reputation as a centre for financial excellence and professional expertise and is a full member of the EU.
In today’s competitive employment markets, employers must consider tax efficient ways in which to remunerate their international executives. Cyprus is the centre of 1st choice for multinational employers. Cyprus makes it entirely possible to achieve substantial tax savings and thereby cut costs to both the employer and the employee.
This article will briefly examine the more popular arrangements established offshore.
1. International Payroll and Employment Companies
If an employer pays staff who are spread around the world (and often working on short-term or long-term projects), the use of a single ‘Employment Company’ in a neutral tax free environment can deliver significant benefits for the employer and employee.
Employer benefits:
• More flexible pay policies
• Increased efficiency
• Reduced tax and social security liabilities
Employee benefits:
• Reduced social insurance contributions by dividing payment of salary between;
o a portion paid to cover living expenses in the field and;
o A nest-egg to be built up in Cyprus for the future enjoyment of the employee.
2. Deferred Compensation Packages
A significant proportion of the cost associated with posting employees abroad is local income tax.
A Cyprus DCP allows employers to
• Save costs by reducing tax employment tax liability and still be bale to
• increase employee pay, at no net increase to the employer
The employer makes income contributions into the plan, which will be neither taxable domestically nor in the host country. However, subsequent distributions to the employee will be taxable in the year that they are paid out to him.
Taxation is thus deferred; during the intervening period the settled gross funds are available for investment and grow in their entirety providing the employee with the opportunity to achieve substantially better growth and return overall even after taxation is eventually applied.
The term deferred compensation may be applied to any payment for services not made at the time the services are rendered.
These arrangements hinge upon a Cyprus discretionary trust. Lawyers and professional trust companies based on the Island are very familiar with the process of formation and the administration of these trusts.
3. Employee Share Ownership Plans (ESOPs)
the principal purpose of an ESOP is to enable employees to participate in the ownership of their employer¹s equity; whilst motivating employees and ensuring loyalty.
The employer establishes a Trust, whose sole purpose is to invest in the equity of the business, for whom both employer and employee work.
An ESOP may be devised to benefit as many or as few of the employees as the employer desires.
However, the plan need not treat all employees as equals and may be drafted to favour certain groups or individuals.
The trust deed is invariably discretionary in nature thereby assisting the employer to effect changes on an on-going basis.
To acquire shares in the employing company, the trust must be funded (say by a loan from the company). In any event, shares will be purchased for the future benefit of the participating employees.
These plans will fall into one of three categories:
• All-Employee Plans
• Executive Plans
• International Share Ownership Plans
It is common for ESOP¹s to employ trustees resident offshore in order to avoid the incidence of Capital Gains Tax (or its equivalent) and Cyprus has become the most favoured choice of jurisdiction in recent years for the establishment of ESOP¹s.
Note: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Susan Davies. YourBooks Ltd Accounting and Finance part of the Your Group of companies based in Cyprus (http://yourbooks.com.cy/)