A share may be issued with several rights attached. Such as the right to vote, right to dividend, right to capital return and the right of redemption. However the right of redemption is slightly different than the other rights it can only be included in the share rights if the shares are issued with such right of redemption attached to them.
This means that an alteration of capital with the approval of the various members should cannot introduce the right of redemption whereas the right to vote might be freely introduced into a specific class after the shares have been issued.
When forming a company in Cyprus it is important to consider the relationship between the shareholders and what rights they will enjoy, more on this topic can be found in my recent publication regarding share plans in Cyprus.
What is a Right of Redemption?
A right of redemption means that the Cyprus Company ‘s board of directors or the shareholders can decide to redeem (cancel) the shares in eexchange for cash or a fresh issue of shares (εξαργυρώνω μετατρέπω σε μετρητά τίτλους με χρηματική αξία (π.χ. επιταγές, κλπ)).
The Cyprus Company’s Articles of Association will typically include provisions specifying the method, time frames and process to be followed for the redemption however Section 57 of the Cyprus Companies law should not be neglected since it also includes certain limitations such as the obligation to redeem only out of profits available for distribution.
What is the Effect of Share Redemption in Cyprus?
The effect of the share redemption in Cyprus is that the shares, and by extension the rights to vote, receive dividend and capital will be eliminated, and in exchange the shareholder can receive cash or new ordinary shares.
The tax effect for Cyprus domiciled individuals is the same however if the shareholder is based outside of Cyprus the tax treatment of the funds might change since local rules classify it as a return of capital. Furthermore because the redemption process allows for the specification of a premium this means that a larger value may be returned than the nominal value of the shares (e.g. € 1,00 per share).
What is the typical use of a share redemption in Cyprus?
Redeemable Shares can be considered as quasi-capital in the Company. They are equity until the board decides they are not and in case the right of redemption is with the shareholder then they are a loan. They can rank pari passu with all other existing shares however at the same time the share rights might be limited to just receipt of dividend income at a fixed rate. Accordingly the usefulness of these instruments is invaluable so long as they are structured correct, in line with commercial reasoning and solid tax advise in order to comply with the ATAD provision.