Share Rights in Cyprus – Share Redemption
A share may be issued with several share rights attached. These share rights can relate to the right to vote, the right to receive a dividend, the right to receive a return of capital and the right of redemption.
The right of redemption is slightly different than the other share rights. In a Cyprus Private Company, the right of redemption 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, 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. If the commercial arrangements of the structure, the future exit strategy fits within the Cyprus company’s strategy, the board of directors may decide to issue shares that include a right of redemption.
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 exchange for cash or a fresh issue of shares (in Greek 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 frame and process to be followed for the share redemption; nevertheless, 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.
If your current articles of association do not include the terms of redemption the registrar of companies will not record the issue of shares until the redemption rights are inserted in the articles of association.
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 correctly, in line with commercial reasoning and solid tax advise in order to comply with the ATAD provision.
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For many years he has worked and devoted his skills and efforts towards building a successful career as a leading executive. From humble beginnings, his aim has always been to yield results; with a keen focus to attention to detail and client satisfaction. His experience has always been varied and not specific, at times he preferred it. With that in mind, he has dealt with CySEC on licensing and ongoing regulation, international private equity and credit fund managers, NASDAQ and NYSE listed companies occasional millionaires as well as self-made millionaires. His passion though is difficult transaction work organizing and deploying people for a common goal. Harris enjoys reading and studying the Cyprus law and sharing that information on this website.
Publications on Cyprus Business Law
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