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Cyprus is widely known as one of the most beneficial holding company jurisdictions, hence, the Cyprus holding company has become a major vehicle in international tax planning. Besides the traditional advantages of a Cyprus holding company, Cyprus companies can also be utilised in other structures exploiting local tax legislation, favourable Double Tax Treaty (DTT) network and EU Directives. Overall result is reduced tax bill.
The attractiveness of Cyprus as a holding company jurisdiction and the frequent utilisation of the Cyprus Holding Company in international tax planning structures, is the result of a number of factors:
Tax free distribution of dividends to non resident shareholders:
No withholding tax deducted in Cyprus on dividends paid by Cyprus Company to foreign shareholders (individuals, corporations) irrespective of whether they hold the shares directly or through nominees. Non-taxation of dividends received:
- No income tax
- No special defence contribution tax (subject to non-stringent conditions)
- Unilateral tax credit relief: tax credit is given for any withholding foreign tax deducted on dividends
- Application of underlying tax provisions included in the Double Tax Treaties: tax credit is given in Cyprus for any foreign tax paid on profits by the company paying the dividends
Ability to extract foreign sourced dividends from subsidiaries at zero or low tax rates. This is achieved through:
- Cyprus’s extensive Double Tax Treaty network
- EU Parent Subsidiary Directive
Other considerations:
- Full exemption from tax on disposal of subsidiary
- No tax on disposal of shares or liquidation of Cyprus Holding company
- No substance requirements, no CFC rules, no minimum holding period
Any Company may carry out its trading activities via Cyprus and benefit from:
- Lowest EU income tax rate of 12,5% (10% up to 31 December 2012) applicable on profits (income less expenses incurred wholly and exclusively for the production of income)
- No withholding tax deducted in Cyprus on dividends paid by Cyprus Company to foreign shareholders
Cyprus company trading in shares and other securities (trading or investment activities) may benefit from:
- Tax exempt gains on securities (“titles”) trading including disposal of shares in subsidiaries
- The list of qualifying securities accepted by the tax authorities as “titles” includes among others shares, bonds, debentures, options/futures/forwards/swaps/depositary receipts/ index participations/repos on titles, units in open-ended or closed-ended collective investment schemes
- Tax exempt dividend income (subject to easily met criteria)
- Unilateral tax credit relief for foreign tax paid on income received abroad
- Underlying tax provisions included in the DTTs where tax credit is given in Cyprus for any foreign tax paid on profits by the company paying the dividends
- No withholding tax deducted in Cyprus on dividends paid by Cyprus Company to foreign shareholders
Cyprus Company may set up a foreign permanent establishment (branch) and escape taxation both
in Cyprus and in the foreign country:
- No taxation of Permanent Establishment in country of operations (DTT article) if project (construction, assembly works, etc) lasts up to twelve months (minimum period per DTT to satisfy the Permanent Establishment Criteria in the other Contracting State)
- The profits of the Permanent Establishment are tax exempt in Cyprus if Permanent Establishment lasts more than 3 months (minimum period to satisfy the permanent establishment criteria in accordance with Cyprus law)
- No withholding tax on dividends paid to foreign investor
Cyprus Company can be used tax efficiently as an employment company:
- Cyprus Company employs staff to work on overseas assignments in high tax countries
- Cyprus company charges at cost plus margin
- Profit taxed in Cyprus at low income tax rate of 12,5% (10% up to 31 December 2012)
- Profit reduced in high tax operating Company by the Cyprus charge
- Overall, employee costs are reduced (lower social contributions and tax costs as compared to other EU jurisdictions)
- Employees are exempt from Cyprus taxation
- Any expenditure (of a capital nature) incurred for the development or acquisition of intangible assets as defined in the Patent Rights Law, the Intellectual Property Law and the Trademarks Law is amortised equally over a 5 year period including the year of acquisition.
- Eighty per cent (80%) of the profit arising from the use of owned intangible assets (trademarks, patents,IP rights including scientific work, literary work, musical work, artistic work, recording, publication,broadcast, movies, database), including compensation for improper use of such assets, and 80% of the profit from the sale of intangible assets is deemed as an expense in arriving at the taxable income.
Cyprus Company can be utilised as an intermediary royalty company between a foreign Licensor Company and a foreign high tax operating company in a treaty location.
- Profits reduced in high tax operating company through payments of license to Cyprus
- Minimise any withholding tax paid in operating country through the use of DTT and EU Directive on Royalties and Interest
- Tax credit in Cyprus for any withholding tax paid in operating country
- No withholding tax payable in Cyprus on payment of Royalties to Licensor Company
- Resulting profit taxed in Cyprus at low income tax of 12,5% (10% up to 31 December 2012)
Cyprus Company can be utilised as a financial intermediary for group financing purposes, through provision of loans to high tax jurisdictions (operating company) and low taxability on the interest margin at the Cyprus Financing Company level:
- Cyprus law does not include thin capitalisation rules (minimum debt/equity ratio)
- Profits reduced in high tax operating company through payments of interest to Cyprus
- No withholding tax paid in EU/Russia/Ukraine on payment of interest to Cyprus Financing Company
- Low taxable net profit margins required by Cyprus tax authorities on back to back loans between related companies:
- Loans up to €50m – 0,35%
- Loans from €50m to €200m – 0,25%
- Loans over €200m – 0,125%
- Profit taxed in Cyprus at low income tax rate of 12,5% (10% up to 31 December 2012)
- Tax credit granted in Cyprus for withholding tax suffered
- No withholding tax payable in Cyprus on payment of interest to its lender
- Lender is situated in a tax efficient jurisdiction
Cyprus Company can be utilised in real estate holding structures eliminating any tax liability on disposal following capital appreciation of the property held abroad:
- Zero or reduced withholding tax on dividends paid to Cyprus by real estate holding company abroad
- Favourable capital gains tax provisions in Cyprus DTTs, allowing the taxing of real estate disposals in Cyprus
- No capital gains tax on disposal of real estate property held directly by Cyprus company
- No tax on disposal of shares in real estate holding company abroad
- No tax in Cyprus on rental income where real estate property is held through a local company
- No withholding tax on payments from Cyprus to Foreign Investor
