TAX BENEFITS OF A CYPRUS HOLDING COMPANY

TAX BENEFITS OF A CYPRUS HOLDING COMPANY

There are no special requirements on the legal form of the holding company in Cyprus. Nevertheless, the widely used form is the private limited liability company, which can be established by one or more persons.  Although there is no minimum required capital, it is common for a small amount of share capital (e.g. €1.000 divided into 1.000 shares of €1 each) to be issued and paid up upon incorporation.

Under the Companies Law financial statements must be prepared annually in accordance with the IFRS.  An annual return to the Registrar of Companies is required under the same Law and an annual corporate income tax return has to be submitted to the Tax Office in accordance with the Cyprus Tax Law.

Tax Advantages

International businesses can enjoy the following advantages in using a Cyprus Holding Company:

  1. Tax exemption on disposal or trading of securities

Income arising from the disposal or trading of securities is exempt from corporate tax.

The term “securities” include shares, debentures, bonds, founder shares, options on titles, or other securities of companies or other legal entities in Cyprus or abroad.

Income from the disposal of the shares of the Cyprus holding company will be exempt from tax.  However capital gains tax is imposed on the sale of shares in non-listed companies in which the underlying asset is the immovable property situated in Cyprus.  In such a case, capital gains tax is imposed at the rate of 20%.

  1. Dividends

Dividend income received from another Cyprus tax resident company or from abroad or from a foreign permanent establishment of a Cyprus holding company is exempt from tax.

For dividend from abroad the exemption does not apply if both of the following conditions hold:

more than 50% of the activities of the overseas paying company result directly or indirectly in passive income (non – trading income), and

the tax burden on the foreign company income is significantly lower than the Cyprus corporate rate (i.e. less than 50% of the 12.5% Cyprus corporate tax rate).

If dividend is received from an EU resident company, the EU parent – subsidiary directive applies, in which case there will be no withholding tax.

If the EU parent subsidiary directive requirements are not met, or dividend is paid from a non-EU resident company, then the provisions of the double tax treaty apply, if one exists between Cyprus and the other country, regarding the rate of withholding tax.

In any case, whether or not a tax treaty is in place a tax credit is provided under the Cyprus Tax regime to the amount of the foreign withholding tax.

  1. Withholding tax

Dividends or interest paid by a Cyprus resident company to non-resident shareholders, corporate or individuals, are not subject to any withholding tax. The same applies to royalties paid from Cyprus with the exception of intellectual property used in Cyprus.  In this case the withholding tax is at the rate of 10%.

  1. Corporate Tax rate

A holding company resident in Cyprus is liable to tax on all worldwide income at a single rate of 12,5% which is one of the lowest in the E.U.

A company is considered to be tax resident in Cyprus if it is managed and controlled from Cyprus.

  1. Group loss relief and losses carried forward

Loss in one group company may be set off against the profit of another group company.  Two companies will qualify for group loss relief, if both are residents of Cyprus and have been members of the group for the whole tax year and the group ownership exceeds 75%.  Losses of a year can only be set off against profits for the same year.

Losses incurred in any tax year from any trade or business, irrespective of whether it is carried in Cyprus or abroad, and not set off against income from other sources, can be carried forward and set off against profits of the next five years.

  1. Liquidation

The sale of participations and shares or the liquidation for a Cyprus holding company is not subject to exit taxes for non-residents provided that the company does not hold immovable property in Cyprus.  The disposal of the immovable property will be subject to capital gains tax.

CONCLUSION

There are several criteria which international investors consider in deciding which is the preferred jurisdiction to establish a holding company.  In all cases there are three main factors that cannot be ignored.

  • The ability of the holding company to receive income from operations abroad, or from subsidiaries abroad or in the host country with zero or minimum tax loss, both in the source country and the host jurisdiction;
  • The ability of the holding company to pay dividends abroad without any withholding tax under the host jurisdiction tax regime;
  • The ability of the holding company to dispose of investment in a subsidiary without capital gains tax being imposed under the host jurisdiction tax regime;

Cyprus scores high on all three of the above criteria.  However, the final decision on the optimal holding company jurisdiction is case specific, based on both tax and non – tax considerations as well as on the investor or business profile.

Cyprus, because of its tax and other attributes described above appears high on the list of the international business community and worldwide tax planners.

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