Tax Planning through the Cyprus Holding Company

Published 24 June 2010 by Anastasios Antoniou LLC

The Cyprus Holding Company is one of the most highly regarded investment vehicles globally.

Offering the lowest corporate tax rate in the EU at 10%, ensuring compliance with EU requirements as an EU Member State as well as committing to the OECD requirements against harmful tax practice, featuring a substantial number of Double Tax Treaties with other States and boasting one of the most business-friendly legislative frameworks, are some of the reasons behind Cyprus’ evolvement into an ideal holding and investment destination.

The following circumstances constitute ideal situations for the incorporation of a Cyprus Holding Company, either as an intermediate holding entity or as an ultimate holding company:

•        For groups investing outside of Cyprus and expecting dividend income streams, which will in most cases be tax exempt when shares are held by a Cyprus Holding Company;

•        To hold subsidiary companies that might be sold in the future, the disposal of which will not be taxable in the case a Cyprus Holding Company holds the shares in these subsidiaries;

•        To harness the tax benefits of the withholding tax provisions found in the extensive double tax treaties network of Cyprus and the EU Parent-Subsidiary Directive;

•        To enjoy the benefits of no taxation over the payment of dividend, interest and royalties in most cases;

•        To enjoy the benefits of no taxation over transactions in securities, making it an appropriate vehicle for funds;

•        Where it may be important to achieve a tax free unwind of the holding company at some stage in the future.
Details of establishing a Cyprus Holding Company
Formation under Cyprus Law, a holding company – as with every company – must be incorporated by qualified Advocates. There are no minimum share capital requirements for Cyprus companies unless they are wholly or partly owned by non EU residents and therefore requiring a permit from the Central Bank. There is no need for the share capital to be fully paid up.

Taxation:
A resident Cyprus Holding Company is fully subject to tax at the rate of 10% on its worldwide income. It is held to be resident in Cyprus if its management and control are in Cyprus.
A non-res
ident company is taxed only on income derived from a permanent establishment in Cyprus and on rental income from property located in Cyprus.

A credit for tax on profits and gains of a Cyprus Holding Company may be offset against tax payable in Cyprus for the same income unilaterally under domestic law, even in the absence of a double taxation treaty.

Income Tax
The taxable income of a Cyprus Holding Company is based on the annual financial statements prepared in accordance with international financial reporting standards. Expenses incurred exclusively for the purposes of the business are deductible while expenses incurred with exempt income are not deductible.
Exemption from Income Tax

Non-resident Cyprus companies are not subject to Cyprus income tax. These companies cannot take advantage of the treaty network and from the tax regime applicable to resident companies.
Resident companies’ profits that are derived directly or indirectly from a permanent establishment outside Cyprus, are not subject to tax. The exemption is not granted if more than 50% of the activity of the paying establishment results in investment income and if the foreign tax is significantly lower than the one payable in Cyprus.

Dividends Exemption
Dividends received by a Cyprus resident company are not subject to tax and are excluded from the net profits but are subject to a special defense contribution tax at a rate of 15% as deemed distributions to Cyprus resident shareholders. This may be avoided if the holding is more than 1%.

Capital Gains Exemption
Profits from the sale of securities (shares, bonds, debentures, etc.) are not subject to tax. No capital gains tax is levied, unless from immovable property in Cyprus or if shares represent immovable property located in Cyprus (in the usual cases).

50% Interest Exemption
50% of the interest received by a Cyprus resident company is exempt from income tax, irrespectively of whether it is from a Cypriot or a foreign source. The remaining 50% is taxed at a 10% rate by way of special defense contribution tax. If the interest arises from the ordinary course of the business of the company, it will not be subject to the special defense contribution tax once such interest is already subject to income tax.

Royalties Exemption
Income from industrial or intellectual property rights granted for use outside Cyprus are not subject to tax.

Exemption from Withholding Tax on Payment of Dividends, Interest and Royalties
Dividends and interest paid by a Cyprus Holding Company are exempt from withholding tax. Royalties paid to non-residents derived from sources outside Cyprus are also not subject to withholding tax. Dividends paid by a Cyprus Holding Company to non-residents are not subject to withholding tax. To avoid submission to a special 15% defence contribution tax, at least 70% of the profits must be distributed within 2 years after the end of the income year.
You can find more about our corporate practice at www.antoniou.com.cy or contact us at corporate@antoniou.com.cy to discuss how you can take advantage of the offerings of Cyprus for tax planning purposes.