Written By: Irene Christodoulou, Esq.

Kinanis LLC

Nicosia, Cyprus

Why Cyprus?

Cyprus’ strategic location has been a key feature in its development into an international business center. In combination with the island’s excellent infrastructure, a legal system based on English common law, high quality of life and low cost of living, shared with its well-educated labor force, good industrial relations and munificent tax incentives, Cyprus is now deemed and ranked as an ideal business center.

Introduction to the Cyprus Holding Company

Holding companies are set up as the vehicle to hold investments in a subsidiary or associate company. Their primary income derived from their holding activities is dividend income and profits from the disposal of their investments, mainly shares.

Matters relating to the holding activities, which are set out in this article, are considered to be the main criteria for the selection of a prime location to set up a holding company in conjunction with the particular circumstances of the investor. Such matters for setting up a holding company include:

•   Incoming dividends remitted by the subsidiary to the holding must either be exempted from or subject to low withholding tax rates relying on any applicable foreign legislation or any applicable double tax treaty. Further, any dividend income received by the holding company must either be exempted from or subject to low corporate income tax rates in the holding company’s jurisdiction. Also, outgoing dividends paid by the holding company to its ultimate shareholders must either be exempted from or subject to low withholding tax rates. Equally, profits realized by the holding company on the sale of shares in the subsidiary must either be exempted from or subject to a low rate of capital gains tax.

•   Other additional tax considerations, which may identify whether a particular location is suitable for a holding company to be established may include for instance, the existence of flexible re-organization rules, group relief and possibility of losses to be carried forward; the existence of Controlled Foreign Company (CFC) rules; the existence of thin capitalization provisions and the ability to obtain interest deduction as an expense in full; the possibility of re-domiciliation to other jurisdictions and the possibility of listing in international stock exchanges. Moreover, additional considerations may include any favorable provisions regarding the taxation of interest and royalties, whether any withholding taxes are payable on interest and royalties, whether there is any obligation of the company to be registered with the VAT authorities of the particular jurisdiction, the taxation of assets which have been distributed and applicable liquidation provisions, tax rates in respect on other such income and lastly, any stamp duty law that may apply.

Having in mind the above considerations, jurisdictions which provide some or all of the above criteria at low tax rates are considered to be prime locations for such holding companies – Cyprus being one of these prime locations.

The Cypriot Tax Regime for Holding Companies

The favorable tax regime of Cyprus is ideal for investors wishing to set up a holding company. Cyprus has signed an extensive number of double tax treaties with countries not only within the European Union but also outside of it. Within the sphere of the European Union, the Parent Subsidiary Directive is applicable.

•   Incoming dividends – Withholding tax in foreign jurisdiction:

A first criterion that a holding company will need to satisfy is the ability to extract dividends from its subsidiaries at a zero or low tax rate. The Cypriot holding company achieves this with the extensive double tax treaties that Cyprus has signed and which are applicable both to countries outside the EU or within the EU. Within EU countries in which the Parent Subsidiary Directive (PSD) is not applicable, then the relevant Double Tax Treaty (DTT) if one exists will apply.

Even if the DTT or the PSD are not providing sufficient protection or if their criteria are not met for implementation, Cyprus applies unilateral tax credit relief in the form of tax credit by operation of its local laws.

•   Outgoing Dividends

Dividends payable by a Cypriot resident company to its foreign shareholders (whether a company or individual) are not subject to any withholding tax in Cyprus.

The non-resident shareholder of a Cyprus company receives the dividends free from any withholding tax. Effectively, Cyprus provides full exemption on the payment of dividends to its non-resident shareholders giving Cyprus an actual advantage over other traditional holding jurisdictions.

If the person receiving the dividend is a Cyprus resident, then withholding tax is payable at a rate of 17 percent. There is no withholding tax on dividends payable from one Cyprus tax resident company to another Cyprus tax resident company. The relevant legislation provides for deemed distribution of dividends every two years in the case of tax resident shareholders.

According to Cypriot tax legislation, foreign dividend income received in Cyprus by a Cyprus tax resident company will not be taxed under the Income Tax law but under the special contribution of the Defense law.

Effectively, there is full tax exemption upon income tax-dividends received from Cyprus companies (either resident or non-resident) or dividends received from overseas companies (foreign) do not bear any corporation tax. Additionally, there is no special defense contribution tax on dividends received from another Cyprus resident company.

There is full exemption from any type of tax on profits from the sale of titles (shares, bonds, debentures, and founders’ shares) as well as full exemption from any capital gains tax from profits realised from the disposal of titles.

Effectively, any profits from the disposal of titles are free from any taxation in Cyprus unless the company is the owner of immovable property in Cyprus.

In conclusion, the new Cypriot tax legislation has created a unique environment for holding companies. It has introduced numerous advantages making Cyprus a prime holding location in the international field of holding regimes.

For more information on Kinanis LLC, please visit kinanis.com or the International Society of Primerus Law Firms.