Cyprus has become one of the most attractive jurisdictions for the creation of a Holding Company.
A Cyprus holding company is a normal company who can participate in domestic and/or foreign companies. If the company is managed and controlled in Cyprus then it will be liable to be taxed in Cyprus on its worldwide income at the competitively low tax rate.
There are numerous advantages that a Cyprus Holding Company offers, some of which are the following:
- Foreign Permanent Establishments (PE’s)
The profits of a Foreign Permanent Establishment of a Cyprus Holding Company will be exempt from Cyprus corporate tax if one of the following two conditions is fulfilled:
(1) The PE must not participate by more than 50% in activities which lead to passive income whether directly or indirectly.
(2) The foreign tax burden imposed on the PE must not be substantially lower than the tax imposed in Cyprus (6.25%).
- Trading in Securities
Income arising from trading in securities is exempt from corporate tax.
The term “Securities” includes, but not limited to the following: ordinary participations (only if they result in titles); repurchase agreements or Repos on titles; participations in companies; units in open-end or closed-end collective investment schemes such as Mutual Funds; International Collective Investment Schemes (ICIS) and Undertakings for Collective Investments in Transferable Securities (UCITS).
- Inheritance or Estate Tax
No Inheritance or Estates Taxes imposed in Cyprus.
- Wealth Tax
No Wealth tax imposed in Cyprus.
- Thin Capitalisation Rules
The Cyprus tax legislation does not impose any thin capitalisation. However, caution must be exercised in relation to interest deductions for loans used for the purchase of assets not used in the business. Thus, interest expenses are disallowed for tax purposes.
- Acquisition Costs
Any interest expense incurred for the direct or indirect complete acquisition of shares in a company (100%) will be tax deductible if the assets of the directly or indirectly acquired subsidiary do not include any assets that are not used in the business.
- Transfer Pricing
Other than a provision in the Income Tax Law which requires transactions between “related parties” to be in accordance with the “arm’s length principle”, there is no explicit transfer pricing legislation in Cyprus. The Cyprus tax legislation has adopted the OECD guidelines to determine whether a transaction is considered “at arm’s length”.
- Exit Route
There are no exit taxes imposed on the liquidation or sale of participations and shares of the company and distribution of the proceeds to the non-resident shareholders. As such, the Cyprus Holding Company offers an ideal exit route.
- EU Directives
Cyprus has fully adopted all EU Directives, including the Parent-Subsidiary, the Interest and Royalties, the Merger Directive and the Savings Directive.
If the sole purpose of a holding company is the purchase and holding of interest in shares in other companies with the intention of deriving dividend income, then the company will not be considered to be performing an economic activity for VAT purposes and thus will not be considered as a taxable person.
Companies which do not perform economic activities are not liable to register for VAT purposes and thus cannot claim input VAT.
Holding companies may become liable to register for VAT if, in additional to the holding of investments, they have taxable or exempt activities such as:
- The supply of management services for a consideration to subsidiaries
- The provision of interest-bearing financing to subsidiaries (unless the financing arises from dividends distributed by the subsidiaries to which finance is given)
- Trading in shares; e.g. purchasing and selling shares to profit from the fluctuations of the share price on a frequent basis
- Withholding Taxes
There are no withholding taxes on payments to Non Tax Resident persons (Companies or Individuals) in respect of Dividends, Interest and Royalties used outside Cyprus.
- Capital Duty
In Cyprus, Capital Duty is estimated at a flat rate of €105 payable upon incorporation plus the amount equal to 0.6% of the initial authorized capital. Shares issues out of the initial authorized capital shall not transfer additional capital duty.
If a company wishes to increase its authorized share capital, then the 0.6% will be imposed on the amount of the increase. Capital duty can be minimized by issuing shares at a premium since share premium is not subject to capital duty.
- Re-Domiciliation of Companies
Re-domiciliation of companies in and out of Cyprus is possible.
- Corporate Tax
- Losses Carried Forward
- Dividends Received from Abroad – (Special Defence Contribution)
- Capital Gains Tax
- Double Taxation Treaties