Setting up a Holding Company in Cyprus

Advantages and Tax Benefits

Tax Benefits

Cyprus is a well-established international centre, has been critically assessed as constituting an attractive location for holding companies from a tax perspective, among others. This is due to the accession of Cyprus to the European Union (EU) and the enactment of the new Cyprus tax legislation, which is now compatible with the “acquis communautaire”.

Cyprus laws and practices are now harmonised with the EU Laws and Directives, the Code of Conduct and the Organization for Economic Cooperation and Development’s recommendation on Harmful Tax Corporation.

A Cyprus holding company can benefit from significant tax advantages, especially when holding share capital in overseas companies. However, to be fully or almost fully tax-exempt, certain conditions and requirements must be met under Cyprus tax law and relevant EU and international standards.

Unlike other countries in Europe, a Cyprus Holding Company must only hold a minimum 1% of the share capital of a foreign subsidiary in order to receive the tax benefits awarded by the new tax reform.

Key Requirements and Terms for Tax Exemption

Corporate Tax Residency

The holding company must be tax resident in Cyprus. This is generally established if the management and control are exercised in Cyprus (i.e., majority of directors are Cyprus residents, board meetings held in Cyprus, etc.).

Exemption on Dividend Income

Dividend income received from a foreign subsidiary is exempt from corporate income tax in Cyprus, provided both of the following apply:

• More than 50% of the paying company’s activities result from non-passive income (i.e., not investment or portfolio income).
• The foreign company is subject to tax at a rate that is not significantly lower than the Cyprus rate (i.e., generally not below 6.25%).

If these conditions are not met, then Special Defense Contribution (SDC) at 17% may apply on the dividend income.

No Withholding Tax (WHT) on Dividends

Cyprus does not impose withholding tax on dividends paid to non-resident shareholders, regardless of their jurisdiction (except in limited blacklisted cases as of 2022).

Exemption on Capital Gains from Sale of Shares

Gains from the sale of shares in subsidiaries (foreign or local) are exempt from tax, provided the shares do not derive their value primarily from immovable property in Cyprus.

Participation Exemption Regime

Cyprus offers a broad participation exemption, especially when:

• The holding company owns at least 1% of the share capital of the subsidiary.
• The holding is strategic (not purely for trading).
• This applies mainly to dividends and capital gains.

Substance Requirements

Although Cyprus does not have strict domestic substance rules, international standards (e.g., OECD, EU anti-abuse rules) and beneficial ownership requirements under double tax treaties mean that:

The company should have economic substance in Cyprus.

• Local directors with decision-making power.
• Local office and staff (if needed).
• Real business purpose and documentation.

No CFC Taxation on Profits of Foreign Subsidiaries

Cyprus has mild Controlled Foreign Company (CFC) rules, applicable only in certain aggressive tax planning cases. If the subsidiary is in a low-tax jurisdiction and not engaged in substantive activity, CFC rules may apply.

Proper Reporting and Accounting

Maintain audited financial statements.
Submit annual returns and corporate tax filings.
Adhere to transfer pricing rules if intra-group transactions exist.

Double tax treaties network

Cyprus has one of the most extensive networks of Double Tax Treaties (DTTs) among EU member states, currently exceeding 65 treaties. Cyprus combines a low-tax regime with a network of double tax treaties. It has concluded a considerable number of double tax treaties compared to other offshore jurisdiction, particularly with Central and Eastern European Countries and a number of Middle Eastern countries. Most of the Treaties follow the OECD model and all of them have the impact of reducing or eliminating the normal withholding taxes imposed by the Contracting states on dividends, interest and royalty payments. This is beneficial for trade with certain Eastern European Countries and Russia because foreign investors investing in Eastern Europe have the opportunity to channel their investments through a country, such as Cyprus, which has a treaty with the investment recipient country allowing for a reduction and in some cases elimination of the withholding taxes.

Common Uses of a Cyprus Holding Company

• International tax structuring.
• Holding shares in EU or non-EU subsidiaries.
• Dividends repatriation and reinvestment.
• Asset protection and succession planning.

TBA Considerations

There are several criteria which international investors consider, when deciding which is the most suitable jurisdiction, where to register 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.

TBA services

We have 2 decades of experience in the incorporation and management of asset holding companies, whether it be for owning property, or for other reasons such as holding an investment portfolio.

We do not simply incorporate Cyprus Holding companies – we always take a client’s needs and personal circumstances into consideration before deciding upon which jurisdiction of incorporation will be best and most suitable.

Owning your assets through a company can reduce or eliminate the inheritance tax, capital gains tax and income tax, and afford confidentiality (seen as a major benefit for those clients residing in high-risk countries). Asset holding companies can also circumvent the need for the granting of probate, an often time-consuming and expensive process, and play a vital role for long term family financial planning.

We are happy to examine possibilities with you for as long as it takes, in order to find the best solution for you and your family.

Please do not hesitate to contact us for more information on how we might be able to benefit you in the ownership of your assets.