Cyprus holding company formation
New tax legislation
A uniform 12.5% corporate tax rate, applicable to the worldwide income, is now levied on all resident companies. This is the lowest corporate tax rate in the European Union and thus the most advantageous standard rate of corporation tax for Cyprus.
The new taxation status on Company is residence-based. A company is only ‘resident in the Republic’ if its business is centrally managed and controlled in Cyprus. Therefore, under the new rules, a resident corporation is taxable on its worldwide income accrued or arising from sources both within and outside Cyprus if it is managed and controlled from Cyprus.
In view of the new tax legislation, the Holding International Business Companies operating from Cyprus are now in a much more beneficial position because they can enjoy the benefits deriving from the tax exceptions as well as the corporate tax benefits by virtue of the new tax legislation.
International businesses can enjoy the following advantages in using a Cyprus Holding Company:
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%.
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.
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%.
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.
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.
Bouble tax treaties network
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.
- 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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