Cyprus: The Ultimate Experience Of Cyprus Holding Companies

INTRODUCTION

Being a trying time for the world economy and the world corporate finance market, the need for tax efficient structures as well as restructuring options for existing structures is growing rapidly. As such, in order to derive the optimum results in such transactions, including mitigation of risk and taxes, the jurisdiction to be used for the implementation of such structures would need to be carefully selected.

The use of the Cypriot jurisdiction may indeed turn such vision into practice. Cyprus' reputation in the international business world as a leading international business center, rests, among others, to its geographical position, its most favourable tax infrastructure and modernized legal system, its stable economy and well established banking sector and equally its Membership to the European Union.

The EU Membership of Cyprus back in 2004 required the harmonisation of its legislation with the acquis communautaire and hence led to a revision of the legislation, among others via the adoption and implementation of a number of EU Directives, providing for a harmonized and tax efficient regime within the Union.

In line with the above, Cyprus has long developed into a key venue for the worldwide operations of multinational companies, primarily via the use of Cyprus holding companies being a major vehicle for international tax planning.

Conventionally and subsequently as a result of its EU membership, Cyprus has been established as the main connection of investors to Russia, Central and Eastern Europe as well as the European Union.

Fig. I The Benefits of a Cyprus Holding Company

Holding companies, classified as tax residents of Cyprus, are, just like all Cyprus resident companies, subject to 10% Corporate Income Tax on their worldwide income.

In line with the above, residency is determined by whether its management and control is exercised in Cyprus, and as such, the mere incorporation of a company in Cyprus is not adequate to that extent. Without "management and control" being formally defined under the Cypriot legislation, and based on the application of the English Common Law principles, management and control is said to be established where:

  • The majority of the Directors of the Company are residents in Cyprus, and
  • Important Company decisions are taken in Cyprus by the local directors,
  • The Company maintains real offices in Cyprus, with distinct telephone/fax lines, domain names, etc. and the employment of professional staff;
  • The Company has an economic substance, i.e. commercial and economic activities in Cyprus.

Cyprus Holding Companies are widely used due to the favourable dividend income streams they have to offer. Most importantly, incoming dividends are exempt from Corporate Income Tax. Even though a 15% defence tax may be imposed on incoming dividends, in most cases, an exemption is allowed. Such exemption is allowed where a holding of at least 1% can be established between the holding and subsidiary company, however it may be refused where BOTH:

  • more than 50% of the activities of the subsidiary company result in investment / passive income; AND
  • the foreign tax imposed on the income of the subsidiary company is substantially lower that the Cyprus taxes, i.e. under 5%.

Dividend payments between Cyprus resident Companies are exempt from defence tax.

As evident from the above, specific anti-abuse provisions are arguably provided for in the form of "controlled foreign company" (CFC) provisions which are intended to prevent the inflow of passive income from low taxed jurisdictions into Cypriot Holding Companies, which would in turn be converted into exempt dividend income.

In addition, the substance-over-form test is applied, which is intended to trigger abusive and artificial transactions, while at the same time the right of a taxpayer to arrange his affairs in a tax efficient way is recognized.

Another important advantage of Cyprus is the fact that capital gains tax is only triggered by gains deriving from the disposal of immovable property situated within Cyprus or gains from the disposal of shares in Companies in possession of immovable property situated in Cyprus. As such, capital gains deriving from the sale of immoveable property situated outside Cyprus fall outside the scope of capital gains tax.

In line with the above, the disposal of securities is exempt both under the Cyprus Income Tax Law, as well as under the Cyprus Capital Gains Tax Law.

The extended list of instruments falling within the definition of securities increases the competitiveness of the Cypriot jurisdiction from a tax planning perspective even further given that the ability of investors to reduce or even eliminate their tax liability by the use of a Cyprus holding company in their structure is further enhanced.

The profit after tax of a Cyprus Holding Company, is available for distribution to its shareholders. The distribution of dividends to Cyprus resident shareholders is subject to a 15% defence tax, which is withheld at the time of distribution. Deemed dividend distribution provisions apply in cases of profits not distributed within a 2-year period following the end of the tax year in which they arose. Accordingly, 70% of the nondistributed profits are taxed at the rate of 15%.

Equally, an exemption from defence tax is granted to non resident shareholders, which is also extended to the deemed dividend distribution provisions.

Apart from the most favourable domestic law provisions, Cyprus Holding Companies may also benefit from the wide network of Double Tax Treaties Cyprus has concluded, and derive dividend payments from its subsidiaries with low or no withholding taxes. Equally, the provisions of the EU Parent - Subsidiary Directive have application where the Cyprus Company receives dividend income from an associated company established in another EU-Member State, thus providing for an elimination of withholding taxes over the dividend distributed.

Double Tax Treaties

*(All the treaties refer to those, which have been ratified. There are 32 treaties covering 40 countries. The numbers in the brackets refer to the explanatory notes here below.

**Under Cyprus tax law, dividends paid to non-resident companies are not subject to withholding tax.

*** Application of the Treaty between the Republic of Cyprus and the USSR.

**** Application of the Treaty between the Republic of Cyprus and Czechoslovakia.

***** Application of the Treaty between the Republic of Cyprus and Yugoslavia.

Explanatory Notes

  1. 5% of the gross amount if the beneficial owner has a holding in the share capital of the paying company of at least Euros 200.000; 10% if the beneficial owner holds directly at least 25% of the share capital of the paying company; 15% in all other cases.
  2. 10% of the gross amount if recipient is a company with at least 25% direct (also indirect in the case of Belgium) share interest; 15% in all other cases.
  3. Subject to certain exemptions.
  4. 5% if beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividends; 10% in all other cases.
  5. Nil if interest is paid or guaranteed by the government of the other state or a statutory body thereof or to the central bank of the other state.
  6. These rates shall not apply if at least 25% of the capital of the Cypriot resident is owned directly or indirectly by the Bulgarian resident (either alone or with other related persons) that is paying the interest of royalties, except when the resident of Cyprus is not liable to tax which is lower than the usual tax rate.
  7. Nil if royalties are copyright and other literary, dramatic, musical or artistic work not including film or videotape royalties.
  8. Nil if royalties are on literary, artistic or scientific work including cinematography films and films or tapes for television or radio broadcasting.
  9. 10% if recipient is a company with at least 10% if recipient is a company with at least 10% direct share interest; 15% in all other cases.
  10. 5% on cinematography films including television films.
  11. 10% if recipient is a company with at least 25% direct share interest; 27% if recipient is a company with more than 25% direct or indirect share interest as long as the German corporate tax on distributed profits is lower than that on undistributed profits and the difference between the two rates is 15% or more; 15% in all other cases.
  12. 5% on cinematography films not including television films.
  13. 5% if recipient is a company with at least 25% direct share interest; 15% in all other cases.
  14. Nil if received by a company which controls, directly or indirectly, at least 50% of the voting power.
  15. At the rate applicable in accordance with domestic law.
  16. 5% if the beneficial owner has directly invested in the capital of the company more than the equivalent of US$100.000:10% in all other cases.
  17. 7% if it is received by a bank or a similar financial institution; 10% in all other cases. Interest paid to the government of the other state, as defined, is exempt from tax.
  18. Nil if shareholder is a company that holds directly at least 25% of the capital of the company paying the dividends; 15% in all other cases.
  19. 15% for any patent trade mark, design or model, plan, secret formula or process or any industrial, commercial, or scientific equipment or for information concerning industrial, commercial or scientific experience.
  20. 10% of the gross amount if it is received by any finical institution (including an insurance company) or in connection with the sale on credit of any industrial, commercial or scientific equipment, merchandise; 15% in all other cases. Interest paid to the government of the other state is exempt from tax.
  21. 5% of the gross amount of the royalties for the use of or the right to use any copyright of literary, dramatic, musical, artistic or scientific work, including software, cinematography films, or films or tapes used for television or radio broadcasting; 10% of the gross amount of the royalties received as consideration for the use of, or the right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience; 15% of the gross amount of the royalties received as consideration for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process.
  22. A resident of Cyprus, other than a company which either alone or together with one or more associated companies controls directly or indirectly at least 10% of the voting power, is entitle to a tax credit in respect of the dividend. Where a resident of Cyprus is entitled to a tax credit, tax may also be charged on the aggregate of the cash dividend and the tax credit, tax may also be charged on the aggregate of the cash dividend and tax credit at a rate not exceeding 15%. In this case any excess tax credit is repayable. Where the recipient is not entitled to a tax credit, the cash dividend is exempt from any tax.
  23. 5% if recipient is a company with at least 10% direct share interest; 15% in all other cases.
  24. 5% on cinematography films
  25. Interest withheld depending on whether income is deriving in the ordinary course of business or not. 10% or 15% are charged respectively.
  26. Royalties charged should not exceed 5%.

Additional benefits under the Cyprus Tax System:

Interest Income Received:

Under the Cypriot tax legislation a distinction is made between interest income received in or being closely related to the ordinary course of business of the Company and interest income earned outside the ordinary course of business of the Company.

In accordance with the above, interest income earned in or being closely related to the ordinary course of business is not treated as interest for tax purposes but rather as income from trading activities and as such it is subject to Cyprus Corporate Income Tax at the rate of 10%. Interest income deriving from group financing activities is treated as interest income closely connected to the ordinary course of business of a Company.

On the other hand, interest income earned outside the ordinary course of business of a company is subject to 10% corporate income tax on 50% of the said interest income and also to a special contribution for the defence of the Republic, rated at 10%, effectively leading to a 15% tax.

Thin capitalization rules:

Cyprus did not incorporate any thin capitalisation rules under its legislation, essentially in the form of debt-to-equity restrictions. It should be noted though, that the Cyprus Income Tax legislation, incorporates deemed interest payment provisions with respect to loans advanced by a Cyprus Company to its shareholders or directors, with no or low interest rates.

Transfer pricing:

There is no specific transfer pricing legislation currently in place, however, from a transfer pricing perspective, the arm's length principle has application, as defined by the OECD, in transactions between related / associated parties. The arm's length principle provisions are incorporated in the revised Income Tax Legislation. From a back-to-back financing perspective, a minimum margin should be allowed, depending on the value of the loans to be put in place.

Interest Paid by the Cyprus Financing Company to Creditors is not subject to any withholding taxes.

Royalties received in Cyprus:

Net royalties income, after the deduction of any royalty payments or expenses and the allowance of any tax credit available, is subject to 10% Corporate Income tax.

Gains on the sale of Intellectual Property:

Gains deriving from the sale of intellectual property may arguably be exempt from Corporate Income Tax, unless the said gain is deemed to be a result of the trading activities of the Company.

Royalties paid are not subject to any withholding taxes given that the rights are exercised outside Cyprus.

Equally, the provisions of the EU Interest and Royalties Directive have application where the Cyprus Company receives interest or royalty payments from an associated company established in another EU-Member State, thus providing for an elimination of withholding taxes over the interest and royalty payments.

A unilateral tax credit is allowed with respect to foreign taxes paid.

Expenses are deductible given that they have incurred wholly and exclusively for the production of income.

The implementation of the EU Mergers Directive enables tax neutral corporate reorganizations.

It is possible to carry forward losses indefinitely, and equally, group relief is allowed for the utilization of tax losses.

CONCLUSION

Especially in today's market, tax exposure has a vast influence on the structuring of investment decisions. While the ultimate aim of investors is to maximise their return on an investment after tax, tax leakage should be kept to the very minimum.

In line with the above, Cyprus may prove to be the ideal jurisdiction for the establishment of an investment vehicle in the form of an intermediary holding company. With its EU Membership and harmonization of its legislation with the EU acquis communautaire, the lowest corporation tax rate within the EU and its full compliance with the OECD regulations against harmful tax practice, Cyprus has a competitive advantage against various international financial centres.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.