Cyprus, as a full member of the EU, offering one of the lowest corporate tax rates, and a reformed Intellectual Property tax regime in line with the OECD’s Base Erosion Profit Shifting (BEPS), aims to become the jurisdiction of choice for those seeking tax efficiency in their corporate dealings.
A Cyprus Holding Company can be used for the purpose of maintaining tax advantages and Cyprus is a well-established, internationally respected and attractive tax jurisdiction for the incorporation of such entities. A ‘holding company’ does not ordinarily trade, rather it holds shares or stock in other legal entities and in this way it controls or owns (in any proportion) other companies which trade and generate income.
Benefits of Incorporating a Cyprus Holding Company
A holding company is regarded as a tax resident in any jurisdiction where its management and control takes place. Significantly, a Cyprus Holding Company if tax resident in Cyprus is not subject to any special taxation regime and has numerous advantages which are set out below.
Exemption from tax on disposal of equities (shares or securities), bonds or derivatives trading of shares/securities.
The sale of shares (including bonds or debentures or other securities issued by the company) of Cyprus companies are exempt from tax. Income from the disposal of the shares of the Cyprus Holding Company will be exempt from corporation tax but where a sale of shares is made in a company holding real estate in Cyprus capital gains tax is imposed at a rate of 20% on the taxable profit. This tax is imposed on the person making the gain and that would be the seller of the shares.
Corporation or company tax for a Cyprus Holding Company, tax resident in Cyprus then it is taxed on all worldwide income at a rate of 12,5%, which makes Cyprus’ corporation tax one of the lowest in the EU. The Corporation Tax rate can be further reduced under certain conditions. See our article on Notional Interest Deduction (NID).
No tax on dividend income received from a subsidiary company from abroad (provided that the holding is at least 1% of the share capital in the overseas company). However, where the dividend is derived from abroad the exemption does not apply if both of the following conditions exist 1) where more than 50% of the activities of the overseas paying company result directly or indirectly in passive income (non – trading income), and 2) 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).
Dividend Income from a Cyprus tax resident company or from a foreign tax resident company or from a foreign permanent establishment of a Cyprus holding company is exempt from tax. There are some exceptions to this rule as stated below.
Controlled Foreign Companies (CFC’s)
From the 1st January 2019 income derived from foreign subsidiaries or permanent establishments of a Cyprus company may be taxed in Cyprus. These rules refer to non-distributed income of the CGC and is taxed under certain conditions.
Withholding Tax (WHT)
Dividends or interest or royalties paid by a Cyprus resident company to a non-resident shareholder, are not subject to withholding tax. So the payer of such tax is not subject to a retention tax in such a case. (certain conditions apply to royalties on rights used within Cyprus).
As Cyprus is an EU member state, a Cyprus Holding Company may also enjoy no withholding tax on dividends received from EU subsidiaries by virtue of the EU Parent Subsidiary Directive.
Cyprus does impose between 5% and 10% WHT on some of income derived by non-resident individuals from the exercise in Cyprus of any profession in the entertainment industry (theater, cinema, football or sports club income).
Now with regard to direct payments of dividends from the USA to Cyprus a WHT rate of 15% is imposed if dividends income is received by a company (in Cyprus) controlling less than 10% of the voting power of the paying company and in all cases if received by an individual. If a company controls at least 10% of the voting power of the paying company other conditions of the paying company have to be satisfied in order for the rate of 5% to apply.
More Cyprus Holding Company Advantages
No thin capitalization rules apply.
Incorporation and administration costs are low.
Cyprus has a good legal accounting and banking system.
Losses can be carried forward to other years.
Use of Nominee directors is permitted
Registration with VAT not required if the Cyprus Holding Company is deriving dividend income only.
Incorporation of the holding company can take place at arm’s length without having to visit Cyprus
Cyprus has a rich network of over 60 double taxation treaties with third countries enabling a Cyprus Holding Company to receive dividend income tax free.
Factors to take into account in choosing a jurisdiction to host a holding company
There are several criteria which one may consider in determining the best or preferred jurisdiction to establish a holding company, such as:
- The ability of a holding company to receive income with minimal or zero tax burden.
- The ability to pay dividends abroad without withholding tax in the paying jurisdiction
- The ability of a holding company to dispose of assets outside Cyprus or in investment in any subsidiary without capital gains tax (profit tax) being imposed in the host jurisdiction.
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