Oct 25, 2013
Holding Companies Tax Advantages
Cyprus – the ideal location for a holding company
Apart from the ideal geographical position and established trade routes throughout the island, Cyprus also has to offer one of the most beneficial and versatile holding company tax regimes in the world. The favorable withholding tax provisions of the Double Tax Treaties (DTT) network and the EU Parent-Subsidiary Directive, among other directives, have been designed and implemented to ensure successful business growth.
Various global companies have chosen Cyprus for the maximization and optimum use of capital and financial resources. FinExpertiza Cyprus team is at your disposal to guide you in taking your firm to the next level and utilizing the benefits Cyprus has to offer.
Income from dividends is tax-free
In most cases, income from dividends is exempt from tax. This makes Cypriot holding companies a very attractive proposition for international groups or individuals investing abroad, aiming at dividend income streams. This is also very favorable as a repatriation vehicle where the investor’s jurisdiction does not have a favorable treaty with the country in which they wish to invest. Because capital gains on investments are not taxable, Cyprus is the perfect location for holding companies with subsidiaries that have potential for high capital appreciation that may be spun off or sold in the future.
The only exceptions that are eligible for Special Contribution for Defense Tax to be applied on dividends received from non-Cypriot companies at the rate of 17% will be in the following cases:
- The income of the subsidiary is subject to an effective tax burden of 5% or lower; or
- The subsidiary engages, directly or indirectly, more than 50% in activities leading to investment income.
Profits from the sales of shares are tax-free
In Cyprus, profits from the sales of securities (defined as “shares, bonds, debentures, founders’ shares and other securities of companies or other legal person, incorporated under a law In Cyprus or abroad, Including options thereon”) are generally exempt from tax, even if this is the only trading activity of the company. There is one exception of 20% capital gain tax if the profit is earned from the sales of shares in certain non-listed companies owning real estate in Cyprus and it reflects the gain from the sale of the underlying Cypriot real estate.
Profits from the activities of a permanent establishment abroad are tax-free
All profits earned from a Permanent Establishment (PE) outside of Cyprus are exempt from tax. If there are losses, they can be offset against its Cypriot income although this exemption does not apply if the PE carries on more than 50% of investment activities (known as “passive income”) and the foreign tax burden is significantly lower than the Cypriot tax burden. If some Cypriot DTTs are used in conjunction with this exemption, this can lead to PE profits avoiding tax altogether.
Income of interest
All gross interest income received by a Cypriot company is subject to a Defense Tax of 30%. However, any interest earned during, or closely connected to, the course of normal business is exempt from Defense Tax but it is subject to Corporate Income Tax of 12.5%.
Interest paid out to non-resident creditors is exempt from any Withholding Tax in Cyprus. There are no “thin capitalization rules” that might limit deduction of interest so that a Cypriot company’s debit/equity ratio would exceed a certain level.
Capital gains on disposal of capital assets are tax-free
The winding-up of a Cypriot company by foreign shareholders is exempt from tax. This makes Cyprus a very attractive destination in cases where there is interest in a tax-free unwinding of the holding company sometime in the future.
Other tax advantages of Cyprus
- There are no thin capitalization rules.
- There is no strict CFC legislation.
- During the life of a Cypriot holding company, there are no net worth (capital gains) taxes.
- Tax losses are carried forward for five years and can be surrendered as group relief.
- Mergers, takeovers and other reorganizations can take place within groups with no tax consequences.There are limited anti-avoidance provisions.
- Unilateral tax relief is granted to all Cypriot companies for foreign tax paid, even with the absence of a double tax treaty.
- For borrowings used for finance of taxable activities, interest deduction is allowed for.
- There are very attractive PE rules and generous PE provisions available in the DTT network.
- There is no obligation for holdings companies for VAT registration and compliance.
- There are extremely low duties for the establishment of companies.
- There are no strict transfer pricing rules.
- There is always a possibility for obtaining Advance Tax Rulings.
For more information and/or advice, please contact us via email at [email protected]