Cyprus has been an attractive place for making international business for many years, for trading purposes in the first place. Even after introduction of 10% corporate tax for both resident and non-resident companies, Cyprus is still one of the countries with the lowest taxation level in EU. In recent years, Cyprus developed its tax legislation and emerged in a decent location for multinational investors considering setting up a holding company for their participations.
Withholding Tax on Incoming Dividends from Non-Cyprus Subsidiaries
Cyprus is a part of the EU’s Parent-Subsidiary directive providing for withholding tax exemption of dividends remitted by a EU subsidiary to its Cypriot holding company. The qualifying shareholding requirement is 25%.
If the subsidiary company doesn’t fall under the EU’s Parent-Subsidiary directive, you may count on one of 45 double tax treaties providing for 0 or reduced withholding tax rates on dividends in favor of the parent company in Cyprus. Its extensive double tax treaties network covers many countries from Eastern and Western Europe.
Cyprus domestic law provides for full exemption from tax on dividends received by a Cypriot holding company from foreign participations. The qualifying shareholding requirement is 1%.
The only exception for this rule are dividends from a subsidiary engaged in more than 50% activities resulting in investment income, and that investment income, from which the subsidiary is paying dividends, is subject to tax at a rate lower than 5%. Dividends directly or indirectly derived from trading subsidiaries are not considered investment income.
Further declaring of the dividends by a Cypriot company to its foreign parent company is again free of withholding tax, irrespective of the country of residence, further taxation of the receiving parent company and existence of a double tax treaty, be it a corporate body or a physical person.
Capital Gains on Disposal of Shares
The law provides for full exemption of a Cypriot holding company from capital gains and income tax on income from disposal or liquidation of its participations in foreign subsidiaries (unless the subsidiary owns immovable property in Cyprus).
Disposal of Shares, or Liquidation of a Cypriot Company
No capital gains or income tax or else are triggered in Cyprus upon disposal or liquidation of participation in a Cypriot holding company by its non-Cyprus shareholders. The rule does no exceptions for parent companies from tax haven jurisdictions, and pays no attention to provisions of a double tax treaty, if any.
Unilateral Tax Credit Relief
If certain income is subject to tax in Cyprus, its domestic law gives unilateral relief for the already paid foreign tax.
There are no annual capital tax or annual net wealth tax in Cyprus.
Other Incentives for Cypriot Holding Companies:
- no substance requirements
- no minimum holding period requirements to be eligible for either tax exemption
- no thin capitalization rules
- no debt-equity restrictions
- no time restrictions on carrying forward of tax losses. A group relief for utilization of tax losses is available.
- no requirement to register for VAT in Cyprus if the company’s main purpose is to hold participations with no involvement in management and administration of subsidiaries directly or indirectly
- no CFC or equivalent legislation
- if re-organizational transaction falls into the EC Merger Directive definition, it is exempted from capital gains and corporation taxes, as well as from transfer fees
- advance tax law interpretation and prior approval are available from the Commissioner of Income Tax in certain cases upon request
- Cyprus is a full European Union member and enjoys the reputation and privileges attached to a European company.
It is appropriate to mention that Cyprus is striving to create a tax incentive company rather than a tax haven. Therefore, incorporating in Cyprus, you may count not only on multiple tax advantages, but also on its status of a reputable business center.