Cyprus Tax Regime Benefits for International Business

By Elias Neocleous and Philippos Aristotelous

Posted: 26th May 2011 08:18

Over the years Cyprus has developed into one of the world's leading locations for holding and finance companies.  Its myriad advantages include the transparent legal system, excellent communications and world-class professional and banking services.  The country is also an EU member state with an open market economy and no restrictions on capital movements.

The optimum participation regime

From a tax perspective, a holding company jurisdiction can be measured against the following benchmarks:

·      First, the holding company must be capable of receiving income streams from and the proceeds of disposal of the investee company with zero (or at least the lowest possible) tax leakage in the investee company’s jurisdiction.

·      Secondly, dividends from and proceeds of disposal of investee companies should not be subject to tax in the holding company jurisdiction.

·      Thirdly, the holding company should be able to pay dividends to its investors without giving rise to any charge to tax in the holding company jurisdiction.  In practice this has always been the most problematic benefit to achieve.

How does Cyprus perform against these benchmarks?

The short answer is, “very well indeed”.

·      Cyprus has an extensive network of double tax treaties and as an EU member state entitles resident companies to the benefits of the EU Parent-Subsidiary Directive;

·      Dividends received by a resident company or a permanent establishment of a non-resident company from a non-resident company are exempt from tax in Cyprus with no minimum shareholding requirement in accordance with the EU Parent-Subsidiary Directive and applicable local law.  There are no Controlled Foreign Company (CFC) provisions under Cyprus law and the only limitation to the exemption for dividends received from abroad is where both limbs of the following test (“Passive Dividend Rules”) apply, namely where:

o   the investment income is more than 50 per cent of the paying company’s activities; and

o   the foreign tax burden on the income of the paying company is substantially lower than the Cyprus tax burden.

·      The profits of a Cyprus company’s permanent establishment in another jurisdiction are similarly exempt, subject to the same conditions as dividends;

·      Non-exempt dividend income is subject to SDC tax at 15%.  Tax credits are available for taxes paid abroad;

·      Interest income that is the result of the main activities of the company or that is closely connected to those activities is taxable at the standard corporate income tax rate of 10% after deduction of associated finance expenses, like any other "active" trading income.  In practice, the liberal transfer pricing regime allows group debt finance to be routed through Cyprus subject to tax at 10% on only a small interest rate margin;

·      Mergers, acquisitions and other reorganisations may be effected without tax cost;

·      No withholding tax is levied by Cyprus apart from a 10% (or less if a double tax treaty provides) withholding tax on royalties derived from the use of a right or asset within Cyprus.  All other dividend, interest and royalty payments made to non-residents may be made without deduction of tax.

·      Capital gains deriving from the disposal of shares and other securities are exempt from all forms of taxation in Cyprus providing the company whose shares are being sold does not hold real estate in Cyprus.

·      Cyprus’s domestic corporate tax regime is extremely good, with profit taxed at 10%, the lowest rate in the EU, generous rules on the deductibility of expenses incurred in producing taxable income and the absence of any specific thin capitalisation regime.

The conclusion

The above factors make Cyprus a highly attractive intermediate holding company jurisdiction, offering the following benefits:

·      Income streams flowing through Cyprus will generally be exempt from Cyprus tax and not attract withholding tax as they leave.

·      Subsidiaries that have scope for significant capital appreciation may be held in Cyprus and sold without any liability to tax on the gain;

·      Other assets (including, in certain circumstances, foreign real estate) with potential for capital appreciation may be held in a Cyprus company which may be disposed of without any liability to tax on the gain.

·      Cyprus’s double tax treaty network and the EU Parent-subsidiary directive offer a number of other tax planning opportunities to reduce withholdings from income paid to the Cyprus resident company.  For instance, Russian withholding tax can be eliminated by using a Cyprus holding company.

·      Cyprus allows payment of dividend, interest and royalties without payment of withholding tax.

Cyprus can also be beneficially used as the location for the ultimate holding company. It is particularly suitable for funds or investment vehicles since there is no tax on transactions in securities, even if this is the entity’s main trading activity.  Since there is no withholding tax on dividends there is no uncertainty over recovery of tax paid.

To take full advantage of the Cyprus holding company regime, the holding company must be tax resident in Cyprus and have a genuine reason for being, not merely a "brass-plate" operation.  Tax residence is determined by the locus of management and control.

If the company is no more than a tax-driven device without an economic function or substance in Cyprus, it may not to be able to benefit from the advantages of Cyprus’s extensive tax treaty network and it may be caught by anti-avoidance rules imposed by operating company jurisdictions to deny the benefits of the EU Parent-Subsidiary Directive or the relevant double tax treaty.

Choosing the best holding company location is a matter of balancing many factors. While no location can claim first place on every test, Cyprus should always be on the shortlist.

 

From its formation in 1965 Andreas Neocleous & Co LLC has grown to be the largest law firm in Cyprus and is generally recognised as the foremost firm in the South-East Mediterranean region, being top-rated in Cyprus by all the leading independent legal research organisations.

With more than one hundred and twenty professionals in Cyprus and mainland Europe, all of whom are fluent in English, Andreas Neocleous & Co LLC provides international clients with service of the highest global standards, specialising in cross-border projects and having the scale and depth of resources required to handle complex international assignments in demanding timescales.

 

Elias Neocleous is a partner and head of the corporate & commercial department at Andreas Neocleous & Co LLC.  He can be contacted on +357 2511 0000 or by email at eliasn@neocleous.com.

 

Philippos Aristotelous is an advocate at Andreas Neocleous & Co LLC and can be contacted on +357 2511 0138 or by email at aristotelous@neocleous.com.

 


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