Cyprus: Cyprus: The three most popular types of International Business Companies (IBCs)operating through Cyprus: Financing, Holding and Trading Companies

Introduction

During the past thirty years Cyprus has developed into a formidable financial centre, renowned for its high quality services.

The local tax system is a key reason for this development. Cyprus is well known for its simplified tax system that provides numerous advantages to international investors.

The purpose of this paper is to provide a detailed analysis of the three most popular types of international Businesses, operating through Cyprus, financing, holding and trading companies.

Financing companies

Back to back loans

During 2011 the Institute of Certified Public Accountants of Cyprus (ICPAC) has agreed with the Commissioner of Income Tax that the below spreads would apply in the case of back to back loans:

Loan amount

Minimum acceptable spread

Up to €50m

0,35%

Between €50m- €200m

0,25%

Above €200m

0,125%

It should be noted that the above spreads apply only when the Cyprus Company acts as an intermediary and obtains loan(s) from a related company which are further granted to another related company.

However the scheme also applies for loans obtained from 3rd parties ( i.e. from a bank), when the covenants and guarantees given for the loans are not from the Cyprus Company ( but from the owners or any other related party), as according to the guidance issued for such loans, those should not be subject to any risks in order to justify the low spreads.

Subsequently, if the loan(s) granted cannot be collected the Cyprus Company would not be able to claim this bad debt as tax deductible.

The time period between obtaining and granting the loan should not be more than 6 months.  

The above spreads should result after taking into account any expenses and exchange differences arising. Therefore a loan of let's say €20m should result a taxable income of €70k and a tax of €8.750.

Loans not considered as B2B

In relation to provision of financing facilities to any party, related or non-related, other than back to back loan, a "market interest rate" should be charged on the loan facilities.

There are no provisions in the tax legislation to what constitutes a "market interest rate". In practice the Tax Authorities generally consider as an arm's length interest rate the rate of 5- 6%, although different factors like the jurisdiction of the borrower (i.e Western European countries in which a company could obtain a business loan for 3% p.a vs Russia in which such loans bear interest of 11%)should also be taken into consideration when deciding what rate to use.

Holding companies

As per the Cypriot tax legislation any gain/ (loss) arising from the disposal of "titles" is exempt / (not allowable) for income tax purposes. Please see below a list of such instruments, as stated in tax circular 2008/13.

  • Ordinary shares
  • Founder's shares
  • Preference shares
  • Options on titles
  • Debentures
  • Bonds
  • Short positions on titles
  • Futures/forwards on titles
  • Swaps on titles
  • Depositary receipts on titles (ADRs and GDRs)
  • Rights of claims on bonds and debentures (interest
  • Income is excluded and taxed under normal rate)
  • Index participations only if they represent titles
  • Repurchase agreements or Repos on titles
  • Participations in companies
  • Units in open‐end or closed‐end collective investment schemes

Any profit from the disposal of the abovementioned products is not taxable ( it is deducted from the company's income) when determining the tax charge of a Cyprus resident Company. On the other hand, any loss deriving from the trade of the such instruments is also not tax allowable ( it is added back to income, thus eliminating the effect of such loss).

Dividend income from participations in companies

Dividends received from abroad are tax exempt unless both of the following conditions are not satisfied.

  • The company paying the dividend must not engage directly or indirectly more than 50% in investing activities, and
  • The foreign tax burden on the income of the company paying the dividend is not substantially lower than the tax burden in Cyprus (the lowest acceptable rate is considered to be 5%, even though CTA has not provided this in writing in the form of circular or guidance).

If both conditions fail then the company is taxed under Special Contribution for Defence (SCD) at 20% for the years 2012 and 2013 and 17% from 2014 and onwards.

Trading companies

Cyprus Tax Authorities expect that a Cyprus tax resident company will be selling goods and/or services at a reasonable gross profit margin resulting to reasonable net taxable margin after deducting administration and banking expenses.

Trading companies are taxed under the normal rate of 12.5%. All expenses that are wholly and exclusive for the generation of taxable income are allowable for tax purposes. All other expenses (which relate to non-business assets or activities are not allowable and are restricted during the computation of the taxable income( please see ''disallowable expenses '' section below).

The tax legislation does not provide any guidance as for what should be the reasonable margin for every specific type of business. In practice though the tax office accept a reasonable margin between 5% to 10% for such companies. It worth noticing that as the absolute amount of annual income increases the acceptable net profit margin decreases. Furthermore the net profit margin should be in line with the financial and operating risks undertaken by the company.

In addition to the above the arm's length provision of the Cyprus tax legislation should be considered which requires transactions between related parties to be conducted at an arm's length basis.

Arm's length transactions

According to the Cyprus tax legislation, article 33 of the Income Tax Law, transactions between related parties must be carried out on an arm's length basis. This means that they should be carried out at no different terms to those applied in transactions between unrelated parties.

In case the Cyprus Tax Authorities (CTAs) consider that transactions between related parties are carried out on a non-arm's length basis, they could adjust the tax base of the company accordingly.

Restriction of disallowable expenses

As discussed above expenses that are not wholly and exclusively for the purpose of trade are not allowable when determining the Cyprus chargeable income.

Example: The servicing cost of a loan used for the purchase of any asset following under '' titles'', in which case the restriction of interest should be calculated using the weighted average cost of borrowings and the cost of "non-business assets" or in case where it can be proved that the investment has been financed out from a specific loan, the interest rate of that specific loan could be accepted.

According to the Cyprus tax legislation and to the circular 2010/8, interest expense relating or deemed to relate to the cost of acquisition of "non-business assets"( assets that do not generate taxable income) should not be allowed as tax deductible for income tax purposes.

In addition circular 2008/14 states that expenses which relate directly or indirectly to exempt income and portion of the overheads expenses should not be treated as tax deductible expenses.

The same circular further clarifies that expenses should be apportioned to taxable and exempt activities according to the proportion of the assets used for generating taxable and exempt income.

Therefore, administration expenses apportioned to assets or activities that result to the production of income which is exempt from Cyprus income tax should not treated as tax deductible expenses for income tax purposes. 

However as from 1.1.2012 the serving cost of loans obtained for the acquisition of 100% of investments ( either Cyprus or foreign entities) are considered as an allowable deduction provided that the acquired entity has no access that are not used in the business. If the acquired entity has such assets, the interest expense will be restricted in the extend that corresponds to those non business assets.

Non-resident companies with local presence

Companies that are non-residents in Cyprus are only taxed for their profits generated in the Republic.

Losses

According to the circular 2013/08 taxable losses are carried forward for five years. Any unitized losses of more than five years, are lost.

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
Similar Articles
Relevancy Powered by MondaqAI
 
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 Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions