European Union: The Tax Reasons For The Establishment Of A Cyprus Holding Company

1. INTRODUCTION

There is nowadays a strong competition among the better and more popular holding jurisdictions. In the last few months, ‘Cyprus’, a well established international centre, has been critically assessed of constituting an attractive location for holding companies from a tax perspective, among others. This is due to the accession of Cyprus to the European Union (EU) and the enactment of the new Cyprus tax legislation, which is now compatible with the acquis communautaire. Cyprus laws and practices are now harmonised with the EU Laws and Directives, the Code of Conduct and the Organization for Economic Cooperation and Development’s recommendation on Harmful Tax Corporation. A brief outline will be made on the features of the Cyprus jurisdiction, which sets up Cyprus as an ideal location for establishing an international holding company.

2. TAX REGIME

Unlike other countries in Europe, a Cyprus Holding Company must only hold at least 1% of the share capital of a foreign subsidiary in order to receive the tax benefits awarded by the new tax reform.

3. NEW TAX LEGISLATION

A uniform 10% corporate tax rate, applicable to the worldwide income, is now levied on all resident companies from the 1^st of January, 2003. This is the lowest corporate tax rate in the European Union and thus the most advantageous standard rate of corporation tax for Cyprus.

The new taxation status on Company is residence-based. A company is only ‘resident in the Republic’ if its business is centrally managed and controlled in Cyprus. Therefore, under the new rules, a resident corporation is taxable on its worldwide income accrued or arising from sources both within and outside Cyprus if it is managed and controlled from Cyprus.

In view of the new tax legislation, the Holding International Business Companies operating from Cyprus are now in a much more beneficial position because they can enjoy the benefits deriving from the tax exceptions as well as the corporate tax benefits by virtue of the new tax legislation.

4. TAX EXEMPTIONS

50% of interest receivable

In view of the new tax legislation 50% of interest received by corporation is tax exempt, excluding interest received from the recipient’s ordinary course of business or closely connected with the recipient’s ordinary business.

Dividends received

Dividends received from abroad are now totally exempt from corporation tax by virtue of the new tax legislation. Furthermore, they are also exempt from the 15% defence contribution provided that the direct holding is at least 1% of the share capital of the overseas company.

Restructuring provisions

In view of the incorporation of the EC Merger Directive 90/434/EEC into the new tax law, there are tax exemptions on the transfer of assets (including shares) under a reorganisation (merger / de-merger / transfer of assets).

Gains on shares and Capital Gains Tax

Profits from buying and selling shares are exempt from tax. Furthermore, there is no capital gains tax except for the 20% capital gains tax applying on gains accruing from disposal of immovable property held in Cyprus and shares in non-listed companies, which own immovable property in Cyprus.

Profits from activities of Permanent Establishment abroad

The profits from a permanent establishment abroad are exempt from taxation. The exemption does not apply if (i) the Permanent establishment directly or indirectly engages in more than fifty per cent (50%) in activities that produce investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus.

Cyprus Branches of Companies

With the accession of Cyprus in the EU, double taxation relief will be available to all Cyprus branches, of companies resident in other member states in the European Union, since there is no discrimination between the companies resident in a Member state and the branches of such companies residence in another member state.

Distributions by Cyprus Holding Companies

Dividends paid to non-resident shareholders are exempt from withholding tax. In fact, Cyprus does not impose withholding taxes on payments of dividend, interest and royalties (provided the intellectual property rights are not used in Cyprus) to non-resident recipients.

5. CORPORATE TAX BENEFITS

Carry forward of Losses

Tax losses for the year 1997 onwards may be carried forward indefinitely. Losses incurred abroad by a permanent establishment of a Cyprus company can be offset against profits of the Cyprus company.

Group relief

The Group relief rules are now enacted, providing for group relief of tax losses between a holding Company and its subsidiaries in the event where the Holding Company owns at least 75% of the Subsidiary directly or indirectly and/or otherwise among companies of the same group for the whole year. However, losses brought forward will not be available for Group Relief.

By virtue of the said rules a company is considered as a member of a group if it is at least a 75% subsidiary of the other, or both companies are at least the 75% subsidiaries of a third company.

6. NETWORK OF DOUBLE TAX TREATIES

Cyprus combines a low-tax regime with a network of double tax treaties. It has concluded 34 double tax treaties, which is considered one of the highest number compared to the number of treaties concluded by any other offshore jurisdiction, particularly with Central and Eastern European Countries and a number of Middle Eastern countries. Most of the Treaties follow the OECD model and all of them have the impact of reducing or eliminating the normal withholding taxes imposed by the Contracting states on dividends, interest and royalty payments. This is beneficial for trade with certain Eastern European Countries and Russia because foreign investors investing in Eastern Europe have the opportunity to channel their investments through a country, such as Cyprus, which has a treaty with the investment recipient country allowing for a reduction and in some cases elimination of the withholding taxes.

7. CONCLUSION

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.