Cypriot holding company is an ordinary company which, besides having a participation in domestic and/or foreign companies, may also be engaged in other activities such as trading, manufacturing or financing. The company is liable to be taxed in Cyprus on its worldwide income, provided that it is managed and controlled in Cyprus.
Advantages of a Cyprus Holding Company
A. Tax Treatment of Incoming Dividends
Dividends received by Cypriot tax resident companies are fully exempt from local taxation in respect of dividends received from foreign corporations provided the Cypriot company own at least 1% of the share capital of the paying company. This exemption will not be granted only if.-
(i) Directly or indirectly more than 50% of the activities of the subsidiary (paying company) result in investment income, and
(ii) The subsidiary (paying company) is subject to tax at a rate substantially lower than the Cypriot rate. (5%)
This exemption also applies to profits of a permanent establishment which a Cyprus company has in another jurisdiction.
B. Tax Treatment of Capital Gains on the Sale of Shares
The full exemption from tax of trading and capital gains made by a Cypriot holding company from the sale of shares in foreign subsidiaries creates a clear advantage over traditional European holding company regimes such as the Netherlands, Denmark, Luxembourg and Switzerland.
C. Withholding Tax on Outgoing Dividends
Outgoing dividends remitted by a Cypriot holding company to the ultimate parent company/beneficial shareholders do not suffer any withholding taxes in Cyprus.
D. Double Taxation Treaties
Cyprus has a Double Taxation Treaty with 34 countries. The existence of these treaties in combination with the low tax paid by a Cyprus company offer the best possibilities for effective international tax planning. The main objective of the double tax treaties is to avoid the double taxation of income earned in any of the two contracting countries. This is done through the tax sparing provisions whereby tax is credited against the tax that must be paid in the contracting state. The treaties also provide for reduced withholding taxes for dividends, interest and royalties.
E. Withholding Tax on Interest
The EU Interest/Royalty Directive has been incorporated into Cypriot domestic legislation and therefore the tax laws provide for exemption at source of interest where the beneficial owner is a nonresident, for payments of interest from Cyprus for any loans received form either the German subsidiaries or any other company.
F. Interest Deduction for Borrowing Costs
It is important for an investor to obtain a tax deduction in respect of borrowing costs incurred in relation to investments in subsidiaries. In general, interest expenses payable by a Cypriot company are fully deductible.
G. Other matters:
• Cyprus corporation tax for business profits is 10 per cent
• Holding companies can also perform other operating activities.
• There are group relief provisions for surrendering of losses between group companies
• Losses can be carried forward indefinitely
• Foreign taxes can be treated as expenses and deducted in Cyprus
• Favourable reorganization and merger rules
Generally Cyprus may be the most advantageous country for holding companies since dividends are fully exempted and also profits from the disposal of the shares of their subsidiaries.