The Cyprus holding company regime, one of the most advantageous in the EU, is probably the most attractive feature of the Cypriot tax system. A holding company is generally set up as an ordinary company resident in Cyprus. There is no geographical limitation on the exercise of a company’s activities and its income may be derived from any source, including a Cypriot-based source. Moreover, there is no restriction on the ownership of a company’s shares. Profits of a Cypriot holding company arising from the sale of shares in other entities enjoy a full exemption from the local tax in Cyprus, with no minimum participation threshold required. However, any profits arising on sale of shares in entities owning immovable property in Cyprus are taxed under capital gains tax at the rate of 20%. Dividends paid by a Cypriot holding company to its ultimate parent company are not subject to withholding tax in Cyprus. Furthermore, the incorporation of EU Interest and Royalties Directive into Cypriot domestic law provides an exemption at source of interest for a beneficial owner that is non-resident in Cyprus but resident in an EU member state.
Overseas dividends income received by a Cypriot holding company is fully exempted from Corporation tax. Moreover, overseas dividend income is also exempted from the 17% Special Defence Contribution tax, provided that:
Not more than 50% of the activities of the paying company result directly or indirectly from investment income; and
The foreign tax burden is not significantly lower than the tax burden in Cyprus. Per Cyprus tax authorities ‘significantly lower’ means a tax burden below 6,25%.
Interest income received by a Cypriot holding company in the ordinary course of its business will be subject to corporate tax at 12,5%. Any other interest income is taxed under Special Defence Contribution tax at the rate of 30%.
Foreign taxes paid on overseas income can be credited against any respective tax liabilities (from both Corporation tax and Special Defence Contribution tax) arising from the same source of income.
There are no thin capitalisation rules in Cyprus, but there are certain indirect restrictions. Interest paid in the course of a company’s normal trading activities, including any amount in relation to the acquisition of assets used in the business, is an allowable deduction. Back-to-back financing transactions must be undertaken on an “arm’s length” basis, such that the borrowing and on lending should not result in a loss to the Cypriot company.
A comprehensive network of double taxation treaties has been integral to Cyprus’s success as a financial centre. It has concluded tax treaties with more than 60 countries, and further treaties are under negotiation, or awaiting ratification, with half as many more. All such treaties apply the credit method to the taxation of dividends and interest, by allowing tax payable in the other country as a credit against tax payable in Cyprus, including the Special Defence Contribution tax. As a result, the taxpayer only pays the higher of the two rates of tax and is not taxed twice on the same income.
Cypriot companies are therefore advantageous for holding, financing, licensing, trading or other operations. The absence of dividend withholding tax offering a tax-free exit for dividends from the EU, the favourable holding company tax regime in combination with the extensive network of double tax treaties have resulted in Cyprus being an appropriate jurisdiction for European holding activities.