Cyprus Holding Company

When deciding upon a corporate structure, the location of a holding company is of great importance in order to take advantage of the many tax benefits on offer. The Cyprus Holding Company has become an attractive vehicle for international business and investment, thanks to its strategic location, favourable tax regime, and a robust legal framework.

What is a Holding Company?

A Cyprus Holding Company is a legal entity established in Cyprus to hold shares in other companies, either locally or internationally. It can also own other assets, such as real estate, intellectual property, and financial instruments. The primary purpose of a Cyprus Holding Company is to consolidate ownership, manage investments, and facilitate tax planning for the shareholders.

Legal Framework

The main legislation governing Cyprus Holding Companies is the Companies Law, Chapter 113. This law has been amended over the years to align with the European Union (EU) regulations and directives, especially after Cyprus joined the EU in 2004.

Key provisions of the Companies Law related to holding companies include:

Company Formation: A Cyprus Holding Company can be formed as a private limited liability company, a public limited liability company, or a European Company (SE). The most common structure is the private limited liability company, which requires at least one shareholder and one director.
Share Capital: There is no minimum share capital requirement for private limited liability companies. However, public limited liability companies must have a minimum share capital of €25,629.
Corporate Governance: The board of directors is responsible for the company’s management, and the company must hold an Annual General Meeting (AGM) within 18 months of incorporation and subsequently every calendar year.
Financial Reporting: Cyprus Holding Companies must prepare annual financial statements in accordance with International Financial Reporting Standards (IFRS) and file them with the Registrar of Companies.

Tax Regime

The Cyprus tax regime is characterised by a low corporate tax rate and favourable tax provisions for holding companies. Key tax legislation relevant to Cyprus Holding Companies includes:

Income Tax Law No. 118(I) of 2002 (as amended): The corporate tax rate in Cyprus is 12.5% on net profits. However, dividend income received by a Cyprus Holding Company from its subsidiaries is generally exempt from corporate tax.
Special Contribution for the Defence of the Republic Law No. 117(I) of 2002 (as amended): This law imposes a special defence contribution on certain types of passive income, such as dividends and interest. However, dividends received by a Cyprus Holding Company from foreign subsidiaries are exempt from this tax.
Capital Gains Tax Law No. 52/1980 (as amended): Capital gains tax is levied at a rate of 20% on the disposal of immovable property situated in Cyprus or the disposal of shares in companies owning such property. However, the sale of shares in a Cyprus Holding Company is exempt from capital gains tax.
Double Tax Treaties: Cyprus has an extensive network of double tax treaties, which provide for the reduction or elimination of withholding taxes on dividends, interest, and royalties paid between Cyprus and treaty partner countries.

Anti-Avoidance Measures and Compliance

To prevent tax abuse and ensure compliance with international standards, Cyprus has implemented various anti-avoidance measures, including:

Transfer Pricing Rules: Cyprus adheres to the OECD Transfer Pricing Guidelines, which require transactions between related parties to be conducted at arm’s length.
Controlled Foreign Company (CFC) Rules: Cyprus has implemented CFC rules in line with the EU Anti-Tax Avoidance Directive (ATAD). These rules aim to prevent the artificial shifting of profits to low-tax jurisdictions.
Anti Avoidance Measures and Exchange of Information: Cyprus is a signatory to the OECD’s Multilateral Competent Authority Agreement (MCAA) on the Automatic Exchange of Financial Account Information and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. These agreements facilitate the automatic exchange of tax-related information between participating jurisdictions to enhance tax transparency and combat tax evasion.
Economic Substance Requirements: Cyprus has adopted economic substance requirements in line with the EU’s requirements on fair taxation and the OECD’s Base Erosion and Profit Shifting (BEPS) project. Cyprus Holding Companies must demonstrate that they have adequate substance in Cyprus, including management and control, qualified personnel, and a physical presence.

Advantages of the Cyprus Holding Company

The Cyprus Holding Company structure offers several benefits to investors and multinational corporations including:

Tax efficient structure: Cyprus has a low corporate tax rate of 12.5% on company profits, which makes it an attractive location for holding companies.
Access to the European market: Cyprus is a member of the European Union, offering access to the single market and the ability to conduct business throughout Europe with ease.
Confidentiality: Cyprus has strict laws protecting the confidentiality of company ownership and financial information.
Favourable double taxation treaties: Cyprus has signed double taxation treaties with several countries, providing relief from double taxation for companies and individuals.

It is worth noting that holding companies can be used for a variety of purposes beyond simply holding other companies and assets. Some of these purposes include:

Asset protection: A Cyprus holding company can be used to hold assets such as property, shares, or intellectual property, providing a layer of protection for the assets and reducing the risk of loss.
Estate planning: Cyprus holding companies can be useful for estate planning purposes, as they can help to transfer assets to future generations in a tax-efficient manner.
International tax planning: Cyprus holding companies can be used to minimise the overall tax burden for multinational businesses, by allowing them to centralise their operations and take advantage of the country’s favourable tax regime.
Investment holding: Cyprus holding companies can be used to hold and manage investments, providing a convenient and tax-efficient structure for investing in foreign markets.

In order to establish a Cyprus holding company, several steps must be taken, including selecting a company name, registering the company with the Cyprus Registrar of Companies, obtaining a tax identification number, and opening a corporate bank account. Additionally, it’s important to appoint directors and shareholders, and to draft the company’s articles of association.

Benefits of a Cyprus Holding Company in Brief

- No withholding tax on dividends paid to non-residents shareholders;
- No withholding tax on interest paid from Cyprus;
- No tax on dividend income received from another Cyprus tax resident company;
- No tax on dividend income received from a foreign permanent establishment (PE) of a Cyprus holding company; provided one of the following conditions are met:
  1. The PE must not engage more than 50% directly or indirectly in activities which lead to passive income.
  2. The foreign tax burden on the profit of the dividend paying company is not lower than 6.25%.

- No tax on dividend income received from abroad; provided
  1. that they are not allowed as a tax deduction in the jurisdiction of the foreign paying company;
  2. the dividend paying subsidy company must not engage directly or indirectly more than 50% in activities which lead to passive income;
  3. or if the foreign tax burden of the dividend paying company is not lower than 6.25%

- Dividends received from abroad are exempt from Special Defense Contribution if one of the following conditions are met:
  1. The dividend paying company must not engage more than 50% directly or indirectly in activities which lead to passive income.
  2. The foreign tax burden on the profit of the dividend paying company is not lower than 6.25%.

No withholding tax on royalties paid from Cyprus in respect of intellectual property exploited outside Cyprus;
No tax on disposal or trading of securities;
Only 2,5% effective taxation on profits from qualifying intellectual property;
Notional interest deduction upon the introduction of new equity