FRSAudit Cyprus - Holding Companies

Cyprus Holding Companies

Introduction

A Cyprus Holding company is a legal entity that can be used by investors as a vehicle to hold properties or make investments in Cyprus and or abroad.

Cyprus has become an important world business centre mainly due:

• To it’s favourable tax regime, having the lowest corporation tax in Europe at 10 %,
• The exemption from tax for dividend income from overseas subsidiaries ,(under some criteria)
• The wide network of double tax treaties that Cyprus has signed with several countries
• The exemption from taxation of the sale of securities such as shares, bonds, debentures and other securities of companies incorporated both in Cyprus or abroad.

Functions of Holding companies

The main functions of the Holding companies are:

• Receiving dividends, interest or royalties
• Making investments in other companies (holding shares in subsidiary or associated undertakings)
• To act as Financing bodies for their investment undertakings by supplying the companies that they hold shares in with funds.

Criteria for choosing the location to set up a Holding Company

It is very important to evaluate carefully the location that a Holding Company will be set up and in this respect the following must be taken into account:

• Commercial reasons
• Tax reasons

Furthermore, a Cyprus Company can utilize under certain circumstances, the benefits of the EU Parent-Subsidiary Directive, which allows for withholding tax exemption between EU based parent companies and EU based subsidiaries companies.

More specifically, the following matters are worth mentioning at this point as they further explain why Cyprus is an advantageous location to establish a Holding Company (and an International Business company in general):

• Dividends from abroad received in Cyprus

Dividends paid by a foreign company to a tax resident Cyprus Holding company are tax free in Cyprus, if the Cyprus Holding Company holds at least 1 % of the share capital of the foreign company paying the dividend and:

a) the revenue of the foreign company paying the dividend ,derived directly or indirectly from investments activities does not exceed 50 % of the total revenue and,

b) the corporation tax rate of the country of the paying company is not substantially lower than the Cypriot corporate tax rate.

• Double Tax Treaties

The wide network of Double Tax Treaties that Cyprus has entered into makes Cyprus a very attractive place to establish a Holding Company as it helps to minimize the withholding tax rates.

• Group losses relief

• The tax losses of one company in the Group can be set off against the Profits of another group company if:

a) the companies are tax resident in Cyprus, and

b) the holding company has at least a 75 % of the share capital of the subsidiary, or

c) each company is at least 75 % subsidiary of the other company

• The set off of the losses can be made against profits of the same tax year
• Any unused tax losses are carried forward to be set off against future profits without any time restrictions.
  
  

• Cyprus enjoys good reputation-as it is not a "tax heaven" country

Using jurisdictions that are tax heavens with no taxation is not advisable as the invoices raised by the companies will be treated with suspicion by the investor's own country's tax authorities and maybe disregarded when calculating the tax to be paid. Cyprus is a good jurisdiction to use in order to set up an IBC, as it is a well known and reputable international business center.

• Banking system

Cyprus has an effective mechanism of regulating and supervising the Banking system via the local regulatory monetary body, which is the Central Bank of Cyprus.

The Central Bank of Cyprus utilizes the directives and recommendations of the Basle Committee on Banking regulation, in order to reduce the systematic risk and maintain the stability of the Cyprus Banking system helping to preserve public confidence, protecting depositors at the same time.

Group Structure Illustration

Remittance of Dividends

• The amount remitted as dividends by the subsidiary to the International Holding Company varies according to the tax rates of the country of incorporation of the subsidiary and the provisions of the Double Tax Treaty between Cyprus and that country.

Tax free receipt of dividend by the Holding company

The receipt of dividends by an International Cyprus Holding company can be completely tax free as:

• Dividend income is exempt from corporation tax in Cyprus, and
• Dividend income may be exempt from Special contribution of defense under certain conditions (see section Dividends from abroad received in Cyprus)

Zero withholding tax

The reimbursement of dividends to the beneficial owners has a zero withholding tax regime (0%) in the situation that the beneficial owner is a corporate entity or an individual not tax resident in Cyprus.

Reduced tax burden & Increased amount of Net income receivable by beneficial owners

Due to the fact that (a) Dividends received by the International Holding company from abroad are tax free(under certain conditions) and (b) no withholding tax is deducted on the reimbursement of dividends by the International Holding company to the beneficial owner, then the amount of the cumulative tax burden is minimized and the net amount of the dividend income paid out to the ultimate beneficial owners is maximized.

Triangular trading with an International Business Company

By utilizing the low tax corporation rate in Cyprus, an International Business Company incorporated in Cyprus, can be used as an intermediary for the purchase of goods from a third country without the goods being imported to Cyprus but instead transferred directly to the country of final destination and sale.

Illustrative example

Purchase of goods by the IBC from a third country

• A Cyprus International Business Company will purchase the goods from the third country manufacturer.
• The goods purchased need not be imported to the island of Cyprus, and instead the goods are being transferred directly from the third country to the country of sale to the final consumer.
• The Cyprus IBC will issue a sale invoice to the company that is receiving the goods in the country of final sale of the products

Re-invoicing of goods

• The sale invoice issued by a Cyprus IBC will result to part of the profit made in the transaction to be taxed in Cyprus at the low rate of 10 % on the net taxable profit (one of the lowest tax rate in the world)
• This will reduce substantially the overall tax burden of the ultimate beneficial owner.

Information Required For The Incorporation Of An International Business Company In Cyprus