The most Popular Tax Planning Structures using Cyprus can be some of the following:
- The Cyprus Holding Company,
- The Cyprus International Trading Company
- The Cyprus Group Finance Company
- The Cyprus IP Royalty Holding Company
Herein below you will find summarized information about the benefits that each type of a Cyprus company can offer. Please contact us for recommendations and assistance on the implementation of a structure using a Cyprus company as your Special Purpose Vehicle (SPV).
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1. The Cyprus Holding Company
The location of a holding company is an important consideration in any international structure where is a desire to minimize the tax charged on income and gains. As we are moving forward in time from EU Accession we are seeing more and more clients preferring Cyprus as a holding company location to other traditional jurisdictions.
As a matter of fact, Cyprus has one of the most beneficial and versatile ‘’Holding Company Regimes’’ currently available in the World.
In order to appreciate the merits of Cyprus as a holding company jurisdiction, it suffices to compare the main typical holding company ‘’optimality criteria’’ (set out below) and the benefits provided by the Cyprus Holding Company Regime (also set out below).
Optimality Criteria for a Holding Company:
Holding companies perform the following functions within a group:
- Asset ownership / participation interest in operating & non-operating group companies.
- Accumulation of capital and shareholder value.
- Consolidation of business segments.
- Asset protection / mitigation of risks.
- Receiving dividends from operating companies.
- Distribution of profits to shareholders.
- Reinvestment of capital into new projects.
For illustration purposes, a holding company should ideally be resident in a jurisdiction which:
- Enables the extraction of foreign sourced dividends at mitigated or preferably zero rates of foreign withholding tax.
- Enables foreign dividends received to be taxed at low or preferably zero rates of domestic corporation or other taxes in the country of residence of the holding company – Not only one should plan to have a holding company in a jurisdiction which can receive foreign dividends with reduced withholding taxes, but one also need to ensure that those dividends are not highly taxed in the holding company’s country of residence.
- Permits the distribution of available profits to non-resident shareholders at low or preferably zero rates of withholding tax – Care needs to be taken that the jurisdiction chosen for a holding company is not one that will impose excessive withholding taxes on distributions of income to the shareholders of the company.
- Allows for the realization of capital gains from the disposal of shares in foreign companies at low or preferably zero rates of both foreign and domestic corporation tax on the gains – All the leading holding company jurisdictions provide, for an exemption from taxation on holding companies realized gains, the disposal of shares in foreign companies.
- Enables the tax – free liquidation of the holding company itself.
The Cyprus Holding Company Regime:
- Cyprus Company receiving foreign dividends, such dividends are exempted from tax (provided that certain minor conditions are satisfied);
- No capital gains tax is payable on the sale or transfer of securities and the gains are exempt from Income Tax (except gains from disposal of shares in companies owing Real Estate situated in Cyprus).
- Profits from a Permanent Establishment (PE) outside Cyprus are tax–exempt and its losses can be set off against Cyprus Income.
- No withholding taxes on outgoing dividends, interest and royalties (with some exceptions).
- Compared to other ‘’key’’ Holding Company Jurisdictions, only Cyprus and the UK have 0% dividend withholding tax (DWT), so no need for complex and expensive ‘’structuring out’’ of DWT. THIS IS AN IMPORTANT COMPETITIVE ADVANTAGE OF CYPRUS compared to other Holding Company Jurisdictions.
- No capital gains or income tax on the liquidation of participation or the liquidation of the Cypriot Holding Company itself.
- No net worth taxes (as mentioned before no capital gains taxes) during the life of the Cypriot Holding Company.
- Tax losses are carried forward and can also be surrendered as group relief.
- Mergers, takeovers and other reorganizations can take place within groups with no tax consequence.
- Unilateral tax relief is granted to all Cyprus Companies for foreign tax suffered irrespective of the absence of a double tax treaty.
- No obligation for the Holding Company (or right) for VAT registration & compliance.
- Low duties – taxes on the establishment of companies.
- Low expense level for professional / financial fees.
2. The Cyprus International Trading Company
Such companies can be used for the invoicing / re-invoicing of goods and services (as well as for the receipt of trading commissions) from any country to any destination and for transit trade activities in combination with the operation of bonded warehouses, bonded factories and the free trade zones.
Cyprus Companies may provide services such as sales promotion, accounting function, provision of labour – executive staff, consulting, market research, commission agent, intermediation, client introduction and many others. They may employ expatriate staff, who benefit from double tax treaty provisions, by paying tax and social insurance in Cyprus at low rates, thus avoiding the high tax tares in their home country.
In this way, profits made by the Cyprus Company are taxed at Cyprus’ Low Corporate Tax Rate of 12,5%, instead of higher corporate tax rates. Trading from a low tax EU State such as Cyprus and using appropriate tax planning – structuring to mitigate Cyprus Tax sometimes to levels below 10% – is far superior strategy nowadays than trading through an offshore company registered in a tax haven.
3. The Cyprus Group Finance Company
Group Finance Companies perform the following functions:
- Sourcing external debt finance.
- Accumulation of interest income and tax optimization of high tax country group operating companies.
- Redistribution of funds within the group.
Such companies may take advantage of the Cyprus Double Tax Treaties by providing loans in treaty countries or other countries where withholding tax on interest is low or nil.
The use of Cyprus Entities for group finance are extremely attractive. Cyprus Finance Companies can fulfill intra-company financial management functions, such as granting of loans for project financing or working capital requirements. Interest payments to the Cyprus Financing Company is tax deductible in the country of the borrower reducing the overall corporation tax liability. Choosing the right international jurisdiction for the use of double tax treaties can reduce or eliminate withholding taxes on interest payments.
These structures are particularly attractive for investment into high tax countries where, local rules permitting, high debt structures are widely used.
Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Cyprus (Group) Finance are the following:
- Absence of interest withholding tax (under a Double Tax Treaty or the Interest and Royalty Directive).
- Low overall tax burden.
- Possibility of deducting interest expenses from taxable income.
- Absence of thin capitalization rules of their inapplicability in the case of ‘’back to back’’ financing.
- Absence of interest withholding tax in connection with interest paid on loan financing, irrespective of jurisdiction or the absence of a DTT (even for interest payments to offshore jurisdictions).
- Reasonable level of ‘’margin’’ required by tax authorities.
- Low expense level for professional / financial fees.
4. The Cyprus IP Royalty Company
Cyprus offers the lowest tax regime on IP rights in Europe (maximum 2%) while protected by EU regulations on IP and by the fact of Cyprus being a member of all major international IP treaties and protocols.
To take advantage of the Cyprus low tax regime on IP you do not need to have the IP registered in Cyprus; it may be registered anywhere in the world but the ownership shall be on a Cyprus company (i.e. the Cyprus company will be the registered holder of the IP). IP includes the following intangibles:
- Copyrights (such as films, sound recordings and musical works, broadcasts, publications, software programs, literary works, scientific works, etc.);
- Trade marks and designs;
- Patents.
Maximum 2% Tax on Profits generated from IP
Having any type of intellectual property registered through a Cyprus company will benefit you from enjoying an 80% tax exemption of your worldwide income from IP use (lease or sale). In other words, the maximum effective tax rate on your income generated through the use of your IP through Cyprus will be as low as 2%, while at the same time benefiting from Cyprus’ wide double tax treaty network
Other Important Aspects of Cyprus Corporate Tax Law
- Taxable and non – taxable Cyprus entities
A company is considered to be a tax resident in Cyprus if it is managed and controlled in Cyprus. Although no definition of ‘management and control’ is provided in the tax law itself, its meaning was established by Court decisions in England. As a rule of thumb, if the majority of directors (or nominee directors) of the company are residents in Cyprus, board meetings are held in Cyprus and important management decisions are taken in Cyprus, management and control is considered to be exercised in Cyprus.
- Group relief in Cyprus companies
The taxable losses of any company may be set – off against the taxable profits of another company in the same group provided that the two companies are members of the same group for the whole year and are both tax residents of Cyprus. For the purpose of group relief, a company is deemed of the same tax group of:
(a) it is 75% subsidiary of another company, or
(b) both are 75% subsidiary of a third company