It is well known that a Cyprus holding company has many tax advantages which are so great that they make it the absolute tool for international tax planning and optimization. Cyprus is a full member of the European Union and a member of the Eurozone therefore Cyprus is fully compliant with the EU Directives. Strategically positioned to connect Europe to Africa, the Middle East and Asia, Cyprus is a natural hub for business and trade. It is in full compliance with the code of Conduct for Business Taxation and against harmful tax competition. Cyprus proudly features on the White list of OECD and has legally committed to the highest standards of transparency which is an essential criterion for successful businesses in today’s world.
Cyprus provides a unique combination of favourable participation exemption provisions on income emanating from international activities, applies a wide network of double tax treaties and zero withholding taxes on any type of payments made anywhere in the world.
Tax Benefits Of Holding Company:
Dividends received from Cyprus:
A Cyprus tax resident company is exempt from tax when receiving dividends from another Cyprus tax resident company.
Dividends received from abroad:
Dividend income received from abroad is exempt from corporation income tax provided it is not allowed as a tax deduction in the jurisdiction of the foreign paying company.
Dividends received from abroad are also exempt from Special Defence Contribution (SDC) unless the dividends falls under the non-exemption rule.
If the below two rules are met, then SDC apply:
(1) The company paying the dividends has 50% investing activities (direct or indirect) and
(2) The tax burden on the foreign company income is significantly lower than the Cyprus corporate rate, ie 6.5%, less than 50% of 12.5%
If the two above rules met, then dividends received from abroad are taxed at the SDC level at rate of 17%.
Trading in securities:
Any income arising from trading in “securities” is completely exempt from tax. The term securities includes but is not limited to: ordinary and preference shares, debenture, bonds, founder shares, options on titles or other securities of companies or other legal entities in Cyprus
Dividends or interest paid by Cyprus resident company to non-resident shareholders, corporate or individuals, are not subject to any withholding tax.
Notional Interest Deduction:
Based on the tax law effective as from 01/01/2015, a Cyprus tax resident company and Cyprus permanent establishments are entitled to a Notional interest Deduction – NID, on the introduction of new capital in the company used for the production of taxable income.
In general terms, the NID is equal to new equity (paid up share capital or share premium) multiplied by the applicable reference rate (10-year government bond) of the country where the funds are employed plus a 3% ,subject to a minimum rate, equal to the yield of the 10-year Cyprus government bond plus a 3% premium
The NID is deductible against the company’s taxable profits that arise as a result of new equity and cannot exceed 80% of the taxable profits as calculate before allowing for this deduction.
Capital gains tax:
Capital gains are not included in the ordinary trading profits of a business but are taxed separately under the “Capital Gains Tax Law”.
Capital gains that arise from the disposal of immovable property situated in Cyprus are subject of flat rate of 20% after allowing for indexation.
Capital gains that arise from the disposal of immovable property held outside Cyprus or shares in companies which may have as underlying assets immovable property situated outside Cyprus are exempt from capital gains tax.
In addition, as from 17 December 2015, capital gains tax also applies to shares in companies that own Cypriot immovable property indirectly, at least 50% of the market value of the said shares derive from such immovable property are subject to Capital Gains Tax.
The sale of participations and shares or the liquidation for a Cyprus holding company is not subject to exit taxes for non-residents provided that the company does not hold immovable property in Cyprus. The disposal of the immovable property will be subject to capital gains tax.
Group relief is allowed for at least 75% of group holdings and is applicable only on current year’s results assuming claimants are Cyprus tax resident companies and members of the same group for the whole tax year. (Subject to conditions)
The Cyprus Tax Law allows for a qualifying company reorganization to be effected tax free at the Cyprus level. These reorganization provisions fully comply with the relevant EU Mergers Directive.
Double Tax Treaties:
Companies registered in Cyprus benefit from the double taxation avoidance treaties that have been established between Cyprus and around 60 other countries. There are double tax treaties in effect with multiple European countries (in and outside the EU) and a number of Middle Eastern countries and the treaties follow the OECD model. As a result, foreign investors do not have to pay additional tax in their home country (Appendix A)
Corporate Tax Rate:
A holding resident company in Cyprus is liable to tax on all worldwide income at a rate of 12,5%, one of the lowest corporate income tax rates in Europe.
A company is considered to be tax resident in Cyprus if the management and control function is exercised in Cyprus.
WHT on outbound payments from Cyprus
|Recipient||Dividends (1) WHT (%)||Interest (1) WHT (%)||Royalties rights not used within Cyprus WHT (%)||Royalties rights used within Cyprus WHT (%)|
|Bosnia (7)||0||0||0||5/10 (5)|
|Canada||0||0||0||0/5/10 (4, 5)|
|Czech Republic||0||0||0||0/10 (11)|
|San Marino (14)||0||0||0||0|
|Saudi Arabia (15)||0||0||0||5/8 (16)|
|Serbia (7)||0||0||0||5/10 (5)|
|Slovak Republic (9)||0||0||0||0/5 (10)|
|Ukraine (17)||0||0||0||5/10 (8)|
|United Arab Emirates||0||0||0||0|
|United Kingdom (13)||0||0||0||0|
- Under Cyprus legislation, there is no WHT on dividends and interest paid to non-residents of Cyprus. Further, there is also no WHT on royalties paid to non-residents of Cyprus for rights not used within Cyprus.
- Royalties earned on rights used within Cyprus are subject to WHT of 10% (except royalties relating to cinematographic films, where the WHT rate is 5%).
- A WHT rate of 5% is applicable on cinematographic films, including films and videotape for television.
- 0% on literary, dramatic, musical, or artistic work (excluding motion picture films and works on film or videotape for use in connection with television).
- The WHT rate of 5% is applicable on cinematographic film royalties.
- 5% WHT applies for any copyright of literary, dramatic, musical, artistic, or scientific work.
- Bosnia, Montenegro, and Serbia apply the Yugoslavia/Cyprus treaty.
- A 5% WHT rate will be levied on payment of royalties in respect of any copyright of scientific work, any patent, trademark, secret formula, process, or information concerning industrial, commercial, or scientific experience and cinematographic films.
- The Cyprus-Czechoslovakia treaty applies with the Slovak Republic.
- 5% WHT rate applies for patents, trademarks, designs or models, plans, secret formulas, or processes, or any industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience.
- 10% WHT rate applies for patent, trademark, design, or model, plan, secret formula or process, computer software or industrial, commercial, or scientific equipment, or for information concerning industrial commercial, or scientific experience.
- 0% WHT rate applies if the payer is a company that is a resident in Cyprus and the beneficial owner of the income is a company (other than partnership) that is a resident in Latvia. 5% WHT rate applies for all other cases.
- The treaty is effective as of 1 January 2019 for Cyprus.
- The treaty/amendments to the treaty is/are effective as of 1 January 2019.
- The treaty is effective as of 1 January 2020.
- 5% WHT rate applies in the cases of royalty payments for the use of, or the right to use, industrial, commercial, or scientific equipment. 8% WHT rate applies for all other cases.
- New protocol to the DTT with Ukraine is effective as from 1 January 2020