The setting up of holding companies within the most appropriate structures becomes nowadays an important consideration for all investors who wish to maximize their after tax return on investments. The global markets are becoming more demanding and the need for choosing the best structures that provide to investors the most tax effective means of consolidating their ownership in different enterprises becomes more imperative. Consequently, the location of holding companies represents an important consideration in any international structure and the investors should consider a number of factors before they finally decide on each holding company jurisdiction in order to achieve optimization of their profits.
The Cyprus holding company regime represents one of the most attractive regimes in the European Union as it provides a number of features to investors for achieving their goals.
The most important features of the Cyprus holding company regime are summarized as follows:
- Tax exemption of dividends received from abroad
Foreign dividends received by a Cyprus company are tax-exempted provided that no more than 50% of the paying company’s activities result directly or indirectly in investment income and the foreign tax burden is not significantly lower than the Cyprus tax burden.
- Tax exemption on disposal of securities
Profits arising from the disposal of securities are tax exempted from any tax in Cyprus provided that securities refer to the list of titles as these are included in the Inland Revenue’s relevant tax circular. Such titles include shares, bonds, debentures, options on titles, swaps on titles etc.
- No withholding tax on dividends paid to non-resident shareholders
Dividends paid by a Cyprus company to its non – resident shareholders are not subject to any withholding tax irrespective of their country of residence.
- Tax credit for foreign tax paid abroad
Tax credit is granted for any income received by a Cyprus company for which tax was suffered abroad provided that such an income is taxable under the Cyprus Tax Law. The tax credit is also provided irrespective of the absence of a Double Tax Treaty. It is noted that credit in respect of tax paid abroad cannot exceed the amount of tax payable in Cyprus in respect of the same source of income.
- Tax losses
Tax losses can be carried forward for setting off with future profits for a maximum period of five years whereas they can also be used for group relief provided that there is at least 75% holding either directly or indirectly.
- No thin capitalization rules.
However, there are certain indirect rules regarding the tax allowance relating to interest expenses associates with the acquisition of certain assets.
- Tax exemption of capital gains arising from the disposal of immovable property held outside Cyprus.
The same applies for any disposal of shares in companies holding immovable property abroad.
- Tax treaties with other countries
Cyprus has a comprehensive network of double tax treaties with more than forty countries whereas a significant number of such treaties are currently under negotiation with other countries thus providing to Cyprus companies an advantageous tax system for avoidance of double taxation.
- Tax free liquidation
No capital gains tax or income tax is payable upon liquidation of the Cyprus holding company itself.
It is obvious from the above, that Cyprus holding companies provide an effective tax vehicle for investors as they provide a favorable package for maximization of return as well as for providing an effective solution for the exit route of repatriation of profits. Setting up a holding jurisdiction is not always tax driven, but also is affected by other factors such as the stability of the business environment, the strategic location and facilities offered by the business system, the excellence and efficiency of the professional services offered as well as the compliance with the European Law and Directives. The Cyprus holding regime comprises all of the above factors thus making Cyprus an attractive jurisdiction for existing and potential investors.