Cyprus Holding Companies

Cyprus is a popular jurisdiction for the incorporation of holding companies. Amongst the attractive facilities it offers are:

A large number of double taxation treaties
EU member
The lowest rate of corporate tax in the EU
No controlled foreign corporation rules for trading companies

The Cyprus holding company

The Cyprus holding company is a company incorporated in Cyprus, by a parent company, for the purpose of holding shares in subsidiaries incorporated in countries in which the Group is engaged in business activities. The Cyprus holding company will receive the dividends paid by those subsidiaries and use them to declare a dividend to the ultimate parent.

Contrary to the position in some other countries the Cyprus holding company may also engage in other activities such as trading, manufacturing or financing.

An international group will be considering a number of factors in deciding where to base its holding company and the four most important are as follows. The tax regime in Cyprus provides the incentives needed. The holding company must be tax resident in Cyprus.

Tax on dividends paid by the subsidiary

If the subsidiary is incorporated in an EU country and, if the EU parent / subsidiary Directive applies, dividends paid to a Cyprus holding company will not suffer deduction for withholding tax in the country from which the dividend is paid.
Where the directive does not apply the dividend may qualify for a reduced or nil rate of withholding tax under one of the Cyprus’ broad network of double taxation treaties.

Corporate tax in Cyprus

Providing the conditions are satisfied a Cyprus holding company will be exempt from tax in Cyprus on dividends received from its subsidiaries. These conditions are:

The Cyprus holding company must own a minimum of 1% of the issued shares in the subsidiary. There is no minimum period during which the shares must be held
More than 50% of the income of the subsidiary must be generated from trading activities
The subsidiary must be subject to tax in the country in which it is resident at a rate which is not less than 50% of the Cyprus rate, i.e. it must pay tax at a rate of at least 5%.

If the relevant income is subject to tax in Cyprus, and not relieved under a double taxation treaty, Cyprus grants unilateral relief in the form of a tax credit.

Treatment of interest received

Interest income received by a Cypriot company and which results from the ordinary activities of the company, will be subject to corporate income tax. Interest which is not so generated will, in addition, be liable to a Special Contribution for Defence of 10%.

Tax on dividends paid

No withholding tax is payable in Cyprus on dividends paid by the holding company to its parent company

Capital gains tax

No capital gains tax is payable in Cyprus on the disposal by the holding company of shares in a subsidiary. In this respect the Cyprus tax regime is more favourable than those in some other jurisdictions which are frequently used for holding companies, such as Denmark, Luxembourg and Switzerland.
There is no income or capital gains tax on the liquidation of a holding company owned by non-residents of Cyprus.

Other attractions of Cyprus as a location for a holding company

A non-EU parent of a Cyprus holding company will receive dividends without deduction for withholding tax. This contrasts with the position in some other EU countries, which have introduced legislation to prevent the benefit of the EU parent/subsidiary directive applying in such circumstances. In these countries the ultimate parent must rely on a double taxation treaty, if any, and this usually produces a less favourable result.
No minimum paid up capital requirement
No thin capitalization rules

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