Cyprus company taxation advantages and other related considerations (Cyprus International company)
Over the past years, Cyprus has been developed into one of the most favorable places for international business. The Cyprus low tax regime combined with Cyprus excellent geographical position, infrastructure and Cyprus ability to offer sophisticated planning structures, the ability to set up and manage Investment Funds (Cyprus Alternative investment funds – AIFs), the enactment of the Cyprus International Trusts Law which provided for the formation and administration of international trusts ,and its excellent infrastructure in banking and telecommunication where some of the key factors for its success.
The accession of Cyprus to the European Union triggered a bold tax reform that aimed towards the alignment of the legislation with EU’s Acquis Communautaire and Code of Conduct of Business Taxation as well as the compliance with the requirements of the Organisation for Economic Co-operation and Development (OECD).
The result of this reform was a sophisticated low tax jurisdiction that rapidly became the jurisdiction of choice for international investors and the premier financial centre for the set-up and operation of Cyprus companies.
Cyprus Company advantages and other related considerations (Cyprus Holding Company):
1) Full exemption from tax on dividend income received from participation. Dividends received by a Cyprus company from overseas participation will be exempt from tax provided that:
Dividends are not considered investment income if they are derived directly or indirectly from trading subsidiaries.
2) No Cyprus withholding tax on distribution of profits by a Cyprus company irrespective of the country of residence of the recipient or the existence of a double tax treaty
No Cyprus withholding tax on dividends to non-residents (individual or body corporate) irrespective of the country of residence or the existence of a double tax treaty.
3) Full exemption from capital gains tax and income tax on the disposal of securities
Full exemption from Cyprus tax on gains from the disposal of securities (shares, debentures, founders’ shares, units of Cyprus funds – open-ended and close-ended collective investment schemes etc) regardless of whether the gain is considered to be of capital or revenue nature.
Therefore, the disposal of shares held in a subsidiary by a Cyprus Company has no Cyprus tax effects.
4) Low tax rate
The Cyprus company tax rate is 12.5%
5) No capital gains or income tax on the liquidation of participation.
The liquidation of participation held by Cyprus Company’s does not give rise to any Cyprus taxes.
6) No capital gains tax or income tax on the disposal of the shares of a Cyprus Company
The disposal of the shares of the Cypriot Company will not result in any Cyprus taxes irrespective of the provisions of a double tax treaty.
7) No capital gains tax or income tax on the redemption of a unit of a Cyprus collective investment scheme (ICIS) (Alternative Investment Funds)(AIFs)
The redemption of a unit of a Cyprus collective investment scheme (ICIS) will not result in any Cyprus taxes irrespective of the provisions of a double tax treaty.
8) No capital gains or income tax upon liquidation of a Cyprus Company
No capital gains-tax, income tax or any other tax arising from the liquidation of a Cyprus Company, owned by non-residents.
9) Reduced withholding tax on dividends received from countries which Cyprus has concluded a double tax treaty
Cyprus double tax treaty network is extensive and expanding with over 50 countries. Cyprus double tax treaty network can be used by the investor to minimize tax burden.
10) Unilateral tax credit
Regardless of whether a tax treaty is present, unilateral tax credit is applied for taxes paid abroad if the income is subject to Cyprus tax. Unilateral tax credit is also applied to low tier subsidiaries of Cyprus a company. Cyprus double tax treaties provisions may be applied if they are more beneficial than the tax credit.
11) EU parent – subsidiary Directive
According to the provisions of the Directive, any payment of dividend from one member state to another is free of withholding tax provided the required conditions are satisfied under the local legislation of the member state.
12) Debt-equity/thin capitalization rules
There are no debt-equity restrictions in Cyprus and a company may therefore be financed in any proportion of debt-to-equity.
13) Minimum holding period
There is no minimum period of holding participation for Cyprus Company in order to be eligible for either the tax exemption on dividend income or the tax exemption on the disposal of shares
14) Interest Income
Interest income of a Cyprus company arising as a result of ordinary activities is taxed like any other “trading” income at Cyprus company tax rate of 12.5%
Other non trading interest is tax at 30%
15) Cyprus related companies’ intra-group financing transactions – Cyprus transfer pricing rules on Cyprus related companies’ intra-group financing transactions)
Cyprus related companies intra-group financing transactions must have adequate interest profit margins and apply the arm’s length principle. There are 2 approaches in calculating interest profit margins on Cyprus related companies’ intra-group financing transactions. 1) Minimum interest rate margin of 2% after tax (pre-tax 2.29%). 2) Any other intra-group financing interest rate margin provided that a transfer pricing analysis is prepared by a transfer pricing expert.
Cyprus management and control and Cyprus economic substance
The Cyprus related companies’ intra-group financing transactions must demonstrate Cyprus substance and that the management and control are exercised in Cyprus. A Cyprus finance company must demonstrate:
16) Cyprus companies’ Notional Interest Deduction (NID) on new equity
Cyprus companies that originally financed by own funds are given notional Interest deduction (NID). The notional Interest deduction (NID) will be granted annually for as long as capital is used in the Company.
Equity. New equity can be introduced either in the form of cash or in kind. Where new equity will be introduced in the form of assets (in kind), the sum of these may not exceed the market value. Assets must be fully documented. Notional interest deduction (NID) will be given on new capital (share capital and share premium to the extent that they have been paid) issued from 1st January 2015.
Interest. Notional interest deduction (NID) will be calculated on the amount of new share capital / share premium the same way as with interest on loans. The rate of notional interest deduction (NID) is defined as the 10 year government bond yield (at December 31 of the year preceding the tax year) of the country in which the new equity is invested, increased by 3% and having as a lower limit the 10 year Cyprus government bond increased by 3%.
Notional interest deduction (NID) is deducted from taxable income but it cannot exceed 80% of taxable income (as defined for tax purposes) before deducting Notional interest deduction (NID).
17) Group loss relief
Offsetting of losses between group companies will be granted only where the surrendering company and the claimant company are part of the same group for the whole of the tax year and interest participation rate between the two companies is more than 75%.
In the case where a subsidiary company is incorporated by its parent company during a specific tax year, the subsidiary company will be considered as being a member of the group for the whole tax year and therefore will be able to claim group relief for that tax year.
Group loss relief is also applied between Cyprus and EU companies.
18) Cyprus VAT considerations
If the Cyprus Holding Company’s activities are strictly the holding of shares in other entities, then it is not considered as a taxable entity as it falls outside the scope of Cyprus VAT legislation and as such it is not obligated to be registered for VAT purposes.
However, if the Cyprus Holding Company is engaged in other activities as well, such as the provision of management and administration services, then it may be able to deduct Cyprus VAT expenses.
19) Cyprus intellectual property regime
80% exemption is granted on Cyprus company’s profits – net income from intellectual property if intellectual property is owned by Cypriot resident company (net of any direct costs). Direct costs will exclude Intellectual Property acquisition costs, interest, immovable property and payables to third parties.
20) Reorganization provisions
Transactions that are defined as “reorganizations”, involving Cyprus companies resident in the Republic and / or not residents of the Republic, are exempt from Cyprus income tax or capital gains tax as well as transfer fees.
21) Cyprus Transfer-in Companies (Transfer of Company’s Seat)
The Cyprus laws provide for re-domiciling a foreign company’s registered office from a country or jurisdiction in the Republic of Cyprus and vice versa. The transfer of a company’s registered office into Cyprus, apply inter alia, if the foreign company is registered in a country which allows re-domiciliation and which company’s Memorandum and Articles of Association provide for the possibility of re-domiciliation.
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Updated: August 2017
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