The location of a holding company is an important consideration in any international structure where there is a desire to minimize the tax charged on income and gains. One thing is certain – there is not just one optimal holding company jurisdiction to suit all investors or investment profiles. A multitude of tax and non-tax factors are taken into account by investors before they finally decide on a holding company jurisdiction.
It still remains, however, that The Netherlands, Luxembourg and other classic holding company jurisdictions now face a new outstanding competitor. 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. However, sometimes best results can be achieved by combining Cyprus with other jurisdictions such as The Netherlands and Luxembourg rather than by substitution.
Leading tax experts, notably among which also the late Prof. Dr Gassner (Tax Chair of the University of Vienna and Chairman of the International Fiscal Association), have stated that 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 (“opcos”) & non-operating group companies.
- Accumulation of capital and shareholder value.
- Consolidation of business segments (incl. consolidated IFRS financial statements).
- Asset protection / mitigation of risks.
- Receiving dividends from operating companies (“opcos”).
- Distribution of profits to shareholders.
- Reinvestment of capital into new projects.
–For illustration purposes, the company should ideally be resident in a jurisdiction which:–
-(only some of the main tax related criteria are listed – not an exhaustive list)-
- Enables the extraction of foreign sourced dividends at mitigated or preferably zero rates of foreign withholding tax – In choosing a holding company jurisdiction, one needs to take into account the benefits of a particular country’s Double Tax Conventions (Treaties) in order to reduce the incidence of foreign withholding tax. High tax jurisdictions generally do not enter into Double Tax Conventions with offshore jurisdictions. For this reason, if offshore (non-Cyprus) Companies are used to own shares in high tax jurisdictions, it is likely to increase the burden of tax, via the imposition of high withholding taxes, rather than reduce it.
- 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 needs 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–
Apart from the generic features of the tax system (see Why Cyprus?), the DTT Network and the adoption of EU Directives, other tax system’s important features beneficial to Cyprus Holding Companies are the following:
- Participation Exemption:
- Foreign dividends are tax-exempt (This exemption does not apply if: more than 50% of the paying company’s activities result directly or indirectly in investment income AND the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6,25% on the profit distributed.). However the exemption does not apply and the dividend is taxed as other income at 12.5% if the dividend is treated as a tax deductible expense in calculating the tax liability of the paying company.
- 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 owning Real Estate situated in Cyprus – only to the extent that the gain relates to the particular Cyprus Real Estate). Also, profits from a Permanent Establishment (PE) outside Cyprus are tax-exempt and its losses can be set-off against Cyprus Income (this exemption also does not apply if the PE carries on more than 50% of investment activities – passive income – AND the overseas tax burden is significantly lower than the Cyprus tax burden). This exemption (PE) in conjunction with the use of some of Cyprus’ DTTs can result in PE profits avoiding tax altogether.
- Low or no withholding taxes on outgoing dividends, interest and royalties (no withholding tax on dividends and interest irrespective of the country or residence of the recipient (even offshore jurisdictions) or the existence of a Double Tax Treaty; no withholding tax on royalty payments for use of the rights outside Cyprus, 10% if the rights will be used in Cyprus (subject to DTT & EU Directives) and 5% on films (subject to DTT & EU Directives).
- We note here that, 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 participations 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 are set off against the profits of the next five years.
- Losses, subject to conditions, can be surrendered as group relief to other Cyprus tax resident companies of the same group.
- As from 01 January 2015, a Cyprus tax resident company may also claim the tax losses of a group company which is tax resident in another EU country, provided such EU Company firstly exhausts all possibilities available to utilize its losses in its country of residence or in the country of any intermediary EU holding company.
- Mergers, takeovers and other re-organizations 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. For dividends received from EU member states, the underlying tax credit is also available.
- No thin capitalization rules.
- Limited anti-avoidance provisions.
- Interest deduction for borrowing costs is provided.
- Absence of strict CFC Legislation.
- Attractive Permanent Establishment (PE) rules and generous PE provisions available in the DTT Network.
- Real Physical and Economic substance needs to be added in a Holding Company in order to obtain tax residency certificate by the Cyprus Tax Authorities and to meet the Active Conduct of Business test and be entitled to Treaty benefits.
- No obligation for the Holding Company (or right) for VAT registration & compliance.
- Low duties – taxes on the establishment of companies.
- Absence of “strict” transfer pricing rules, other than a provision in the Income Tax Law which requires transactions between ‘related parties’ to be in accordance with the ‘arm’s length principle’.
- Possibility to obtain Advance Tax Rulings.
- Low expense level for professional / financial fees.
In conclusion, the Cyprus Tax System Enables:
(a) the extraction of foreign sourced dividends at mitigated or zero rates of foreign withholding tax (owing to the use of the Parent Subsidiary Directive or the Use of Double Tax Treaties if the Directive is not applicable).
(b) the receipt of foreign dividends at zero rates of corporation tax or special defense contribution (local withholding tax) or any other local taxes (subject to conditions – anti avoidance provisions that are easy to satisfy), i.e. “an EU Holding Company with no domestic tax leakage on holding activities”.
(c) the distribution of available profits to non-resident shareholders at zero rates of dividend withholding tax, irrespective of jurisdiction or the absence of a DTT (even to offshore jurisdictions), and
(d) allows for the realization of capital gains from the disposal of shares in foreign companies at zero rates of corporation and capital gains tax on the gains”, irrespective of holding period and shareholder percentage and no capital gains tax on the liquidation of the holding company itself.
However, in such structures where the holding company is established in a low tax jurisdiction like Cyprus and the subsidiaries are in high tax countries then substance has become a crucial consideration. Many countries given the OECD BEPS project have already incorporated anti abuse provisions in their domestic tax legislation and others will follow in order to counter the use of purely tax driven conduit companies and the phenomenon of treaty shopping. The OECD has also developed a multilateral instrument that all countries participating in the BEPS project can use, to amend their existing double taxation agreements to avoid again treaty shopping and the use of conduit companies with main purposes of avoiding withholding tax on dividend payments.
So in our experience and in accordance with the above, a holding company should have separate, genuine offices and employ separate staff and directors that have the knowledge and expertise of the company’s activities and actually take part in the decision making process of the company.
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Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request (contact us). However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors.
Note: Our Directors are continuously traveling to a number of countries meeting existing and potential clients and associates.
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