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22.10.2014 CYPRUS HOLDING COMPANIES


Despite the difficulties Cyprus faced in 2013 with the economic recession and stabilisation program, Cyprus remains a dependable global business and financial hub, keeping on offering access to an ideal tax system, a widespread network of tax treaties and a transparent lawful framework. We might likewise want to highlight that the greater part of the Cyprus legislation do not impact international business and non-resident shareholders of Cypriot Companies.

With the worldwide monetary downturn investors are seeking for cost effective structures and viable tax solutions. There are numerous countries to consider however, Cyprus is still considered a standout amongst the most appealing jurisdictions. Cyprus’ financial system offers a range of exceptionally beneficial tax advantages, as we will elaborate more herein below.

The low tax rate along with a convenient time zone area and an experienced legal, banking and accounting structure, places Cyprus amongst the most preferred jurisdictions for international tax planners.

The legislative system of Cyprus offers the accompanying profits:

The introduction of the notion of tax resident and non-resident businesses;

Worldwide income tax imposed on tax residents and on non-residents who receive income from Cyprus;

A fixed corporate tax rate of 12.5%;

Tax is not imposed on profits earned from trading and transfer of securities;

Exemption from withholding tax on payment of Dividends, Interest and Royalties;

Group re-organisations are tax exempt;

Tax-relief is imposed on organisations who have experienced losses;

Foreign tax are offered tax credits;

Eighty per cent (80%) of the revenue from intellectual property rights deemed as expense thus effectively tax is payable on the remaining 20% less other expenses.

Full implementation of the European Union parent-subsidiary directive, the European Union mergers edict, the European Union ordinance on communal assistance and collaboration and the European Union royalty and interest instruction.

Income tax is forced on the overall salary of all Cyprus inhabitants, both individuals and companies or organisations. Non-occupant individuals are only taxed on income received from Cyprus. A company is regarded as a tax resident when its administration or management is run and practiced in Cyprus. Despite the fact that there is no solid definition, it is proposed that ‘effective management control’ is available in the situation where most of the executives and directors are in fact inhabitants of Cyprus or in the situation where the board of directors’ meetings are held in Cyprus.

A standardized corporate tax rate of 12.5% is imposed on the taxable profits of tax-resident corporations in Cyprus as defined by the Income Tax legislation. According to the Tax Income legislation profits derived from businesses, interest received through the standard course of business, rent obtained from properties; royalties and any consideration for the trading of goodwill are used to calculate the Income Tax of tax-resident corporations in Cyprus.

Tax Treatment of Dividend Distribution

Briefly speaking withholding tax is not imposed on the dividends paid by a resident company to another resident company. However, 17% withholding tax is imposed on the dividends paid by a resident company to an individual. Finally, non-resident companies or individuals that receive dividends by a resident company are exempted from any withholding tax.

In a few words, withholding tax of any form is not imposed on dividends received by non-resident companies from resident companies. This regulation applies to all, regardless of the double tax treaty agreement with Cyprus or the non-resident shareholder’s origin.

Tax Treatment of Dividend Income in Cyprus

Under Cyprus legislation, any profits deriving from dividends is absolved from taxation, paying little mind whether the profits were obtained from an alternate tax-resident company or from a non-resident company. Likewise, the profits of a resident company which were obtained directly or indirectly from a non-resident company, located outside the country, are exempted from the Special Defence Contribution and Income Tax.

The exemption is not applicable if:

More than half (50%) of the activities of the paying corporation are used for investment income purposes, and

Thetax rate of the paying corporation is much*lower than the Cyprus corporate rate.

*when the tax rate is 50% of the Cyprus tax rate, 6.25%.

It must be mentioned that both situations outlined above must be present so as not to be exempted from taxation.

According to the European Union parent-subsidiary edict, a dividend paid by an EU subsidiary can be received by the Cyprus holding organization without preserving tax. However, a double treaty is applicable in the occasion the EU parent-subsidiary directives are not up held and thus are not met. All non-European Union subsidiary companies which are based in countries that have a double tax treaty agreement with Cyprus will be subject to the requirements of the double tax treaty.

In any case, even though the tax legislation differentiates between treaty and non-treaty countries, where withholding tax is abstracted from the dividend profits received from a Cyprus subsidiary, the Cypriot tax authorities offer a tax credit equivalent to the amount of non-residential withholding tax. Thus, in the majority of situations, due to the implementation of the foreign withholding tax on dividends paid to a Cyprus Holding company, the tax amount is reduced to zero.

Tax Treatment of Disposal of Subsidiary

Income tax is not imposed on profits originating from the disposal or trading of securities. These securities include government bonds, debentures, shares, founder shares or other forms of shares of legal entities whether in Cyprus or other countries. International Collective Investment Schemes (ICIS) have rapidly developed and succeeded due to the exemption from capital and profits received from trading securities in Cyprus. Simply put, an ICIS in the country has the ability to trade in securities in any stock market without being subjected to any tax on the profits received.

Taxation Aspects of Group Reorganisation

The income tax legislation in Cyprus includes the requirements of the European Union Directive and offers the benefits of tax-neutral organisations to both European Union residents and non-European Union residents. In addition, the benefits of this tax are offered to both foreign and domestic transactions and include the capital gains tax, stamp duty and VAT.

Under the reorganisation legislation, assets and liabilities do not increase tax liability regarding the profits of the transferring company, which also comprise of supplies and raw materials or reserves transferred under a reorganisation. Further, the collective losses of a company which is reorganising may also be reallocated and transported to the new company. In the occasion that the new company has a holding in the transferring company, the new company is not subject to any tax liability on the profits accumulated as a consequence of cancelling the holding. The new prearranged shares, that were transferred or exchanged due to the reorganisation, remain at the same value due to the fact that reorganisation and share exchange are not subject to taxation.

Briefly speaking, the requirements of tax legislation in Cyprus concerning tax-neutral reorganisations are more beneficial in comparison to the requirements imposed by the EU merger directive. Thus, controlled groups in Cyprus can be reorganised and restructured efficiently without being imposed any taxes.

Group Loss Relief Provisions

A business that suffers losses has the chance to transfer these losses forward for the following five years to counterbalance the profit it will generate in the future. This tax legislation is known as Group Relief and is only applied to tax-resident companies on the island of Cyprus. Losses of one company in the group can be set-off against the profits of another company if the companies are tax resident in Cyprus and if they belong to the same group for the whole year appraisal. Group relief applies when the holding company owns at least 75% of the share capital of the subsidiary or among companies which belong to the same group for the whole year with 75% each directly or indirect in the other company. Losses brought forward will not be available for group relief, only the current year losses can be transferred.

Taxation Treatment of Group Transactions

Cyprus companies are not subject to dainty capitalisation regulations placing any capital restrictions. Cyprus organisations or companies can be funded by loans from its owner, and any interest required to be paid to its lender is fully deducted for tax purposes, provided it meets all the requirements set by the loan agreement.

According to the Income Tax legislation, all interest income placed on deposits is fully exempted from the income tax. Nevertheless, 30% of Special Defence Contribution is imposed for any interest income on deposits, either credited or received by tax-resident companies or individuals.

Furthermore, any interest income collected from every day course of business, including interest linked to the common trading actions of a business, is incorporated when calculating the taxable profits of a tax-resident company in Cyprus. Nevertheless, the Special Defence Contribution is excluded from this type of interest. This implies that the tax rate on interest received in the normal course of business is 12.5%.

One of the most beneficial features of tax legislation in Cyprus is the Cyprus Royalty Company Scheme. This is because an intellectual property owning company can benefit from 80% tax relief on its net profits from royalty receipts, thus decreasing the tax rate to 2.5% and less. Furthermore, royalty premiums used outside the island for the intellectual property owning company, are not imposed any withholding tax.

Conclusion: Tax Strategies Increase Returns

As a result of increasing worldwide competition, organizations and companies face difficulties in managing and maintaining the growth rate required by its stakeholders. In this way, worldwide international tax planning is one of the most efficient plans implemented so as to increase the after tax profits and consequently the shareholders’ profits. Cyprus is a low tax country where international business individuals, multinational companies and tax advisors prefer to set up and carry out their business ventures and investments.

The Cyprus holding company is amongst the most beneficial tax efficient holding companies, and offers a plethora of benefits not offered by other holding company jurisdictions.

If you need professional advice and assistance, please contact us at solutions@oxfordcy.com and we will be happy to assist.


Sourxe:  http://oxfordglobalservices.com/