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Information for Cyprus Expats on the workings of Cyprus Holding Companies
I. Legal Framework and Tax Residency
Limited liability companies in Cyprus are regulated by Cyprus Companies Law (CAP113), which is a virtual copy of the 1948 English Companies Act and which has been fully harmonised with relevant EU legislation as part of the island’s accession to the EU in 2004.
CAP113 does not differentiate between holding companies and companies engaging in other activities.
Furthermore, as of 1 January 2003, Cyprus tax legislation fully complies with the OECD initiative against harmful tax practices.
Tax Residency
A Cyprus tax resident company is subject to tax in Cyprus on its world-wide income, whilst a non-Cyprus tax resident person is subject to tax only on incomes arising in Cyprus (subject to domestic law and or double taxation conventions exemptions). Cyprus tax resident companies are all companies whose management and control is exercised in Cyprus irrespective of their place of registration.
There is no definition of the term «management and control» in the Cyprus tax law nor is there any circular on this issue from the Cyprus tax authority.
The term «management and control» is found in the definition of «resident in the Republic» in section 2 of the Income Tax Law 118(I)/02, as amended. Under this definition, residence, when applied to a company, means a company whose management and control is exercised in the Republic. UK case law in this respect would be of persuasive authority. In practice it may (in simple terms) be taken to mean that management and control is:
(a) where the majority of the directors reside,
(b) where the board meetings of the company are held and
(c) where the general policy of the company is formulated
The co-existence of all three criteria is essential. The place where the meetings of the directors are held, although essential, may not in itself be conclusive sometimes. It is the place where the real management and control of a company are exercised.
A company may claim that its management and control is exercised in Cyprus by declaring so on its tax return and such a declaration would be accepted by the tax authorities without any further examination.
If the residency of a company is disputed by another tax authority (for example where the beneficial owner resides), the issue would be resolved under the procedure envisaged in the bilateral double taxation treaty between the two countries.
II. Taxation of Cyprus-Resident Companies
Introduction. The income tax rate for Cyprus-resident companies is 10%, which is the lowest in the European Union. Additionally, certain types of income may also be subject to Special Defence Contribution (SDC). The income of a holding company would normally fall under three categories:
1.Dividend income
2.Interest income
3.Trading/Capital Gain on disposal of investments
1. Dividend Income
Dividend income is exempt from Income Tax.
Dividends received from a non-Cyprus tax resident company are also exempt from SDC. The exemption does not apply where (1) the dividend paying company engages directly or indirectly more than 50% in activities which lead to investment income and (2) the foreign tax burden on the income of the company paying the dividends is substantially lower than the tax burden of the company in Cyprus (substantially lower means lower than 5%). If one of the conditions applies, the dividend still gets the exemption
Example 1: the dividend is paid by a company whose income is more than 50% investment income but the foreign tax burden is not substantially lower than that of Cyprus (the foreign tax is over 5%). In this example the dividend will be exempt in Cyprus.
Example 2: the dividend is paid from a company whose income is more than 50% trading income and the foreign tax burden is nil. Again the dividend in this example will still be exempt in Cyprus.
Example 3: the dividend is paid from a company whose income is more than 50% investment income and the foreign tax burden is substantially lower than the Cyprus tax. In this example the dividend in Cyprus will be taxable at 15% against which credit relief will be given in respect of any foreign tax.
2. Interest income
A Cypriot-resident holding company receiving interest which is deemed not to be from or closely related to its ordinary business activities is exempt from income tax but is subject to SDC at 10% on the whole amount of the interest received (see table below).
In the case where the interest is considered to have been earned by a company in the ordinary course of business or interest which is closely related to the ordinary activities of the business - for example, a bank or a land developer who commonly sells land or buildings for which the settlement is made by instalments that are carrying interest, or a Cyprus company who borrows from and lends to other Group companies – the interest will be subject to income tax at 10% and will be exempt from SDC.
Financing activities are considered as trading activities and therefore not considered as passive investment. Consequently, interest income from such activities is exempt from SDC and is taxed as a trading income at 10% income tax only.
3. Trading/Capital Gain on Disposal of investments
Any capital or trading gain arising from the disposal of “titles” is exempt from taxation.
The term “titles” has been clarified in a recent tax circular issued in December 2008 to include the following: ordinary shares, founder’s shares, preference shares, options on titles, debentures, bonds, short positions on titles, futures/forwards on titles, swaps on titles, depository receipts on titles i.e. ADRs & GDRs, rights of claim on bonds and debentures, index participations only if they result in titles, repurchase agreements or Repos on titles, participations in companies for Russian OOO & ZAO - the Americans LLC provided that they suffer tax on their profits – the Romanian SA & SRL – the Bulgarians AD & OOD, units in open-end or close-end collective investment schemes which includes investment trusts, investment funds, mutual funds, unit trusts, real estate investment trusts, international collective investment schemes, undertakings for collective investments in transferable securities. It should be noted that any gains arising from the sale of shares of companies owning immovable property that is situated in Cyprus are subject to capital gains tax.
OTHER POINTS TO BE NOTED
Taxation of dividends paid by the holding company to its shareholders Irrespective of the provisions stated in any double tax agreement in force between Cyprus and any other country, there is no withholding tax upon payment of dividends from a Cyprus company to non-Cyprus tax resident shareholders. The nil withholding tax provisions are specifically provided in the local tax legislation
Utilisation of losses Tax losses incurred in any one year which cannot be set off against other profits of the same year, can be carried forward and set off against future profits for an indefinite period of time. This provision applies for all unutilized tax losses for the year 1997 and onwards. It should be noted that when the expenses are associated with income which is not taxable according to the provisions of the legislation, no losses are recognized for tax purposes i.e. expenses associated with the sale of titles.
Tax ruling system The tax authorities may issue binding rulings for specific structure and facts. VAT in relation to holding companies According to the Cyprus VAT legislation, holding companies do not have taxable supplies and therefore have neither obligation nor entitlement to apply even for a voluntary registration. This means that any VAT suffered on their expenses in Cyprus or abroad cannot be recovered.
Company registration fees There is a fixed fee of €102,52 plus 0.6% on the amount of the authorized share capital. Subsequent increases of the authorized share capital are subject to a capital duty of 0.6%. Shares may also be issued above their nominal value in which case the authorized share capital does not need to be increased.
© George Karavis Grant Thornton Cyprus website
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