Christos Mavrellis on the extra advantages a Cyprus holding company has over its competitors.
The term ‘Cyprus holding company’ has been in use in tax consultancy circles worldwide since the introduction of Cyprus’s current tax regime in 2002, ahead of its accession to the European Union (EU) when the country aligned its laws with those of the Acquis Communautaire.
Usually, the term ‘holding company’, when used in legal documents, denotes a company that controls either through the holding of the majority of voting rights, or the right to nominate the majority of the board of directors of another company.
However, in Cyprus tax legislation, when referring to the tax treatment of the dividends received by a Cyprus company the term holding company has a wider meaning. Subject to certain conditions, it is extended to cover not only dividends received by a Cyprus holding company from a subsidiary, but from any shareholding in a foreign company which represents more than one per cent of the issued share capital of that foreign company, subject to the criteria laid out below.
Effectively, if a Cyprus company or a foreign company which is managed and controlled in Cyprus and is thus a tax resident of Cyprus receives any dividends from another company, such dividend is free from income tax and it is also free from any withholding tax on dividends, which in Cyprus is known as special defence contribution. If that other company is a foreign company it may also be free from Cyprus income tax and special defence contribution under certain conditions.
In this short article we shall not analyse the tax treatment of dividends payable by a Cyprus-tax resident company to another Cyprus-tax resident company or to their ultimate shareholders who are Cyprus tax residents, but instead shall focus on the tax treatment of royalties received by a Cyprus holding company from foreign companies or corporations. We will also look at the tax treatment of any dividends which a Cyprus holding company pays over to its non-resident shareholders, individuals or corporations.
If a Cyprus holding company holds any number of shares in the capital of a foreign company and receives any dividend from it, this dividend will not be subject to any income tax or special defence contribution in Cyprus provided that either:
Of importance is the reference to direct or indirect income from passive investment. This means that the important criterion is not the character of the income received by the foreign company, which may in most cases be a dividend, but the original source of the income from subsidiaries or participations down the line, which in almost all cases, with minor exceptions, is active income.
By application of the above provision the dividends which do not qualify for the exemption are effectively dividends from minor participation or from substantial participation in huge listed companies abroad where the holding is under one per cent.
Even in such cases, however, by application of the relevant treaties, exemptions may be applicable, again resulting in no tax or special defence contribution in Cyprus.
The one per cent minimum holding in a foreign company which was a requirement for the participation exemption to apply has been abolished in an effort to further promote Cyprus as a centre for the structuring and administration of mutual funds and other collective investment vehicles.
It is also very important to note that the application of double tax treaties may lead to low or even no withholding tax on dividends in the foreign country despite the fact that there will likewise be no tax in Cyprus on such dividends, as explained above.
Even in cases where no treaty exists, Cyprus unilaterally grants credit for any tax on dividends paid abroad and such credit extends to and takes into account the tax paid by the foreign company on the relevant income out of which the dividend is paid.
When a Cyprus holding company owned by shareholders who are not tax residents of Cyprus declares a dividend, such dividend can be paid to these non-resident shareholders without any withholding or other tax or special defence contribution in Cyprus. When investors who are not tax residents of Cyprus (whether or not they are companies/corporations in countries which are European Economic Union members) acquire shares in a Cyprus company, which in turn acquires shares in foreign companies or corporations, they may ultimately receive dividends via the Cyprus holding company and obtain the benefits of the Cyprus double tax treaties. The Cyprus double tax treaty network is quite extensive, covering over 40 countries in various parts of the world.
It is also important to point out that a Cyprus holding company is not a special corporate entity from either a corporate law or tax law perspective, but is just an ordinary company and could engage in other activities as well, including trading and whatever else a company may do. The tax treatment of dividends as explained above is not related to the company itself but to the nature of the particular income.
Cyprus holding companies can also be used as vehicles to raise funds through listing at international stock exchanges or alternative markets and quite a number of them have been successfully used in this direction.
Recently, Cyprus Companies Law has been amended to remove certain burdensome requirements for translation of prospectuses into Greek, which can now be accepted in other languages, and also to release public companies from the requirement to file a prospectus under certain conditions in line with the EU Prospectus Directive.
Other income of a Cyprus holding company not falling within the definition of dividend from the worldwide operations of a company which is a tax resident of Cyprus is subject to corporation tax at the rate of 10 per cent, which is the lowest corporation tax in the EU.
Double tax treaties also apply with respect to such other income. In addition, unilateral relief is granted on any tax that would be payable in Cyprus on income on which tax has been paid abroad, whether there is a treaty or not.
The dividends which the Cyprus company may pay to its non-resident shareholders from any such other income are also tax-exempt in Cyprus, in the same manner as any dividends emanating from dividend income.
Judging by the information provided above, it is not had to see why the Cyprus holding company, and Cyprus companies in general, are regarded as the best vehicles for investment and operations in various countries. Cyprus is considered a gateway for investments by EU investors in other EU or non-EU countries, as well as for investment by non-EU investors into EU countries.
A favourable tax regime, coupled with the well-established legal system of Cyprus which is based on common law, and the high standards of professional services have led to the success of Cyprus as an international financial centre. Recently, Cyprus companies have been listed in international stock exchanges, such as the London Stock Exchange, the Alternative Investment Market, the Frankfurt Stock Exchange and Oslo, a sure sign that international recognition of this friendly jurisdiction is on the rise.
Christos Mavrellis, Chrysses Demetriades & Co. LLC, Cyprus