The Cyprus Holding Company
Cyprus is a member of the EU and the Eurozone, and consistently aligns its legislation with the acquis communautaire. It is well-established as a reputable international business and financial centre, particularly considering its investor-friendly environment, compliance with OECD standards and transparency, and geostrategic location as a gateway between the crossroads of Europe, Africa, Asia and the East. It has highly-skilled and multilingual legal, financial and administration professionals, and remains an attractive and competitive holding company jurisdiction.
Of course, deciding on a suitable location to incorporate a holding company can be difficult and require consideration of several relevant matters. The Cyprus holding company however is often a preferred vehicle of choice for managing investments of high-calibre, worldwide clients. The Cyprus holding company is favoured by many for numerous reasons. For instance, it can be incorporated and maintained at very low cost and overhead expenses, and benefits from one of the lowest corporate income tax (“CIT”) in the EU at 12.5%. Moreover, the Cyprus holding company can be redomiciled at any time out of Cyprus, provided that the third country permits so as well. Although there are no restrictions on its legal form, the most popular business vehicle used in Cyprus is in the form of a Cyprus private company limited by shares (“CyCo”).
There is no minimum share capital for a CyCo, however it is usually at least EUR 1,000. Nonetheless, it is prudent if the share capital of the CyCo reflects its actual business. It can have between 1 to 50 shareholders, including nominees, who may be either natural or legal persons of any nationality or residency.
Registration fees are payable to the Cyprus Registrar of companies (“Registrar”) upon incorporation of a CyCo, upon every further increase of registered nominal/authorized capital and upon every further issue of shares. There is no cap on the amount payable for registration fees.
Any capital contribution, for instance, share premium contributions, into a Cypriot company will not be subject to the levy of registration fees. Such contributions can be made through the issue of one or more shares with nominal value and share premium, subject to payment of minor registration fees only. Such contributions are common practice to reduce the amount of registration fees payable and are not considered to be abusive, even in cases of disproportionate share premium contributions.
For confidentiality purposes, it may be possible to use nominee or fiduciary arrangements. For instance, the shares may be held by a nominee (individual or company) as legal / registered owner in trust for the beneficial owner (“BO”) – i.e. without public disclosure of the UBO’s identity. The identity of the legal owner is recorded in the public registers of the Registrar. However, information regarding the BO is disclosed upon opening a bank account whereby the bank in complying with the applicable AML laws, rules and regulations requires all relevant information of the BO to establish the Client Due Diligence information regarding the BO. Nonetheless, in accordance with the applicable banking laws such information shall be maintained by the bank in strict confidence, subject to any obligatory exchange of information i.e. if required by law or if ordered by a Court. Pursuant to AML legislation and once agreed at EU level, additional changes are required including the creation and development of ultimate beneficial owner registers in Cyprus. Therefore, Cyprus companies may (in the future) need to declare ultimate beneficial owners in registers, in addition to shareholders. Whilst Cyprus is expected to implement and comply with EU requirements, it is not expected to introduce a central register in early course or before the mandatory requirement arises.
A CyCo must have at least one director and, in order for it to be tax resident in Cyprus to enjoy its benefits, must have its management and control function in Cyprus. Its registered office address must also be in Cyprus.
The CyCo must have a secretary which could be a natural or legal person residing in Cyprus.
Further the CyCo must maintain bookkeeping and an auditor licenced in Cyprus must prepare its audited financial statements in accordance with IFRS.
Furthermore, a CyCo is subject to an annual levy of EUR350 payable at the Registrar.
In addition to holding subsidiaries for international tax planning purposes, the Cyprus holding company can in parallel undertake commercial activities. Only certain financial activities including, but not limited to, investment services in relation to financial instruments, may require authorization from the Cyprus Securities & Exchange Commission, unless an exemption can be provided.
As regards the Cyprus tax regime, please note as follows:-
- Extensive network of intergovernmental Double Tax Treaties (“DTT”) with more than 60 countries, and in negotiation with other countries.
- As already mentioned, the CIT rate is 12.5% on taxable income accruing to Cyprus corporate taxpayers after considering certain exemptions.
- Dividends received by CyCo are exempt from CIT, unless dividends are deductible for the purposes of determining the foreign tax on the income of the company paying the dividend. If the dividend exemption is not available, it should be subject to CIT at the rate of 12.5% and the dividend should not be subject to the Special Contribution for the Defence Fund of Cyprus (“Defence Tax”).
- Dividends received from a non-CyCo are exempt from Defence Tax, subject to certain conditions. If the applicable conditions are not met, Defence Tax is levied at a rate of 17% on the gross amount of dividends received.
- Capital gains realised upon the sale of securities are exempt from CIT in Cyprus. Any losses resulting from the sale of securities are not tax deductible. Capital Gains Tax (“CGT”) is levied at a rate of 20% only with respect to gains realised from the disposal of:
- Immovable property situated in Cyprus; or
- Shares in companies whose property consists of, inter alia, immovable property situated in Cyprus; or
- Shares of companies which either directly or indirectly participate in a company or companies which own immovable property situated in Cyprus and at least 50% of the market value of such shares is derived from the relevant immovable property.
- Interest income recognized on an accrual basis by a CyCo is subject to CIT at 12.5% if such income is considered to be generated in the “ordinary carrying on of a business” or is “considered closely connected thereto”. All other interest income which is not considered to arise in the “ordinary carrying on of a business” or “closely connected thereto” will be subject to Defence Tax at a rate of 30% and will be exempt from CIT in Cyprus.
Interest expense incurred in connection with the acquisition (directly or indirectly) of shares in a 100% owned subsidiary company which is made on or after 1 January 2012 (irrespective of the tax residency status of the subsidiary) will be deductible for Cypriot tax purposes. This would apply provided that the assets of the subsidiary do not include assets not used in the business. However, in case the subsidiary possesses such assets, the restriction on interest at the level of the holding company is limited only to the amount corresponding to these assets.
- Foreign tax paid or withheld on profits and gains of a CyCo can be credited against Cypriot tax payable (either unilaterally under domestic law or bilaterally under a tax treaty). Such tax relief cannot exceed the Cypriot tax payable on the same income or gain in the same tax year. Any excess foreign tax credits not utilised cannot be set off against other sources of income and cannot be carried forward.
- An entity should be entitled to claim a Notional Interest Deduction (“NID”) on corporate equity for every new equity that would be introduced into the business and since such equity does not relate to existing capital or profits derived before 1 January 2015. The NID will equal the multiple of “reference interest rate” in which the ‘’new equity’’ will be invested and used by a CyCo in the carrying on of its business activities.
NID granted on new equity cannot exceed 80% of the taxable profit before allowing the NID.
- Cyprus is required to adopt the EU Anti-Tax Avoidance Directive (“ATAD”) by 1 January 2019. ATAD combats abusive tax practices in the field of corporate taxation and contains rules aimed at addressing some of the practices most commonly used by large companies to reduce their tax liability.
- Cyprus does not levy any withholding taxes on payments of dividends and interest to non-Cyprus tax residents or to Cypriot tax resident individuals who are not domiciled for tax purposes in Cyprus.
There is a 17% withholding tax on dividend payments made to an individual who is considered to be both a resident and domiciled for tax purposes in Cyprus.
- The Defence Tax law includes provisions for the deemed distribution of profits, whereby a CyCo is deemed to have distributed to their Cyprus tax resident shareholders (both companies and individuals) 70% of their after-tax profits at the end of two years from the end of the year to which the profits relate to. Any actual dividends paid out of such profits, either during the year in the form of interim dividends or within the two years’ period after the year end, reduce the profits subject to the deemed distribution rules.
- Currently, Cyprus has no transfer pricing (“TP”) documentation requirements (apart from back-to-back intra-group financing). However, the arm’s-length principle is codified in the domestic tax law in a wording similar to that of Article 9 of the OECD Model Tax Convention on “Associated Enterprises”. Consequently, all transactions entered into with related parties should be concluded at arm’s length basis to avoid adjustments of the taxable profit by the Cypriot tax authorities.
Cyprus therefore also offers significant international tax planning incentives and prospects.
As regards registration of a CyCo, 2 – 3 proposed names are normally required which should first be approved by the Registrar. Additionally, the client must specify its source of funds which will be used to fund the CyCo, the required share capital, the object and activities, products or services, type of clients, with which jurisdictions the CyCo will transact business and expected annual turnover. Subject to standard Client Due Diligence procedures and approvals, our firm regularly assists with the set up of corporate structures which consist of a Cyprus element.
In summary, Cyprus continues to be in the top tier of holding company jurisdictions, with substantial benefits for serious investors, particularly for business in Europe, Africa, Asia and the East. In fact, the CyCo has over the years proved its resilience, flexibility and robustness as a holding company. Hence the numerous reasons for which a CyCo should be considered as a strong holding company candidate.