Cyprus Company offers the lowest tax rate in the EU

     By Anastasios Antoniou LLC

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The following piece details the business-friendly tax regime of Cyprus and how it can be harnessed through the establishment of a Cyprus Holding Company, the most tax-efficient holding corporate vehicle in the EU with a corporate tax at 10% and zero withholding tax on dividends in most cases

Cyprus has dynamically placed itself on the map for the most attractive holding regimes worldwide. The Cyprus Holding Company is one of the most highly regarded investment vehicles globally. Offering the lowest corporate tax rate in the EU at 10%, ensuring compliance with EU requirements as an EU Member State as well as committing to the OECD requirements against harmful tax practice, featuring a substantial number of Double Tax Treaties with other States and boasting one of the most business-friendly legislative frameworks, are some of the reasons behind Cyprus’ evolvement into an ideal holding and investment destination.

The following circumstances constitute ideal situations for the incorporation of a Cyprus Holding Company, either as an intermediate holding entity or as an ultimate holding company:

• For groups investing outside of Cyprus and expecting dividend income streams, which will in most cases be tax exempt when shares are held by a Cyprus Holding Company;
• To hold subsidiary companies that might be sold in the future, the disposal of which will not be taxable in the case a Cyprus Holding Company holds the shares in these subsidiaries;
• To harness the tax benefits of the withholding tax provisions found in the extensive double tax treaties network of Cyprus and the EU Parent-Subsidiary Directive;
• To enjoy the benefits of no taxation over the payment of dividend, interest and royalties in most cases;
• To enjoy the benefits of no taxation over transactions in securities, making it an appropriate vehicle for funds;
• Where it may be important to achieve a tax free unwind of the holding company at some stage in the future.

The Cyprus Tax Regime

The Cyprus Holding Company takes full advantage of the favorable Cypriot tax regime, provided its management and control is situated in Cyprus. The following are the main features of this regime, which has made Cyprus an ideal holding destination for international tax planning purposes:

Corporate Tax
Cyprus features an EU-lowest 10% corporate tax rate over profits.

Dividends from Subsidiaries of a Cyprus Holding Company
Low or zero withholding tax rates can be affected when extracting dividends from underlying subsidiaries of a Cyprus Holding Company, through the mechanisms of either:

• An applicable Double Tax Treaty;
• The provisions of EU Directive 90/435/EEC (“the Parent/Subsidiary Directive”)

Where the investment is outside the EU or the conditions of the EU, or where the conditions of the Parent/Subsidiary Directive are not satisfied, Cyprus can rely on its vast Double Taxation Treaties network. The rates applicable through Cyprus’ double taxation treaties concluded with other States are shown below in Table A.

Incoming Dividends Taxation
Dividends received by a Cyprus holding company from a Cyprus subsidiary are exempted from any taxation in Cyprus.
Dividends received from outside Cyprus are subject to the Special Contribution for Defense at 15%; however exemption is almost always obtained, thus resulting in the zero taxation of foreign incoming dividend in Cyprus.

Outgoing Dividends Taxation
Non-residents receiving dividends from a Cyprus company are not subject to any taxation.

Capital Gains Taxation
Only gains from the disposal of immovable property in Cyprus are taxed, or gains from the disposal of shares in a company the property of which constitutes immovable property in Cyprus.
The disposal of shares, securities and debentures is exempted from any taxation.

A Cyprus company can be capitalized entirely from loans and any arm’s length interest paid to a parent company shall by entirely deductible.

Other Advantages
No withholding tax on royalties for use outside Cyprus
No withholding tax on interest
Credit relief available for foreign withholding tax unilaterally
Ability to carry forward losses indefinitely
Group relief rules available
Flexible and tax efficient reorganization provisions
Wide network of double tax treaties

In Focus: the Treatment of Dividends

Dividends received by a Cyprus resident are not taxed under the Income Tax Law but are instead subject to the Special Contribution for Defense, pursuant to the provisions of the relevant legislation.
The Special Contribution rate of 15% is open to an exemption satisfied in the following cases:
(1) Dividends paid from one Cyprus resident company to another.

(2) Dividends received from an overseas company by a resident company of Cyprus or a company which is not a resident of Cyprus but has a permanent establishment in Cyprus, holding directly at least one per cent (1%) of the share capital of the overseas company.

Exemption (2) does not apply if both of the following criteria are met:

(a) More than 50% of the activities of the company paying the dividend are a direct or indirect result of investment; and
(b) The foreign taxation imposed on that company’s income is substantially lower than the respective Cypriot taxation.

Under the Cyprus tax legislation, dividend income received by a Cyprus resident will not be charged under the income tax law but under the Special Contribution for the Defense Law (SCDL) at 15%.
Non-residents receiving dividends from a Cyprus company are not subject to any taxation in Cyprus.

ABOUT THE AUTHOR: Anastasios Antoniou LLC
Anastasios Antoniou LLC is a boutique Cyprus Law Firm advising on wide range of practice areas, with a specialized focus in competition law, investment funds, corporate law, financial services law and energy law. What sets our Firm apart is its commitment to the provision of comprehensive legal solutions to contemporary legal challenges in a clear, reliable and unequivocal manner. Our concrete set of values means that formulating client relationships founded on trust, reliability and integrity is a pivotal element of how we work.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.