Historically holding companies have been in existence for various reasons, such as legal, commercial but mainly tax. Throughout the world the barriers to capital movements are fast disappearing. Tax differences have become a very significant factor in commercial decisions, and therefore investment structures which have the least tax leakage are preferred by investors. For years the preferred holding company locations by investors were the Luxembourg company established under the 1929 legislation or the Netherlands company enjoying the participation exemption. During the last decade various European Countries have introduced holding company regimes and nowadays it is very difficult for a multinational group to select the right jurisdiction in which to establish their holding company. A multinational group in choosing a suitable holding company jurisdiction should give consideration to the below mentioned major tax considerations.
Even though tax considerations may not be the decisive factor in choosing to set up a holding company in a particular jurisdiction, tax costs play a significant role.
Main Tax Factors
- Tax regime with regards to the realisation of capital gains from the disposal of the shares in subsidiary companies.
- Tax regime with regards to withholding tax on any dividends paid by the holding company to its shareholders.
- Tax regime with regards to the extraction of dividends from subsidiary companies with no or low withholding taxes.
- Tax regime with regards to the taxation of any dividends received from subsidiary companies.
How does Cyprus measures up against these benchmarks?
In brief, the answer is “extremely well”.
1.) Tax regime with regards to the realisation of capital gains from the disposal of the shares in subsidiary companies.
Cypriot tax rules provide full exemption from local taxation on the realisation of capital gains from the disposal of the shares in subsidiary companies, irrespective of whether the gain is considered to be of a capital or of a revenue nature. There is no requirement for any minimum holding period or minimum % holding.
2.)Tax regime with regards to withholding tax on any dividends paid by the Cyprus company to its shareholders.
Outward dividends paid by the Cyprus company to individuals or companies non-resident in Cyprus do not suffer any withholding tax in Cyprus. The exemption applies to dividend payments made to non-resident companies, irrespective of the country of residency of the parent company, whether it is resident in a EU country or not.
3.) Tax regime with regards to the extraction of dividends from subsidiary companies with no or low withholding taxes and
4.) Tax regime with regards to the taxation of dividends received from subsidiary companies
Cyprus has transposed into Cypriot Law the EU Parent Subsidiary Directive. Though Cyprus tax rules are more liberal than the requirements of the Directive. In accordance with the Directive dividends between member state companies should not suffer any withholding taxes. The directive provides for certain minimum criteria to be met otherwise if the criteria are not met the member state may not apply the directive.
Cyprus provides full exemption (subject to certain conditions) from local taxation in respect of dividends received by a Cyprus holding company from its non-resident subsidiaries. The applicability of this exemption is not dependent on the holding period of the shareholding, or on a minimum % holding in the non-resident subsidiary The exemption to the general rule of non taxing dividends received from foreign participations will not be granted only under certain conditions. Please contact us for more information.
Example with a EU resident subsidiary.
Example with a non EU resident subsidiary.