Holding Companies in Cyprus

Transcription

1 Holding Companies in Cyprus 1

2 Contents Page # Introduction 3 Formation of a Holding Company 3 Taxation of Holding Company 4 Dividend Income 4 Capital Gains on Disposal of Shares 4 Repatriation of Dividends 5 Other Features 6 Deemed Distribution 6 Controlled Foreign Corporations 6 Transfer Pricing Rules 6 Thin capitalisation Rules 6 Sale of Shares in a Cyprus Holding Company 7 Capital Gains Tax 7 Stamp Duty 7 Tax Treaty Network 7 Conclusion 7 2

3 Introduction As a consequence of the amendment of the tax legislation in Cyprus in and certain amendments thereafter, Cyprus is now a very favourable jurisdiction to establish a holding company. When there is added to this the wide network of double tax treaties that Cyprus has signed, it quickly emerges that Cyprus is the ideal location to set up a holding company to hold subsidiaries within and outside the EU. The main elements of attraction to Cyprus are: Low rate of corporate tax No corporate income tax on dividend income No withholding tax in Cyprus on dividends paid to a non-resident of Cyprus No capital gains tax or corporate income tax on the disposal of shares in a Cyprus Company No specific transfer pricing, thin capitalisation or CFC rules Extensive network of double tax treaties These factors together with Cyprus having a developed infrastructure and an accepted legal system based on common law, make Cyprus an ideal choice for establishment of a holding company. Formation of a Holding Company The holding company will be a company registered in accordance with the provisions of the Companies Law cap.113 and will be a limited liability company, either public or private. In practice, the most usual form is a private limited liability company. For a private limited liability company, there is no minimum equity requirement. In a structure where a Cyprus holding company is used, it will be necessary to ensure that the company is tax resident in Cyprus. The test of tax residency is the trite test as decided in De Beers Consolidated Mines Ltd. v. Howe 2 where Loreburn, J. stated that a company resides where its real business is carried on and the real business is carried on where the central management and control actually abides. In simplistic terms this can be taken to mean that a company is resident where its directors (or majority of them) are resident. More correctly stated however, it is that the principle almost always followed, is that a company is resident in the jurisdiction where its 1 Law 118(I)/2002 (as amended) (the Income Tax Law ). 2 [1906] AC 455 3

4 board of directors meet. 3 Accordingly, to establish management and control and thus tax residency in Cyprus, the holding company needs to have persons in office as directors who are residents of Cyprus this needs to be all or a majority of the directors. Taxation of Holding Company General Tax Regime Cyprus has a very favourable tax regime with a corporate income tax rate of 12.5% on worldwide income. In addition to corporate income tax, there s also the possibility of charge to special defence contribution, capital gains tax and stamp duty. Each of these will be considered with respect to the different types of income. Dividend Income The Income Tax Law (section 8) expressly exempts from the charge to corporate income tax any income from dividends. Dividend income may, however, be subject to special defence contribution under the provisions of the Special Contribution for the Defence of the Republic Law. The basic charging provision (section 3(2) (a)) 4 provides that every person resident in Cyprus receiving or deemed to be receiving any dividends from a company, will be liable to a defence contribution of 20%. The Special Contribution for the Defence of the Republic Law does however permit certain exemptions to the charge to such contribution. In the case of a holding company there are a number of exemptions that are pertinent: a) a dividend paid by a Cyprus tax resident company to another tax resident company is exempt from the special defence contribution except if the dividend is distributed after the end of four years from the tax year in which the profits distributed were earned; b) a dividend paid by a non-resident company to a resident company (or a company not resident but having permanent establishment in Cyprus) will be exempt from the special defence contribution. The exemption will not be available however if: i. the entity paying the dividend, directly or indirectly, derives its income by more than 50% from investment (passive) income; and ii. the foreign tax burden on the entity paying the dividend is substantially lower 5 than the tax burden applicable in Cyprus on the company receiving the dividend. 3 The Income Tax Law refers to the management and control being exercised in Cyprus. 4 Law 117(I)/2002 (as amended) 5 This has been interpreted as lower than 5% 4

5 Accordingly, where the Cyprus Company is used as a holding or intermediary holding company for a trading operation, the tax burden can be reduced to zero with no corporate income tax and no special defence levy payable. Withholding Tax on Dividends Dividends can be paid to a Cyprus holding company at low or zero rates of withholding tax either as a result of the application of the EU Parent/Subsidiary Directive 6 or one of the many double tax treaties that Cyprus has signed Double Tax Treaty Relief Cyprus has signed a large number of double tax treaties, many of which provide for a 0% withholding tax on dividends paid to Cyprus from the other contracting states while other treaties provide for 5%, 10% or 15% and in the case of Greece, 25% withholding tax on dividend payments. In circumstances where there is no tax payable in Cyprus, the issue of obtaining a credit in Cyprus for such tax does not arise. However, where for example the 20% special defence contribution might apply, which will be seldom on both elements (passive income and lower tax burden need to apply simultaneously for the exemption from special defence contribution to be denied), then a unilateral tax credit will be available for any foreign tax withheld on the dividends (and if a double tax treaty so provides or the dividends are received from an EU Member State a tax credit for the underlying taxes is also available). Capital Gains Tax There is no capital gains tax payable in Cyprus on the sale or disposal of shares in a Cyprus company nor is any such gain liable to corporate income tax. Capital gains tax only arises on a disposal of immovable property located in Cyprus or on a disposal of shares in a company which is not listed on a recognised stock exchange that owns immovable property in Cyprus. Repatriation of Dividends Any dividends or distributions by a Cyprus holding company to its non-cyprus tax resident shareholders are not liable to any withholding tax, thus all distributions can be made gross. This is the case irrespective of whether or not there is a double tax treaty in place with the state of residence of the shareholder. Other Features 6 Council Directive 2011/96/EU 5

6 The other features of the Cyprus holding company structure are: - Deemed Distribution A Cyprus resident company is in accordance with section 3(3) of the Special Contribution for the Defence of the Republic Law, deemed to have distributed 70% of its profits after tax 7 in the form of dividends to its shareholders at the end of two years from the end of the tax year to which the profits relate and the shareholders will be assessed accordingly to special defence contribution on the amount of such dividends. Where the shares in the holding company are held by another Cyprus tax resident company the shares of which are partly held by non-cyprus tax residents, the amount of any special defence contribution paid by reason of the application of the deemed distribution provisions will be refunded once an actual dividend is distributed to those non-cyprus tax resident shareholders. If all the ultimate beneficial shareholders of the holding company are not tax residents of Cyprus, then the deemed distribution rules do not apply even if the direct shareholder of the holding company is another Cypriot tax resident company. The provision of section 3(3) of the Special Contribution for the Defence of the Republic Law, do not apply as regards profits attributable to shareholders who are not residents of Cyprus. - Controlled Foreign Corporations Rules ( CFC Rules ) Cyprus does not have any CFC Rules. Accordingly, it is possible for a Cyprus holding company to hold shares in the other companies domiciled and resident in other jurisdictions and not require the profits of that entity to be repatriated to Cyprus. - Transfer Pricing Rules Cyprus does not have any specific transfer pricing rules or transfer pricing documentation requirements. The arm s length principle contained in the Cyprus Income Tax Law requires transactions between related parties to be executed, for tax purposes, at fair market values and on normal commercial terms. - Thin Capitalisation Rules Cyprus does not have in place thin capitalisation rules and thus there are no restrictions on the ability of a Cyprus holding company to finance its operations by borrowings. The financing from related parties must be entered into on an arm s length basis and any interest paid will, subject to fulfilment of certain conditions, be fully deductible. 7 Which covers corporate tax, special defence contribution, capital gains tax and foreign tax for which no credit has been given. 6

7 However, any interest on loans to acquire shares is not tax deductible for a seven years period unless 100% of the shares of the subsidiary are acquired after the 1 st of January 2012 and that subsidiary does not own any assets not used in the business (if it does own such assets, then partial restriction of the interest expense applies at the level of the Cyprus holding company). Under the provisions of the Special Contribution for the Defence of the Republic Law, interest received or credited is liable to special defence contribution at the rate of 30% 8 unless the interest accrues from the ordinary carrying on of the business including interest closely connected with the ordinary carrying on of the business. In such case, it is not interest for the purpose of the Special Contribution for the Defence of the Republic Law and will fall to be taxed as income under the Income Tax Law. In cases of back-to-back loans through a Cyprus holding company, subject to certain requirements, the interest paid by the holding company is fully tax deductible and as such only the differential between interest paid and interest received by the holding company will be taxable at the rate of 10%. However, the transactions with related parties must be entered into on an arm s length basis. Accordingly and depending on the amounts of the back-to-back loans granted through a Cypriot holding company, the net taxable interest margin should be between 0.125% to 0.35%. Sale of Shares in a Cyprus Holding Company The sale or disposal of shares (and securities widely defined) in a Cyprus company does not give rise to any charge to Cyprus income tax or capital gains tax. There will only be a charge to capital gains tax where the holding company owns immovable property in Cyprus Tax Treaty Network Cyprus has signed a plethora of double tax treaties with both EU and non-eu countries 8 in particular Eastern European and CIS states which greatly add to its position as an ideal location for a holding company. Conclusion The current tax legislation has put in place a regime that allows Cyprus to present itself as the ideal jurisdiction to locate a group holding or intermediary holding entity 8 15% up to 28 April,

8 For further information on Cyprus holding companies, please contact: Thomas Keane Christina Vgenopoulou Partner Partner Tel: Tel: The foregoing should not be read or construed or relied upon as legal advice in any specific or individual circumstance. August,