The Tax Reasons For The Establishment Of A Cyprus Holding Company.INTRODUCTION There is nowadays a strong competition among the better and more popular holding jurisdictions. In the last few months, 'Cyprus', a well established international centre, has been critically assessed of constituting an attractive location for holding companies from a tax perspective, among others. This is due to the accession Coming into possession of a right or office; increase; augmentation; addition. The right to all that one's own property produces, whether that property be movable or immovable; and the right to that which is united to it by accession, either naturally or artificially. of Cyprus to the European Union European Union (EU), name given since the ratification (Nov., 1993) of the Treaty of European Union, or Maastricht Treaty, to the European Community (EU) and the enactment of the new Cyprus tax legislation, which is now compatible with the acquis communautaire The term acquis communautaire (IPA: /a.ˈki/), or EU acquis, is used in European Union law to refer to the total body of EU law accumulated thus far. . Cyprus laws and practices are now harmonised Adj. 1. harmonised - involving or characterized by harmony consonant, harmonical, harmonized, harmonic harmonious - musically pleasing with the EU Laws and Directives, the Code of Conduct and the Organization for Economic Cooperation and Development's recommendation on Harmful Tax Corporation. A brief outline will be made on the features of the Cyprus jurisdiction, which sets up Cyprus as an ideal location for establishing an international holding company. TAX REGIME Unlike other countries in Europe, a Cyprus Holding Company must only hold at least 1% of the share capital of a foreign subsidiary in order to receive the tax benefits awarded by the new tax reform. NEW TAX LEGISLATION A uniform 10% corporate tax rate, applicable to the worldwide income, is now levied on all resident companies from the 1st of January, 2003. This is the lowest corporate tax rate in the European Union and thus the most advantageous standard rate of corporation tax for Cyprus. The new taxation status on Company is residence-based. A company is only 'resident in the Republic' if its business is centrally managed and controlled in Cyprus. Therefore, under the new rules, a resident corporation is taxable on its worldwide income accrued ac·crue v. ac·crued, ac·cru·ing, ac·crues v.intr. 1. To come to one as a gain, addition, or increment: interest accruing in my savings account. 2. or arising from sources both within and outside Cyprus if it is managed and controlled from Cyprus. In view of the new tax legislation, the Holding International Business Companies operating from Cyprus are now in a much more beneficial position because they can enjoy the benefits deriving from the tax exceptions as well as the corporate tax benefits by virtue of the new tax legislation. TAX EXEMPTIONS tax exemption, immunity from the requirement of paying taxes. Federal, state, and usually local law provide exemption from taxation for a wide variety of organizations, usually not-for-profit, such as churches, colleges, universities, health care providers, various 50% of interest receivable In view of the new tax legislation 50% of interest received by corporation is tax exempt, excluding interest received from the recipient's ordinary course of business or closely connected with the recipient's ordinary business. Dividends received Dividends received from abroad are now totally exempt from corporation tax by virtue of the new tax legislation. Furthermore, they are also exempt from the 15% defence contribution provided that the direct holding is at least 1% of the share capital of the overseas company. Restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). provisions In view of the incorporation of the EC Merger Directive 90/434/EEC into the new tax law, there are tax exemptions on the transfer of assets The conveyance of something of value from one person, place, or situation to another. The law recognizes that persons are generally entitled to transfer their assets to whomever they wish and for whatever reason. The most common means of transfer are wills, trusts, and gifts. (including shares) under a reorganisation Noun 1. reorganisation - the imposition of a new organization; organizing differently (often involving extensive and drastic changes); "a committee was appointed to oversee the reorganization of the curriculum"; "top officials were forced out in the cabinet (merger / de-merger De-merger A corporate strategy to sell off subsidiaries or divisions of a company. Notes: For example, in 2001 British Telecom did a de-merger of its mobile phone arm, BT Wireless, in an attempt to boost the performance of its stock. / transfer of assets). Gains on shares and Capital Gains Tax Profits from buying and selling shares are exempt from tax. Furthermore, there is no capital gains tax except for the 20% capital gains tax applying on gains accruing from disposal of immovable property In all the civil law systems, immovable property is the equivalent of "real property" in common law systems, i.e. it is land or any permanent feature or structure above or below the surface. held in Cyprus and shares in non-listed companies, which own immovable property in Cyprus. Profits from activities of Permanent Establishment abroad The profits from a permanent establishment abroad are exempt from taxation. The exemption does not apply if (i) the Permanent establishment directly or indirectly engages in more than fifty per cent (50%) in activities that produce investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus. Cyprus Branches of Companies With the accession of Cyprus in the EU, double taxation relief will be available to all Cyprus branches, of companies resident in other member states in the European Union, since there is no discrimination between the companies resident in a Member state and the branches of such companies residence in another member state. Distributions by Cyprus Holding Companies Dividends paid to non-resident shareholders are exempt from withholding tax The amount legally deducted from an employee's wages or salary by the employer, who uses it to prepay the charges imposed by the government on the employee's yearly earnings. . In fact, Cyprus does not impose withholding taxes on payments of dividend, interest and royalties (provided the intellectual property rights are not used in Cyprus) to non-resident recipients. CORPORATE TAX BENEFITS Carry forward of Losses Tax losses for the year 1997 onwards on·ward adj. Moving or tending forward. adv. also on·wards In a direction or toward a position that is ahead in space or time; forward. Adv. 1. may be carried forward indefinitely in·def·i·nite adj. Not definite, especially: a. Unclear; vague. b. Lacking precise limits: an indefinite leave of absence. c. . Losses incurred abroad by a permanent establishment of a Cyprus company can be offset against profits of the Cyprus company. Group relief The Group relief rules are now enacted, providing for group relief of tax losses between a holding Company and its subsidiaries in the event where the Holding Company owns at least 75% of the Subsidiary directly or indirectly and/or otherwise among companies of the same group for the whole year. However, losses brought forward will not be available for Group Relief. By virtue of the said rules a company is considered as a member of a group if it is at least a 75% subsidiary of the other, or both companies are at least the 75% subsidiaries of a third company. NETWORK OF DOUBLE TAX TREATIES Cyprus combines a low-tax regime with a network of double tax treaties. It has concluded 34 double tax treaties, which is considered one of the highest number compared to the number of treaties concluded by any other offshore jurisdiction, particularly with Central and Eastern European Countries and a number of Middle Eastern countries. Most of the Treaties follow the OECD OECD: see Organization for Economic Cooperation and Development. model and all of them have the impact of reducing or eliminating the normal withholding taxes imposed by the Contracting states on dividends, interest and royalty payments. This is beneficial for trade with certain Eastern European Countries and Russia because foreign investors investing in Eastern Europe Eastern Europe The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991. have the opportunity to channel their investments through a country, such as Cyprus, which has a treaty with the investment recipient country allowing for a reduction and in some cases elimination of the withholding taxes. CONCLUSION To come to a conclusion, Cyprus, one of the smallest European low tax jurisdictions, is a suitable place for locating an intermediary Intermediary See: Financial intermediary intermediary See financial intermediary. company due to the island's combination of tax treaties and low-tax regime. Dividends can flow through the Cyprus company totally tax free and the company can be used to take advantage of the extensive network of double tax treaties. Copyright [c] 2006 Christodoulos G. Vassiliades & Co The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . Mr Christodoulos Vassiliades Ledra Management Limited Ledra House 15 Ayiou Pavlou Street Ayios Andreas Nicosia 1105 CYPRUS E-mail: corporate@vasslaw.net Click Here for related articles (c) Mondaq Ltd, 2006 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
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