Cyprus tax resident company taxation characteristics, and Cyprus tax resident company advantages.
Over the past years, Cyprus has been developed into one of the most favorable places for international business. The Cyprus tax regime combined with Cyprus excellent geographical position, infrastructure and Cyprus ability to offer opportunities for business planning, the ability to set up and manage Investment Funds (Cyprus Alternative investment funds – AIFs) and its excellent infrastructure in banking and telecommunication were some of the key factors for its success.
The alignment of the legislation with EU’s Acquis Communautaire and Code of Conduct of Business Taxation as well as the compliance with the requirements of the Organisation for Economic Co-operation and Development (OECD) have also contributed to its success.
The result of this reform was a sophisticated tax jurisdiction that rapidly became the jurisdiction of choice for international investors and the premier financial center for the set-up and operation of Cyprus companies.
Cyprus Tax Resident Company advantages and other related considerations (Cyprus Holding Company):
1) Full exemption from tax on dividend income received from participation. Dividends received by a Cyprus tax resident company from overseas participation will be exempt from tax provided that:
Dividends are not considered investment income if they are derived directly or indirectly from trading subsidiaries.
2) No Cyprus withholding tax on the distribution of profits by a Cyprus tax resident company irrespective of the country of residence of the recipient or the existence of a double tax treaty
No Cyprus withholding tax on dividends to non-residents (individual or body corporate) irrespective of the country of residence or the existence of a double tax treaty.
3) Exemption from capital gains tax and income tax on the disposal of securities
Exemption from Cyprus tax on gains from the disposal of securities (shares, debentures, founders’ shares, units of Cyprus funds – open-ended and closed-ended collective investment schemes, etc) regardless of whether the gain is considered to be of capital or revenue nature.
4) Tax rate
The Cyprus tax resident company tax rate is 12.5%
5) No capital gains or income tax on the liquidation of participation.
The liquidation of participation held by Cyprus tax resident Company does not give rise to any Cyprus taxes.
6) No capital gains tax or income tax on the disposal of the shares of a Cyprus Company
The disposal of the shares of the Cypriot Company will not result in any Cyprus taxes irrespective of the provisions of a double tax treaty.
7) No capital gains tax or income tax on the redemption of units/shares of a Cyprus collective investment scheme (ICIS) (Alternative Investment Funds)(AIFs)
The redemption of units/shares of a Cyprus collective investment scheme (ICIS) will not result in any Cyprus taxes irrespective of the provisions of a double tax treaty.
8) Reduced withholding tax on dividends received from countries which Cyprus has concluded a double tax treaty
Cyprus double tax treaty network is extensive and expanding with over 60 countries. Cyprus double tax treaty network can be used by the investor to minimize the tax burden and avoid double taxation.
9) Unilateral tax credit
Regardless of whether a tax treaty is present, the unilateral tax credit is applied for taxes paid abroad if the income is subject to the Cyprus tax. The unilateral tax credit is also applied to low tier subsidiaries of Cyprus a company. Cyprus double tax treaties provisions may be applied if they are more beneficial than the tax credit.
10) EU parent-subsidiary Directive
According to the provisions of the Directive, any payment of a dividend from one member state to another is free of withholding tax provided the required conditions are satisfied under the local legislation of the member state.
11) Minimum holding period
There is no minimum period of holding participation for Cyprus tax resident Company in order to be eligible for either the tax exemption on dividend income or the tax exemption on the disposal of shares
12) Interest Income
Interest income of a Cyprus tax resident company arising as a result of ordinary activities is taxed like any other “trading” income at Cyprus company tax rate of 12.5%
Any other non-trading interest is tax at 30%
13) Cyprus related companies’ intra-group financing transactions – Cyprus transfer pricing rules on Cyprus related companies’ intra-group financing transactions
Cyprus related companies intra-group financing transactions must have adequate interest profit margins and apply the arm’s length principle. There are 2 approaches in calculating interest profit margins on Cyprus related companies’ intra-group financing transactions. 1) Minimum interest rate margin of 2% after tax (pre-tax 2.29%). 2) Any other intra-group financing interest rate margin provided that a transfer pricing analysis is prepared by a transfer pricing expert.
14) Cyprus companies’ Notional Interest Deduction (NID) on new equity
Cyprus companies that originally financed by own funds are given notional Interest deduction (NID). The notional interest deduction (NID) will be granted annually for as long as capital is used in the Company.
Equity. New equity can be introduced either in the form of cash or in kind. Where new equity will be introduced in the form of assets (in-kind), the sum of these may not exceed the market value. Assets must be fully documented. Notional interest deduction (NID) will be given on new capital (share capital and share premium to the extent that they have been paid) issued from 1st January 2015.
Interest. Notional interest deduction (NID) will be calculated on the amount of new share capital/share premium the same way as with interest on loans. The rate of notional interest deduction (NID) is defined as the 10-year government bond yield (at December 31 of the year preceding the tax year) of the country in which the new equity is invested, increased by 3% and having as a lower limit the 10 year Cyprus government bond increased by 3%.
Notional interest deduction (NID) is deducted from taxable income but it cannot exceed 80% of taxable income (as defined for tax purposes) before deducting Notional interest deduction (NID).
15) Group loss relief
Offsetting of losses between group companies is granted where the interest participation rate between the two companies is more than 75%.
In the case where a subsidiary company is incorporated by its parent company during a specific tax year, the subsidiary company will be considered as being a member of the group for the whole tax year and therefore will be able to claim group relief for that tax year.
Group loss relief is also applied between Cyprus and the EU.
16) Cyprus VAT considerations
If the Cyprus Holding Company’s activities are strictly the holding of shares in other entities, then it is not considered as a taxable entity as it falls outside the scope of Cyprus VAT legislation and as such, it is not obligated to be registered for VAT purposes.
However, if the Cyprus Holding Company is engaged in other activities as well, such as the provision of management and administration services, then it may be able to deduct Cyprus VAT expenses.
17) Cyprus intellectual property regime
80% exemption is granted on Cyprus company’s profits – net income from intellectual property if intellectual property is owned by Cypriot resident company (net of any direct costs). Direct costs will exclude Intellectual Property acquisition costs, interest, immovable property and payables to third parties.
18) Reorganization provisions
Transactions that are defined as “reorganizations”, involving Cyprus companies resident in the Republic and / or not residents of the Republic, are exempt from Cyprus income tax or capital gains tax as well as transfer fees.
Mergers, divisions, transfer of assets and exchange of shares, are considered reorganizations.
20) Cyprus Transfer-in Companies (Transfer of Company’s Seat)
The Cyprus laws provide for re-domiciling a foreign company’s registered office from a country or jurisdiction in the Republic of Cyprus and vice versa. The transfer of a company’s registered office into Cyprus, apply inter alia if the foreign company is registered in a country which allows re-domiciliation and which company’s Memorandum and Articles of Association provide for the possibility of re-domiciliation.
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