Cyprus: An Alternative Structuring route    

Cyprus is emerging as one of the alternative jurisdictions for structuring of Investments and is fast emerging as one of the most favoured jurisdictions. The advantages that Cyprus offers are many to make it an attractive destination in Europe

Till recently, investors setting up a holding company to hold their participations around the world would look no further than the traditional holding company jurisdictions to achieve efficient tax repatriation of profits. Cyprus is a member of the EU and is in compliance with the OECD requirements, has well developed tax legislation.

EU accession

The Tax reforms that took place in 2003, together with Cyprus' accession to the EU in 2004, have paved in the development of Cyprus as an international business centre.

Cyprus has excellent legal, financial and professional services, good infrastructure, a large skilled workforce, an English-based financial system; low taxation (with double tax treaties) and lack of bureaucratic inertia have enabled international business to thrive in Cyprus. It has become the backbone of the Cypriot economy.

The Cypriot Holding Company and Tax Incentives

The Cypriot Tax System offers unique tax advantages which can be listed as below:

Foreign Dividend Income received by a Cyprus holding company from overseas participations is exempt from tax. The only condition that need to be satisfied is a minimum 1% participation in the share capital of the overseas company, and that 50% of the activities that the overseas company engages in (directly or indirectly) lead to non-investment income or are subject to a tax burden of more than 5%.

The reference to "directly or indirectly" in the legislation allows a look-through approach for multi-tier participations, so if somewhere along the tier the activities are of a non-investment nature the dividend will be exempt from tax in Cyprus. Dividends received by the participations from direct tier companies are not considered investment income if they are derived directly or indirectly from business income (non-investment income) earned by the subsidiaries.

With Holding taxes: No withholding tax on out-going dividends, interest and royalties in most cases to payments of dividends to non-residents regardless of whether the recipient is a body corporate or an individual, the country of residence or the existence of a double tax treaty.

Sale of Shares and Other Securities: Full exemption from tax is granted on the gains from the disposal of securities irrespective of whether the gain is considered to be of a capital or revenue nature (except shares in companies owning real estate situated in Cyprus).This exemption enables a Cypriot holding company to dispose of the shares in its participations without triggering adverse tax implications in Cyprus.

Further, the liquidation of foreign participations held by the Cypriot holding company does not give rise to any tax in Cyprus.

The disposal of the shares of the Cypriot holding company will not result in any tax in Cyprus, irrespective of the provisions of a double tax treaty, provided the Cypriot holding company does not own immovable property in the Republic.

No capital gains tax, income tax or any other tax arises on the liquidation of a Cypriot holding company owned by non-resident, irrespective of the method of liquidation. There is also no annual capital or net-worth tax in Cyprus.

Wider Treaty Network: Cyprus has a wide treaty network, including the main western European countries as well as most of the eastern European countries. Generally most treaties provide for reduced rates of withholding tax on dividends, interest and royalties paid out of the treaty country, or the avoidance of double taxation if a resident in one of the treaty countries derives income from the other treaty country.

Cyprus is a full member of the EU. Consequently, and provided the required conditions are satisfied under the local legislation of the relevant EU country, any payment of dividend, interest or royalties from any other member state will be free of withholding tax based on the provisions of the Parent/Subsidiary and Interest and Royalty Directives.

Unilateral Tax Relief for taxes paid abroad is granted in the form of a tax credit if the respective income is subject to tax in Cyprus. The relief is given regardless of whether a double tax treaty exists. If a treaty is in force the treaty provisions (if more beneficial) apply.

Cyprus has no substance requirements, no debt-equity restrictions, no minimum holding period and no thin-capitalization rules. The absence of debt-equity restrictions means a company may be financed in any proportion of debt to equity, and there is no minimum period of holding participations to be eligible for either the tax exemption on dividend income or the tax exemption on the disposal of shares.

Cypriot Holding companies and VAT: Companies whose main purpose is to hold participations do not have the right or obligation to register for value-added tax in Cyprus. This applies when the main business activity is the acquisition and holding of participations in other companies without taking part in the management and administration of these companies, either directly or indirectly. In many cases this might be an advantage, as the VAT reverse charge provisions will not apply

Mergers, Takeovers and Re-organizations: Mergers, Takeovers and other Re-Organizations can take place within groups with no tax consequence as Cyprus has fully adopted the EC Merger Directive. Low duties also make it an attractive destination.

Formation of Cypriot Holding companies

Cypriot holding company is a company whose principal or exclusive purpose is to hold and manage participations in other companies. Holding companies do not have any special status and are just like any other company set up in accordance with the Cyprus Companies Law. They qualify as companies eligible under the EU parent subsidiary directive.

Any one or more persons (or any seven or more persons in the case of a public company) who cooperate for any legal purpose may, by signing the memorandum of association and by complying with the provisions of the Companies Law for registration, form a limited liability company. The usual type of company is a limited liability company whose members' liability is limited by the memorandum of association to the amount, if any, that has not been paid on the shares issued.

The name of a company must be unique. As long as the name is not similar to a name already registered, the Registrar will give its approval but words such as King, Queen, Royal or Corporation cannot be accepted. Alternatively, if registration is urgent and the name is not so important, shelf companies are available and the name of the company can be changed later.

Every company in Cyprus must have a memorandum and articles of association that specify the activities in which the company may engage (known as the object clause) and the means by which it will govern its affairs. No minimum level of issued and paid up capital of the company has been set. However it is common for this to be at least C£1,000

There must be at least one shareholder in the company, but there is no specific requirement to have local directors. To ensure that the company is managed and controlled in Cyprus, which might be important for tax-planning purposes, it is common practice for the majority of the directors to be Cypriot residents.

Company law requires that every company must have a company secretary and a registered office address in Cyprus, which may also be used as the company's business address.The only duty or fee payable on the incorporation of a Cypriot company is the capital duty, which is payable on the authorized share capital.

Share premium is not subject to capital duty; so it is possible to reduce the capital duty when participations are being transferred to a Cypriot holding company, with the Cypriot holding company issuing shares at a premium rather than reflecting the value of the participations through a large amount of authorized share capital.

Company compliance: Every Cypriot Company is required to maintain proper books of account and to prepare financial statements in accordance with IFRS, which must be audited in accordance with IAS.

In accordance with Cyprus' tax laws, every company should submit an income tax return on an annual basis. Annual financial statements prepared in Greek and an annual return should also be submitted to the Registrar of Companies.

The EU difference

The Cyprus holding company combines an ideal jurisdiction, with zero taxation on income from participations, the use of double taxation agreements and other international investment agreements, and (since accession to the EU) all the EU Directives. This unique combination offers tax advisers the opportunity to use Cyprus in international tax structures to effectively reduce their clients' total tax burden. Cyprus is today used as an efficient jurisdiction for routing investments in the EU by third-country investors or by member state investors investing outside the EU. So it is not surprising that, since accession, many have characterized Cyprus as the gateway to Europe.