Cyprus is a prime venue for the worldwide operations of multinational corporations, particularly through the use of Cyprus holding companies. The corporate structure involves the ownership of a foreign subsidiary by a resident Cyprus holding company which is in turn owned by a parent corporation.

The Cyprus holding company is considered a major vehicle for international tax planning for the following reasons:

1. Incoming dividends remitted by the subsidiary to the Cyprus holding company are subject to low or no withholding tax, in the country where the subsidiary is based. This is due to the very beneficial double taxation agreements between Cyprus and many countries in the world, the effect of which is a reduction of withholding taxes on dividends remitted or total exemption from withholding taxes. Cyprus has signed 35 double taxation treaties covering over 40 countries. These treaties cover an array of countries from the Americas to Central and Eastern Europe as well as Asia. Additionally, as a member of the EU, Cyprus is governed by the provisions of the EU’s Parent Subsidiary directive, whose effect is that in case where a Cyprus holding company controls at least 25% of the shares of an EU subsidiary for a minimum period of 24 months, any dividends remitted by the EU subsidiary to the Cyprus holding company are free of any withholding taxes in the other EU country. Where the provisions of this directive do not apply (or where anti-avoidance provisions are in place), Cyprus holding companies can rely on the extensive network of double taxation treaties.
2. Dividend income received by the Cyprus holding company from the subsidiary is subject to no corporation tax in Cyprus provided the Cyprus holding company holds at least 1% of the share capital of the subsidiary.
3. Profits realized by the Cyprus holding company from the sale of shares of the subsidiary or from the sale of any shares, are exempt from Cyprus corporation tax. This also encourages the set up in Cyprus of collective investment schemes as well.
4. Outgoing dividends paid by the Cyprus holding company to the ultimate non-resident parent company are exempt from any withholding taxes irrespective of the existence of any double taxation treaties and irrespective of the applicability of the EU Parent Subsidiary directive.
5. Unlike Cyprus, other holding company regimes only reduce or exempt withholding taxes on outgoing dividends where there is a double taxation treaty in force between the holding company jurisdiction and the ultimate parent company jurisdiction or, where both the holding company and the parent corporation are resident in the EU.

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* Dividends remitted by an EU subsidiary to Cyprus holding company (or any EU parent company) are subject to no withholding taxes provided that the Cyprus holding company (or any EU parent company) controls at least 25% of the shares of an EU subsidiary for a minimum period of 24 months.

**These dividend, interest, and royalty withholding tax rates are provided for in the respective Double Tax Treaties with Cyprus. Dividend income received by the Cyprus holding company from the subsidiary is subject to no corporation tax in Cyprus provided the Cyprus holding company holds at least 1% of the share capital of the subsidiary.

The profits of all Cyprus companies are taxed at a rate of 10% which is one of the lowest corporation taxes in the EU.

The Cyprus legislation conforms fully to EU law, EU Code of Conduct of business and abides to the Organisation for Economic Co-operation and Development (OECD) standards.

Companies established in the EU have the automatic right and privilege to freedom of establishment in Cyprus. In the Centros case (1999), the European Court of Justice sanctioned the principle that a corporate body established in the Community has the right of establishment throughout the entire EU and even to conduct all its business outside the state of its origin. This means that any EU company or corporation can without any restrictions establish a holding company in Cyprus.

The Cyprus law conforms to the relevant EU Directives thus enabling reorganizations, mergers, acquisitions and amalgamations of companies without any implications.

There are no time restrictions on the carrying forward of losses to be set off against future taxable profits i.e. a company incurring losses in the first three years of operations may carry these losses forward for a set-off in the years with taxable profits in the future.

There is group relief for the utilization of tax losses. Therefore a diversified group of companies belonging to a Cyprus holding company can set-off the taxable profits of the best performing subsidiaries against the losses of its loss making companies and arrive at an aggregate taxable profit.

The capital requirements to set up a Cyprus holding company as well as the management and administration costs are very reasonable. Professional services are among the less costly in the EU and at the same time the services offered by Cypriot professionals are of the highest quality.

Conclusions

Multinational corporations and international businesses active in cross-border investment activities can increase considerably their return on investment by using the Cyprus holding company structure in their international tax planning. Cyprus encourages foreign investment and is committed to creating conditions favourable to both offshore entities and those seeking an operational base in a low-cost, low-tax area. The strategic location of the island, its modern and efficient legal, professional and banking services, the business infrastructure and environment, combined with the tax incentives and concessions available to foreign investors, are the most important factors attracting international companies to operate in and through Cyprus, which has thus been established as a reputable international business centre.