THE VERDICT
These factors set out above make Cyprus a very
attractive jurisdiction for intermediate holding
companies, offering the following benefits:
l operating companies may pay dividends through
a Cyprus company, which will generally be tax
exempt in Cyprus and not suffer withholding tax
as they leave;
l subsidiaries held in Cyprus may be disposed of
without any liability to tax on the gain;
l assets (including foreign real estate in certain
circumstances) with scope for significant capital
appreciation may be held in a Cyprus company
and disposed of without any liability to tax on the
gain;
l Cyprus’s double tax treaty network and the EU
Parent-Subsidiary directive offer a number of
other tax planning opportunities;
l Cyprus allows payment of dividend, interest and
royalties without payment of withholding tax.
Cyprus can also be used as the location for the ultimate
holding company of a group that is relocating to a new
jurisdiction or on formation of a new publicly traded
corporation with international operations. It is
particularly suitable for funds or investment vehicles
since there is no tax on transactions in securities, even
if this is the entity’s main trading activity. Since there is
no withholding tax on dividends there is no uncertainty
over recovery of tax paid. Furthermore, there is a cap
on stamp duty.
In order to benefit from the Cyprus tax regime, the
holding company must be tax resident in Cyprus.
This is a matter of ensuring that management and
control is demonstrably exercised in Cyprus by the
directors. In addition, the company must have
economic substance: if it is no more than a tax-driven
device without an economic function or substance in
Cyprus, it may not be able to benefit from the
advantages of Cyprus’s extensive tax treaty network
and, in particular, may be caught by anti-avoidance
rules imposed by operating company jurisdictions to
deny such arrangements the benefits of the Parent-Subsidiary Directive.
Cyprus’s commitment to transparency ensures that
it is not stigmatised as a tax haven, and use of a
holding company structure involving Cyprus is unlikely
to provoke undue scrutiny from overseas tax
authorities, which is not the case for many other
financial centres.
RECENT DEVELOPMENTS
The Protocol to the Russia – Cyprus agreement, which
was concluded in April 2009 and signed in the autumn
of 2010, is expected to be ratified during 2011 and enter
into force at the end of that year. It has generally been
hailed as a very successful outcome for Cyprus,
preserving the key benefits of the
existing treaty while aligning
certain features, particularly the
taxation of capital gains relating to
“property-rich” companies, with
the OECD model treaty. It gives
Cyprus “most favoured nation”
status by providing that Russia will
implement similar provisions in all
its double tax agreements, and will
amend the Protocol to match any
more favourable terms it may
agree with any other treaty partner.
The withholding rates applicable to interest and
royalties will be zero, and the rate for dividends 5%,
subject to a minimum investment level of b100,000.
These rates are substantially lower than the general
rates of Russian withholding tax, and lower than the
rates set out in many of Russia’s other double taxation
agreements, which means that the use of a Cyprus
holding company can reduce the impact of Russian
withholding taxes and significantly increase the post-tax
return to investors.
An important consequence of the Protocol was the
removal of Cyprus from the list of jurisdictions that do
not qualify for the Russian participation exemption. This
development should see an increase in the use of
Cyprus as a jurisdiction for Russian investment.
THE OVERALL CONCLUSION
The final choice of a holding company location is a
question of balancing tax and non-tax considerations.
While no single location can claim first place on every
test, Cyprus should always be on the shortlist. ■
About the author:
Elias Neocleous is head of the corporate and
commercial department at Andreas Neocleous LLC.
Andreas Neocleous LLC
Neocleous House
195 Makarios III Avenue
CY-3030 Limassol
P.O. Box 50613
CY-3608 Limassol
Tel: +357 25 110000
Fax: +357 25 110001
Email: info@neocleous.com
Web: www.neocleous.com
