Cyprus
Best fiscal location for Holding-management in Europe
Upon joining the European Union on May 1st 2004, Cyprus instantly became the most favourable holding jurisdiction in Europe. A Cypriot holding company can receive dividends from Dutch subsidiaries untaxed, and pass them on to its own shareholders untaxed as well. Capital gains from the sale of shares are also not taxable in Cyprus. This has made Cyprus’ fiscal climate more attractive than that of the European holding jurisdictions that were preferred until then: Britain, Denmark, Luxembourg, Switzerland, and The Netherlands.
No tax on dividends
Since its membership, the EU Parent-Subsidiary directive applies to Cyprus as well, barring withholding taxes on dividends from subsidiaries in other member states. Were it not for this directive the Netherlands would levy a 25% withholding tax, regardless of the holding company's jurisdiction. As withholding taxes are unknown in Cypriot tax law, we can pass on these dividends to an investment holding company in a zero tax haven.
Converting capital gains into dividends
In addition it is possible to avoid taxation of capital gains. A Dutch intermediate holding is essential to make the capital gains route work. As there is no Dutch-Cypriot Double Tax Treaty, gains realised on selling a Dutch subsidiary would be subject to Dutch corporation tax of 29,6%. A Dutch holding in between the Cyprus holding and the Dutch operating company however converts the capital gains into untaxed dividends paid to the Cyprus holding.
These savings make a carefully-planned tax structure cost effective from pre-tax profits of € 20.000 and higher. An international holding structure therefore is no longer the privilege of multinationals, but a good investment for small and medium-sized companies as well. When a Trust or Foundation in turn holds the shares of the Cypriot holding any dividends received from the Cypriot holding and any gains realised from selling the shares in the Cypriot holding remain untaxed and protected indefinitely. As the essence of this structure is to avoid dividend tax, we call it the Dividend Structure.
Using Cyprus as a base for Finance, Intellectual property and trading companies
Cyprus has the lowest Corporation Tax rate within the EU. EU-membership has not only made Cyprus a perfect location for holding companies. Thanks to a judgement of the European Court of Justice, Dutch businesses can now be financed from Cyprus and deduct all interest from their profits. In Cyprus this interest is subject to the lowest Corporation Tax of any EU member state. This nominal rate of 10% can effectively be lowered to under 1% by financing the Cypriot holding in turn from a zero tax haven. This is possible because Cyprus does not levy withholding taxes on interest, just as there are none on dividends and on royalties. Royalties from intellectual property rights like patents, brands, software, and (franchise) formulas can be routed to a zero-tax jurisdiction in the same manner with the same tax advantages. Finally, by transferring part of its activities to the island, trading companies involved in import and export are also in a position to benefit from the favourable tax regime in Cyprus. With its financial and economic infrastructure, and English as the language of business, Cyprus has developed into the most competitive location for holding, finance companies, intellectual property, and trading companies in Europe.
For consultants Cyprus can prove a lucrative operational base as well. With low costs and high fees their tax bill can sky-rocket. Our office in Limassol can provide more detailed information on an appropriate structure for consultants, freelancers, and interim-managers.