The most important features of the tax system, which are beneficial to Cyprus Holding Companies, arise from the terms of EU Directives and Double Tax Treaties concluded by Cyprus and are stated below:

Participation Exemption:

1. Foreign dividends are tax-exempt (if a minimum 1% holding in the company paying the dividend is maintained). Also note that this exemption does not apply if the non-resident company, paying the dividend, carries on, directly or indirectly, more than 50% of investment activities AND the overseas tax burden is significantly lower than the Cyprus Tax Burden [(practically interpreted by the Tax Authorities to mean less than 5% “headline tax”).

2. Low, or no withholding taxes on outgoing dividends, interest and royalties (no withholding tax on dividends and interest irrespective of the country or residence of the recipient (even offshore jurisdictions) or the existence of a Double Tax Treat; no withholding tax on royalty payments for use of the rights outside Cyprus, 10% if the rights will be used in Cyprus (subject to DTT & EU Directives) and 5% on films (subject to DTT & EU Directives).

3. No capital gains tax is payable on the sale or transfer of securities and the gains are exempt from Income Tax (except gains from disposal of shares in companies owning Real Estate situated in Cyprus – only to the extent that the gain relates to the particular Cyprus Real Estate). Also, profits from a Permanent Establishment (PE) outside Cyprus are tax-exempt and its losses can be set-off against Cyprus Income (this exemption also does not apply if the PE carries on more than 50% of investment activities – passive income – AND the overseas tax burden is significantly lower than the Cyprus tax burden). This exemption (PE) in conjunction with the use of some of Cyprus’ DTTs can result in PE profits avoiding tax altogether.

4. It has to be noted that, compared to other Holding Company Jurisdictions, only Cyprus and the UK have 0% Dividend Withholding Tax (DWT), so no need for complex and expensive “structuring out” of DWT. THIS IS AN IMPORTANT COMPETITIVE ADVANTAGE OF CYPRUS compared to other Holding Company Jurisdictions.

5. No capital gains or income tax on the liquidation of participations or the liquidation of the Cypriot Holding Company itself.

6. No net worth taxes (as mentioned before no capital gains taxes) during the life of the Cypriot Holding Company.

7. Tax losses can be carried forward indefinitely to be set-off against future profits.

8. Mergers, takeovers and other re-organizations can take place within groups with no tax consequence.

However, it is worth noting that irrespective of any holding company scheme or any Treaty for the Avoidance of Double Taxation, all profits emanating from real estate assets, are taxed, or partially taxed, subject to the laws of the country in which the real estate property is being situated.

In conclusion, the Cyprus Tax System offers:

1. The extraction of foreign sourced dividends, at reduced, or zero rates of foreign withholding tax (owing to the use of the Parent Subsidiary Directive or the Use of Double Tax Treaties if the Directive is not applicable).

2. The distribution of available profits to non-resident shareholders at zero percent rates of dividend withholding tax, (0%) irrespective of jurisdiction or the absence of a DTT (even to offshore jurisdictions).

3. The realization of capital gains from the disposal of shares in foreign companies at zero percent rates of corporation and capital gains tax on the gains, irrespective of holding period and shareholder percentage and no capital gains tax on the liquidation of the Holding Company itself.

4. The receipt of foreign dividends at zero rates of corporation tax or special defence contribution (local withholding tax) or any other local taxes (subject to conditions – anti avoidance provisions that are easy to satisfy), i.e. “an EU Holding Company with no domestic tax leakage on holding activities”.

All in all Cyprus is a serious international corporate service and international tax centre that should be considered seriously by any international investor who wishes to set up a company abroad.