Cyprus tax legislation, its tax benefits and asset protection

Cyprus has been an attractive place to do international business for many years, mainly for commercial purposes. Even after the introduction of 10% corporate tax, both for resident and non-resident companies, Cyprus remains one of the countries with the lowest level of taxation in the EU. In recent years, Cyprus has developed its tax legislation and emerged as a respectable place for multinational investors to consider the creation of a holding company for their shares.

Tax benefits Withholding taxes on dividends from non-Cypriot subsidiaries

Cyprus is part of the EU Matrices and Subsidiaries Directive, which provides for exemption from withholding tax on dividends remitted by an EU subsidiary to its Cypriot corporate headquarters. The qualifying participation requirement is 25%.

If the subsidiary is not included under the EU Matrix and Subsidiary Directive, you can count on one of the 45 double tax treaties that provide for the release or reduction of withholding tax on dividends in favor of the parent company in Cyprus. Its extensive network of double tax treaties covers many countries in Eastern and Western Europe.

The dividends received

The national legislation of Cyprus provides for the total exemption from tax on dividends received by a corporation in Cyprus with foreign holdings. The qualifying participation required is 1%.

The only exception to this rule is the dividends of a subsidiary that exceeds 50% of activities derived from investment income and that income from participations, of which the subsidiary is paying dividends, is subject to tax at a rate lower than 5%. Dividends obtained directly or indirectly from the commercial subsidiaries are not considered income from participations.

Dividends paid

The additional declarations of dividends of a Cypriot company to its parent company abroad, is again free from withholding at source, regardless of the country of residence, of a new tax regime of the receiving parent company or of the existence of an agreement of double taxation, be it a natural or legal person.

Capital gains from the sale of shares

 The law provides for the total exemption of Cypriot corporate companies in taxes on capital gains and income taxes for the elimination or liquidation of their participation in foreign subsidiaries (unless the subsidiary owns real estate in Cyprus).

Transfer of shares or liquidation of a Cypriot company

No capital gains tax, or other tax, is applied in Cyprus on the assignment or liquidation of the participation in a Cypriot holding company by non-Cypriot shareholders. The rule does not make exceptions for parent companies located in tax havens, and does not take into account the provisions of a double taxation treaty, if any.

Unilateral assistance tax credit

If an income is subject to taxes in Cyprus, its national legislation grants unilateral reductions of that tax already paid abroad.

There is no annual tax on capital or net worth in Cyprus. 
Other Incentives for Cypriot corporate companies:

• There are no background requirements 
• There is no minimum participation period required to be eligible for tax exemption. 
• No rules on undercapitalization. 
• There are no restrictions on debt instruments. 
• No time restrictions to drag fiscal deficits. An assistance group for handling tax losses is available. 
• There is no need to register VAT in Cyprus if the main purpose of the company is only to hold shares without interfering in the management and administration of the subsidiaries, directly or indirectly. 
• There is no Law of Control of Foreign Corporations or equivalent law. 
• If the re-organization management falls within the definition of the EC Merger Directive, it is exempt from capital gains tax and corporate taxes, as well as from the transfer of quotas. 
• The advance interpretation of the Tax Law and prior approval are available with the Income Tax Commissioner, upon request, in some cases. 
• Cyprus is a full member of the European Union and enjoys the reputation and privileges attached to European Companies.

It is worth mentioning that Cyprus is endeavoring to create an institution of fiscal incentives instead of a tax haven. Therefore, when settling in Cyprus you can, count not only with multiple tax advantages, but also with your status as a respectable business center.