The Cyprus Holding Company: A gateway to Europe, Asia, Africa and the Middle East Tax Services October 2019 kpmg.com.cy 02 | Section or Brochure name Table of contents The Cyprus Holding Company 3 Corporate Tax provisions 4 Other taxes 6 Other considerations 8 Tax Treaties: withholding tax tables 9 Cyprus Holding matrix 12 The Cyprus Holding Company 1 The Cyprus Holding Company Cyprus is a full member of the European Union and a this spirit, assumed the status of an early adopter under member of the Eurozone. Strategically positioned to the Common Reporting Standard initiative. connect Europe to Africa, the Middle East and Asia, Aspiring to become the jurisdiction of choice, Cyprus Cyprus is a natural hub for business and trade. offers one of the lowest corporate rates in the EU, The recent political and social upheaval in the Eastern combined with a notional interest deduction on newly Mediterranean basin, which has spilled over the wider introduced equity and a fully reformed Intangible area of the Middle East, in combination with the political Property regime in line with OECD’s Base Erosion Profit and economic uncertainty in the greater region, not Shifting (BEPS) action plan and the nexus principle. only upgrade the strategic position and geopolitical role KPMG operates in Cyprus since 1948 and currently of Cyprus in this part of the world, but also they render employs more than 900 professionals working from 6 Cyprus a symbol of security and stability, in its capacity different offices around the country. as the Easternmost border of Europe. We are a member of the global network of KPMG, one In the last decades, Cyprus has established itself of the world’s largest professional firms providing Audit, as a reputable and trust-worthy financial centre Tax and Advisory services, employing 207.000 people in complemented by an advanced legal, accounting and 153 countries and territories. Our clients look to KPMG banking system, highly skilled and multilingual workforce, for a consistent standard of service based on high excellent telecommunications infrastructure and order professional capabilities, industry insight, local convenient year round flight connections. knowledge and expertise. The Cyprus tax legislation is fully compliant with the Join us and experience at first hand a wider spectrum of EU Acquis Communautaire and all EU Tax Directives. It opportunities available to you and your business. is in full compliance with the EU Code of Conduct for Business Taxation and against harmful tax competition and has been recently rated as “largely compliant” by George Markides the OECD-hosted Global Forum on transparency and Board Member, Head of Tax exchange of information for tax purposes. Cyprus has in The Cyprus Holding Company 3 Corporate Tax provisions Tax residency (SDC ) at the rate of 30% on a gross Royalties A company is considered to be a tax basis. If the intangible property right is resident of Cyprus if the management granted to a Cyprus company for and control function is exercised in Dividends use outside Cyprus, then there is no Cyprus. Inter-company dividends withholding tax and the corporate A Cyprus tax resident company is tax rate (12,5%) is applied only on Corporate tax exempt from tax when receiving the royalty income left in the Cyprus Trading profits are taxed at the rate of dividends from another Cyprus tax Company. Gross amounts of 12,5%, one of the lowest corporate resident company, provided the royalties from sources within Cyprus income tax rates in Europe. dividend is not indirectly received by a company which is not a tax Notional interest deduction (NID) after the expiry of a four year period, resident of Cyprus are liable to 5% The NID is available on equity issued from the end of the year to which withholding tax on film royalties and by a Cyprus company on the profits giving rise to the dividend 10% withholding tax on any other or after 1st January 2015 and used in relate. royalties, unless a lower rate applies the business for the purpose under a DTA (for income received from qualifying IP assets, see below). of generating taxable income. It is Dividends received from abroad calculated by multiplying the Dividends received from abroad by Intellectual property rights (IPR) new equity amount by a so called a Cyprus tax resident company are A new IP regime is in place as from “reference” interest rate. The exempt from corporate income tax, July 1st 2016, fully aligned with BEPS reference interest rate is equal to the provided they are not allowed as a tax Action 5 and the Nexus principle. yield of the 10-year Governmental deduction in the jurisdiction of the bond of the country in which the new foreign paying company. Profits from qualifying intangible capital is invested, plus 3%. The NID assets are entitled to an 80% is deductible against the company’s Dividends received from abroad are deduction, calculated as per the taxable profits that arise as a result also exempt from Special Contribution statutory formula set in line with the of the newly introduced capital and for Defense (SDC), if one of the Nexus principle. The resulting cannot exceed 80% of the taxable following conditions is satisfied: effective tax rate will always be 2,5% profit, as calculated before allowing 1. The company paying the dividend or less. for this deduction. does not engage more than 50% directly or indirectly in activities Interest Income A tax payer may elect to claim all or which lead to passive income Active interest income (interest part of the available deduction for a (active vs passive test) income effectively connected with particular year. OR the carrying on of a trade or business) 2. The foreign tax burden on the is subject to the corporate income tax In the event of a loss, only 20% of income of the company paying rate of 12,5%, as any other income. that loss can be offset against income the dividend is not substantially from other sources or be carried lower than the tax burden in Passive interest income, (income not forward to be offset against income of Cyprus (effective tax rate test). If connected to a trade or business), is the following tax years. neither of the above conditions is exempt from corporate income tax satisfied, then dividends received and instead it is taxed separately at Transitional arrangements have also from abroad are taxed at the SDC the Special Contribution for Defence been introduced, allowing the level at the rate of 17%. provisions of the old IP regime to continue to apply up and until the 30th June 2021. Tax credit availability The PE exemption method will retain FOREX differences A tax credit will be afforded, according the default position in the absence of Foreign exchange (FX) gains or losses to the Double Taxation Agreements an election. will be tax exempt/not tax deductible (DTAs) concluded by Cyprus. In the irrespective of whether they are absence of a DTA, Cyprus unilaterally Trading in securities realised or unrealised. The exemption affords a credit for the foreign tax, Any income arising from trading in will not apply to companies that are paid up to the amount of tax that “securities” is completely exempt trading in currencies and currency would have been payable in Cyprus from tax. The term securities includes derivatives. Such companies on the same income. For dividends but is not limited to: ordinary and irrevocably elect for unrealised gains/ received from EU Member States, the preference shares, founder’s shares, losses not to be taxed/tax deducted underlying tax credit is also available. options on titles, debentures, bonds, accordingly. short positions on titles, futures/ Withholding taxes forwards on titles, swaps on titles, Acquisition costs There are no withholding taxes depositary receipts on titles, rights Any interest expense incurred for the on payments to non tax resident of claims on bonds and debentures, 100% direct or indirect acquisition persons, other than royalties derived index participations (only if they result of shares in a company will be from sources in Cyprus by a company in titles), repurchase agreements deductible for tax purposes, provided which is not a tax resident of Cyprus. or Repos on titles, participations that the assets of the company in companies, units in open-end or acquired do not include any assets Offshore drilling activities closed-end collective investment that are not used in the business. A 5% withholding tax is levied on the schemes such as Mutual Funds, remuneration derived by a non tax International Collective Investment Interest limitation rule resident person with no permanent Schemes (ICIS) and Undertakings for As from 1st January 2019 exceeding establishment in Cyprus, as a result Collective Investments in Transferable borrowing costs (EBC)* shall be of the provision of services within Securities (UCITS). deductible only up to 30% of the Cyprus in relation to the extraction, taxpayer’s earnings before interest, exploration or use of the continental Tax losses tax, depreciation and amortisation shelf, as well as the establishment Group relief is allowed for at least (EBITDA). and use of pipelines and other seventy-five percent (75%) group Not captured by the rule: installations on the ground, on the holdings and is applicable only on • EBC up to EUR 3.000.000 seabed and on the surface of the sea. current year’s results, assuming • Standalone entities and financial claimants are Cyprus tax resident undertakings Foreign Permanent Establishments companies and members of the same • Loans concluded before 17 June 2016 (PE’s) group for the whole tax year. * EBC is the amount by which tax deductible borrowing costs exceed taxable interest The profit of a foreign PE of a Cyprus income.