What are Holding Companies?
In simple terms, Holding Companies are companies that do not offer a product of services but exist for the sole purpose of owning and controlling other companies via share majority; they are usually found within a Group of Companies as the Parent entity of the other Subsidiary companies. As such, their main source of income derives as dividends from this disposal of capital to its subsidiaries.
What are the main operations of a Holding Company?
As mentioned, Holding Companies do not offer any products or services to the general public, but they do have operations as they are managing their Subsidiaries through their share ownership control. They do not manage the day-to-day operations of their subsidiaries but they have the power to assign directors and managers who, in turn, report back to the Holding Company on matters related to strategic decisions and overall performance. To this end, the operations of its Subsidiaries are not the responsibility of the Parent entity but the assigned individuals who directly control the Subsidiaries. Holding Company’s operations are limited to managing the disposable capital to the Subsidiaries as an investment, evaluating the performance of the investment and giving instructions and/or objectives to the directors of the controlling investment.
Why establish a Holding Company?
For an investor that wishes to establish multiple companies, or even one company in need of sup- porting services such as property management, holding companies offer one major advantage. Developing a structure where the risk and liability of the Parent entity is distributed to its Subsidiaries which offers a level of protection for the investor.
The most significant risk an investor faces is the failure of the company. By having a Holding Company structure, if one of your subsidiaries fails the other will remain unaffected and your Parent entity will only lose a portion of the disposable capital. Consider a structure where you establish a holding company with one subsidiary to own its brand name and trademarks, another to own its immovable property, another to own its movable assets or equipment and others to operate the offering of its products and services. This way, each subsidiary, as well as the holding company itself, has limited financial and legal liability.
Another benefit of having a Holding Company is the limitation of tax liability by strategically basing your subsidiaries in jurisdictions with lower tax rates.
What are the important considerations for establishing a Holding Company?
As mentioned, while establishing a Holding Company one must consider the structure and tax liability of all the entities. The structure greatly depends on the products and services you are offering, with the major criteria being the available investment funds of the Parent entity, and the synergy and cost of Subsidiaries, as well as the legal implications your structure may have.
Tax is the second most important consideration as there are numerous tax international structures you can take advantage of, remaining within legal compliance in the selected structure. Keep in mind that the Holding Company’s income derives from dividends earned from its subsidiaries which, depending on the jurisdiction, can be subjected to non-standard tax rates, thus location of your Primary entity can be in a different jurisdiction from that/those of its Subsidiaries.
How individual investors can use a Holding Company?
Rather than owning assets personally, and therefore being liable for them, the Holding Company can own them, mitigating all the risks of your personal assets to the Holding Company.
LOCATION CRITERIA
The jurisdiction where you establish your Holding Company is the primary consideration for any investor as the proper choice will greatly benefit and protect your business interests. Depending on your business plan, products and services your Subsidiaries must use criteria in relation to their structure and synergy, whereas your Parent entity must consider the financial implications of disposal of funds and tax.
The following considerations are criteria related to the holding activities in order to select the prime location in which to set up your holding company:
1. Incoming Dividends – Withholding Tax on Foreign Jurisdiction
Incoming dividends remitted by the subsidiary to the holding must either be exempt from, or subject to, low withholding tax rates relying on any applicable foreign legislation or any applicable double tax treaty.
2. Outgoing Dividends
Outgoing dividends paid by the holding company to its ultimate shareholders must either be exempt from or subject to low withholding tax rates in the holding company’s jurisdiction.
3. Dividend Income Received – Local Tax
Dividend income received by the holding company must either be exempt from or subject to low corporate income tax rates in the holding company’s jurisdiction.
4. Capital Gains Tax on the Sale of Titles
Profits realised by the holding company on the sale of titles in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company’s jurisdiction.
5. Additional Tax Considerations
Additional tax considerations, which may identify whether a particular location is suitable for a holding company to be established, may include:
• the existence or not of flexible reorganisation rules;
• whether group relief is granted;
• possibility of losses to be carried forward;
• the existence or not of Controlled Foreign Company (CFC) rules;
• the existence or not of thin capitalization provisions and the ability to obtain interest
deduction as an expense in full;
• possibility of re-domiciliation to other jurisdictions;
• favourable or not provisions as to the taxation of interest income and royalties;
• percentage of withholding taxes on interest and royalties;
• obligation or not to become registered for VAT;
• favourable or not liquidation provisions and taxation of assets distributed to the
shareholders; and
• the level of corporate and local tax rates in respect of other income.
Jurisdictions which provide some or all of the above criteria with flexible and favourable rules at low tax rates, are considered as prime locations for holding companies. The location that is more suitable in each specific case ultimately depends on the particular circumstances in question and on individual tax and non-tax objectives.
CHOOSING CYPRUS
Deciding on a suitable location to incorporate a holding company can be difficult and requires consideration of several relevant matters. The Cyprus holding company however is often a preferred vehicle of choice for managing investments of high-calibre, worldwide clients, particularly for business in Europe, Africa, Asia and the East. The Cyprus holding company is favoured by many for numerous reasons. For instance, it can be incorporated and maintained at very low cost and overhead expenses, and benefits from one of the lowest corporate income tax rates in the EU at 12.5%. Moreover, the Cyprus holding company can be redomiciled at any time out of Cyprus, provided that the third country permits so as well. Although there are no restrictions on its legal form, the most popular business vehicle used in Cyprus is in the form of a Cyprus private company limited by shares.
Tax Advantages
Cyprus offers significant international tax planning incentives and prospects. International businesses can enjoy the following advantages by using a Cyprus Holding Company:
(a) Tax exemption on disposal or trading of securities.
Income arising from the disposal or trading of securities is exempt from corporate tax. The term “securities” include shares, debentures, bonds, founder shares, options on titles, or other securities of companies or other legal entities in Cyprus or abroad. Income from the disposal of the shares of the Cyprus holding company will be exempt from tax.
However capital gains tax is imposed at a rate of 20% only with respect to gains realised
from the disposal of:
• Immovable property situated in Cyprus; or
• shares in companies whose property consists of, inter alia, immovable property situated
in Cyprus; or
• shares of companies which either directly or indirectly participate in a company or
companies which own immovable property situated in Cyprus and at least 50% of the market value of such shares is derived from the relevant immovable property.
(b) Dividends
Dividend income received from another Cyprus tax resident company or from abroad, or from a foreign permanent establishment of a Cyprus holding company, is exempt from Corporate Income tax unless dividends are deductible for the purposes of determining the foreign tax on the income of the company paying the dividend. If the dividend exemption is not available, it should be subject to Corporate Income tax at the rate of 12.5% and the dividend should not be subject to the Special Contribution for the Defence Fund of Cyprus (“Defence Tax”).
For dividend from abroad the exemption does not apply if both of the following conditions hold:
• more than 50% of the activities of the overseas paying company result directly or indirectly in passive income (non–trading income), and
• the tax burden on the foreign company income is significantly lower than the Cyprus corporate rate (i.e., less than 50% of the 12.5% Cyprus corporate tax rate).
If a dividend is received from an EU resident company, the EU parent – subsidiary directive applies, in which case there will be no withholding tax.
If the EU parent subsidiary directive requirements are not met, or dividend is paid from a non-EU resident company, then the provisions of the double tax treaty apply, if one exists between Cyprus and the other country, regarding the rate of withholding tax.
In any case, whether or not a tax treaty is in place a tax credit is provided under the Cyprus Tax regime to the amount of the foreign withholding tax.
(c) Withholding tax
Dividends or interest paid by a Cyprus resident company to non-resident shareholders, corporate or individuals, are not subject to any withholding tax. The same applies to royalties paid from Cyprus with the exception of intellectual property used in Cyprus. In this case the withholding tax is at the rate of 10%.
Dividends received from a non-CY Company are exempt from Defence Tax, subject to certain conditions. If the applicable conditions are not met, Defence Tax is levied at a rate of 17% on the gross amount of dividends received.
(d) Corporate Tax rate
A holding company resident in Cyprus is liable to tax on all worldwide income at a single rate of 12,5% which is one of the lowest in the E.U.
A company is considered to be tax resident in Cyprus if it is managed and controlled from Cyprus.
(e) Group loss relief and losses carried forward
Loss in one group company may be set off against the profit of another group company. Two companies will qualify for group loss relief, if both are residents of Cyprus and have been members of the group for the whole tax year, and the group ownership exceeds 75%. Losses of a year can only be set off against profits for the same year.
Losses incurred in any tax year from any trade or business, irrespective of whether it is carried in Cyprus or abroad and not set off against income from other sources, can be carried forward and set off against profits of the next five years.
(f) Liquidation
The sale of participations and shares or the liquidation for a Cyprus holding company is not subject to exit taxes for non-residents, provided that the company does not hold immovable property in Cyprus. The disposal of the immovable property will be subject to capital gains tax.
6. Additional Tax Considerations
Re-organisation
Re-organisation is fully exempt from tax. Re-organisation can include merger, de-merger, transfer or exchange of assets and shares between Cyprus resident companies and / or non-resident Cyprus companies.
Company Losses
Losses can be carried forward to the next year and be set off against future profits. You are allowed to carry over losses up to five years forward.
Group Relief
Cyprus has amended the Group relief provisions of the Law and other than companies’ tax-res- idents in Cyprus, now, accommodates subsidiary companies tax residents in another Member State.
Group Relief allows for taxable losses to be diverged to another group member company. This applies not only to companies’ tax residents in a Member State but also to countries that include Group Relief in the DTT, or countries participating in Convention on Mutual Administrative Assistance in Tax Matters multilateral convention for exchange of information.
Holding Companies can be considered part of a Group if they hold controlling voting rights of 75% or more of a subsidiary or another company.
Controlled Foreign Company (CFC) Legislation
Cyprus does not have Controlled Foreign Company (CFC) Legislation and, in accordance to a recent judgment of the European Court of Justice (ECJ) (between Cadbury Schweppes and the UK Commissioners of Income Tax), the CFC rules cannot be enforced once the subsidiary registered in a Member State is engaged in genuine economic activities.
To this end no income is credited to a Cyprus parent even if the income arises in a tax heaven country or in respect of passive activities.
Controlled Thin Capitalisation
Rules
No provisions in the law exist requiring the companies to maintain a debt-to-equity particular ratio. Thin capitalisation refers to the situation in which a company is financed through a relatively high level of debt compared to equity.
Re-domiciliation
Foreign companies can now benefit from a new legislation which allows the re-domiciliation to and from Cyprus.
Listing in Stock Exchanges
The Holding Company can be listed either in Cyprus Stock Exchange or in any other reputable International Stock Exchange, under certain conditions. Being an EU Member State, the listing is subject to regulations and standards imposed by EU, however you can enjoy the benefits offered by EU listing platforms.
VAT Scope
Holding Company activities fall outside the scope of the VAT in Cyprus and if the company engages exclusively to holding activities is not entitled or obliged to register for VAT purposes.
Stamp Duty Provisions
Under the stamp duty legislation of Cyprus, stamp duty is imposed on documents / contracts / and other printed instruments which refer to assets in Cyprus, or matters or things that will be done in Cyprus irrespective of where the documents are signed. Stamp duty charges starts from €35 for no amount reference and can reach a 0.20% for amounts over €170,000, up to a maximum fee of €20,000.
Trading Income
Corporate Income Tax in Cyprus is subject to a 12.5% on net profits.
Liquidation / Dissolution
If a Cyprus Holding Company is liquidated and its assets are distributed to its shareholders; if the shareholders are non-residents of Cyprus, then the distribution is done without any taxation on the non-resident shareholders.
CHOOSING CYPRUS CONCLUSION
With the tax changes and updates, its EU membership and it strategically placed geographical position, Cyprus offers numerous advantages for holding companies. Cyprus has become a key location for Holding Companies to control and manage their Subsidiaries worldwide. Prime location highlights are:
• the ability to receive dividends on low or zero withholding tax rate,
• the non-taxation of dividends received under the circumstances mentioned above,
• the non-taxation of profits from the sale of shares,
• the tax-free distribution of dividends to its non-resident shareholders, and
• the flexible re-organisation rules along with all the other tax considerations and incentives.