Holding and finance companies
 
Function
An optimal holding company structure should provide for the following requirements:

1. The holding company should be able to extract dividends from the operating company or companies free of withholding tax or at the lowest possible rate of withholding tax.
2. The holding company should be able to dispose of its investment in the operating company without any liability to capital gains tax or its equivalent in the operating country.
3. The domestic law of the holding company jurisdiction should wholly or largely exempt such dividends and capital gains from local tax.
4. The investors (or the ultimate holding company) should be able to extract dividends from the holding company without any charge to tax in the holding company jurisdiction.
5. The holding company should be able to obtain interest deduction in full.

 
Cypriot holding companies
A Cypriot holding company is generally set up as an ordinary company resident in Cyprus. Besides holding shares in domestic or foreign companies or both, the holding company may also have other functions such as trading, manufacturing or financing; there are no restrictions on its activities. It is taxable in Cyprus on its worldwide income, provided that it is managed and controlled in Cyprus.
 
The advantages of establishing a Cypriot holding company include:

• Tax treatment of incoming dividends - maximum of 15% SDC tax which may be exempt)
• Tax treatment of capital gains on the sale of shares - Exemption from tax of trading gains and capital gains from the sale of shares in a subsidiary, but gains from shares in companies owning immovable property in Cyprus are not.
• Withholding tax on outgoing dividends - Outgoing dividends remitted to its ultimate parent company are not taxable.
• Withholding tax on interest - Exemption at source of interest it the beneficial owner is resident in an EU member state other than Cyprus.
• Interest deduction for borrowing costs - Interest expenses payable by a Cypriot company are fully tax-deductible.
• Thin capitalization - No specific provisions relating to thin capitalization of companies, such as limits on debt-equity ratios.
• Controlled Foreign Company (CFC) legislation - Cyprus’s CFC legislation is much less restrictive than that of many other jurisdictions, targeting only certain types of income that are not derived from real business activities to create a distinction between participation (active income) and investment (passive income). The CFC provisions will be triggered only if more than 50% of the non-resident company activities result directly or indirectly in investment income, and the foreign tax burden on the income of the non-resident company paying the dividend is substantially lower than the tax burden of the company which is receiving the dividend and is tax-resident in Cyprus.
• Double taxation treaties - Cyprus double taxation treaty network ensures that dividends received by a Cypriot holding company from its foreign subsidiary are either exempt from or subject to low withholding tax in the subsidiary’s place of residence.
• Tax rate of 12.5% - Tax on company profits is at the rate of 10% (lowest in Europe) and legislation does not prevent from performing operating activities. Companies enjoy carry forward of losses and treatment of foreign taxes as expenses.
• Interest income - Liability to corporation tax and SDC on interest receivable is determined by whether the interest is active or passive.

 
The EU Parent/Subsidiary Directive
The Directive was incorporated into Cypriot law in the form of the Income Tax Law and the Special Contribution for the Defense Law. These Laws establish a liberal system of double taxation avoidance. The new tax regime extends to non-EU countries, as the Laws distinguish only between residents and non-residents of Cyprus. On the taxation of dividends, the Cyprus tax laws are even more liberal than the Directive
 
Company reorganizations
The new tax rules for company reorganizations such as mergers, divisions, transfers of assets (including immovable property) and exchanges of shares follow the EU Merger Directive. The rules extend to domestic reorganizations, cross-border reorganizations involving member and non-member states and reorganizations abroad with tax implications in Cyprus. Such reorganizations do not give rise to recognition of income at company and shareholder level and any gains made are exempt from any tax in Cyprus. Losses incurred before the reorganization may be carried forward by the new entity, and losses from one activity may be offset against profits from another. No stamp duty is payable on documents effecting a reorganization.
 
General Advantages for locating a Holding Company in Cyprus-Conclusion
In general, the Cyprus taxation regime constitutes Cyprus a highly attractive holding company jurisdiction.  Summarizing below the benefits:

1. groups investing outside Cyprus may use the Cyprus Holding company as intermediary and in general be tax exempt in Cyprus and not charged with withholding tax as they leave;
2. subsidiaries that have scope for significant capital appreciation may be held in Cyprus and sold without any liability to tax on the gain;
3. assets (including, in certain circumstances, foreign real estate) that have scope for significant capital appreciation may be placed in a Cypriot corporate structure and sold without any liability to tax on the gain;
4. Cyprus’s double tax treaty network and the EU Parent/Subsidiary Directive offer a number of other tax planning opportunities;
5. Cyprus offers a favourable exit strategy under Cyprus law which allows payment of dividend, interest and royalties without payment of withholding tax.
6. An ultimate holding company can be located or relocated in Cyprus as a tax jurisdiction in order to enjoy all the tax and cost benefits.
7. In the case of a fund or an investment vehicle, Cyprus jurisdiction offers no tax on transactions in securities
8. Cyprus has enacted legislation to implement the European Council SE Regulation, and has already implemented the EU Mergers Directive, allowing companies from other member states to re-form in Cyprus without any tax cost.

 
The holding company must genuinely be resident in Cyprus. Mere incorporation in Cyprus is not sufficient: the locus of real management and control must be in Cyprus.
 
All in all, the final choice of a holding company location is a question of balancing tax and non-tax considerations.