Cyprus Holding Company - The Swiss Connection

The use of a Cypriot Holding Company to hold a Swiss Permanent Establishment (branch) can afford attractive tax advantages, especially where the activity involved is re-invoicing.Cyprus is a well-established international financial centre, which offers low corporate tax rates (10%) and multiple tax benefits for holding companies. Some of the principal tax advantages for Cyprus Holding Companies are as follows:

• There is a broad network of double tax treaties, and being included within and having full accession to the EU, it is party to the EU Parent-Subsidiary Directive, and thus dividend distributions from EU countries up to Cypriot Companies are free of withholding tax.
• Exemption from corporate tax on dividends received from foreign companies.
• No withholding tax on distributions from a Cyprus Holding Company to a non-Cyprus resident shareholder.
• No capital gains tax, except where Cypriot real estate is held either directly or indirectly via shares in a private company.

In accordance with the Tax Law of Cyprus, income received from a foreign PE is prima facie exempt in Cyprus, subject to a passive income test being passed, whereby PE status would not be granted if the PE directly or indirectly engages more than 50% in activities which generate investment income, and the foreign tax burden of the PE is substantially lower than the tax burden of the Cyprus resident company.

It may be advisable to obtain a tax ruling in Cyprus to be absolutely sure that any PE income paid up to the holding company is exempt from tax in Cyprus.

Substance

Crucial to the above structure being tax efficient is the ability to demonstrate substance in Cyprus. In order to be deemed resident in Cyprus, a company must be “managed and controlled” there, with the majority of directors being resident there, and with all board meetings and important policy decisions taking place there. In addition, it may be desirable to set up dedicated telephone and fax lines, and have employees working for the Cyprus company.

To satisfy the Swiss tax authorities that there is a commercial rationale behind the structure, it is recommended that a binding ruling be obtained in, for example, the Canton of Zug before proceeding with any re-invoicing structure.

How can IFG help?

IFG has offices in both Switzerland (Geneva, Zurich and Zug) and Cyprus, and with an excellent network of lawyers and accountants is ideally placed to establish and administer such structures, whilst at the same time drawing on any expertise or advice where required.

IFG does not provide taxation or legal advice. The information and expression of opinion expressed in this briefing note are not intended to be a comprehensive study or to provide taxation or legal advice. Specific advice concerning individual situations should be taken and IFG can provide introductions to advisers who specialise in this area.