Maarten F. Koper Senior Tax Manager Ernst & Young

1

A comparative analysis of the position of Cyprus as an

international business centre vis a vis other EU Member

States

A comparative analysis of the position of Cyprus as an

international business centre vis a vis other EU Member

States

Maarten F. KoperSenior Tax Manager Ernst & Young

Maarten F. KoperSenior Tax Manager Ernst & Young

April 19, 20232

Holding CompaniesHolding companies perform the following functions within a corporate group of companies:

• Ownership of shares / participation interest in group companies

• Accumulation of capital and shareholder value

• Reinvestment of capital into new projects

• Distribution of profits to shareholders

• Consolidation of various business segments

• Receiving dividends from operating companies

• Consolidated financial IFRS financial statements

• Asset protection / mitigation of risks

April 19, 20233

Holding CompaniesCyprus as a jurisdiction for holding companies suits a number of criteria which are considered to be:

• Absence (under a double tax treaty or based on EU parent-subsidiary directive) of WHT on dividends paid from subsidiary company to Cyprus holding company

• Low overall tax burden in Cyprus :

– Low (corporate) income tax rates,

– No tax on dividends (subject to conditions),

– No CFC rules (which may tax retained earnings on foreign low-taxed subsidiary companies generating (passive) investment income)

– Low duties on establishment of companies,

– No tax on capital gains;

• No outbound WHT on profit distributions to foreign shareholders

• Reasonable establishment and operational costs.

April 19, 20234

(Group) Finance Companies

(Group) finance companies perform the following functions within a corporate group of companies:

• Sourcing external debt finance

• Redistribution of funds within the corporate group

• Accumulation of interest income and tax optimization of operating companies of the group in high-tax countries.

April 19, 20235

(Group) Finance Companies

Cyprus as a jurisdiction for finance companies suits a number of criteria which are considered to be: • Absence (under a double tax treaty or interest and royalty directive) of

interest withholding tax in connection with interest on loan financing provided by group finance company

• A low overall tax burden in Cyprus, including, but not limited to:

– low level of taxation of interest income and the possibility of deducting interest expenses from taxable profit,

– absence of thin capitalization rules or their inapplicability in the case of “back-to-back” financing.

• Absence of interest withholding tax in connection with interest paid on loan financing (including to an offshore tax jurisdiction)

• Reasonable level of margin required by the tax authorities.

April 19, 20236

IPR/Licensing Companies

Licensing companies perform the following functions within a corporate group of companies:

• Holding of the ownership right on:– Licenses– Trademarks– Innovations – Scientific discoveries– Other objects of intellectual property

• Juridical protection of intellectual property objects / industrial property, provided by the foreign law

• Granting rights to use the objects of intellectual property by the operational companies in high tax jurisdictions and their tax optimization via license fees.

April 19, 20237

IPR/Licensing Company

Cyprus as a jurisdiction for a licensing company suits a number of criteria considered to be:• Absence or reduction of WHT on license fees (under DTT or EU Interest and

royalty Directive) on license fees paid to Cyprus IPR/license company;

• Low general tax burden in Cyprus, including but not limited to:

– Tax deduction of license payment,

– Effective depreciation of intellectual property objects in tax accounting

• Absence of WHT on license fees payment (including offshore companies)

• Reasonable level of margin required by the tax authorities.

• Neutral VAT treatment

• Existence of the legislation protecting intellectual property rights and participation of Cyprus in international agreements regarding intellectual property rights protection.

April 19, 20238

ConsiderationsConsiderations AustriaAustria

(CIT rate of 25%)(CIT rate of 25%)

BelgiumBelgium


CyprusCyprus

(CIT rate of (CIT rate of 10%)10%)

DenmarkDenmark


Capital gains Either exempt (no abuse!) or taxable, if opted for taxation with the consequence that a depreciation of the participation

value is tax deductible. This regulation is new up from 2004 (for old companies up

from 2006)

Exempt (provided conditions are

met)

Exempt (other than immovable property located

in Cyprus)

Exempt if the shares have been held for at least 3 years. Special provisions apply for

shares CFC companies

Dividend taxation

Exempt (provided conditions are met) 95% deductible (provided

conditions are met)

Exempt (provided certain conditions

are met)

Exempt if recipient holds at least 20% for a consecutive period of at least 12 months. Special provisions apply for shares in CFC companies

Dividend withholding tax

Domestic rate 25%

0% (provided conditions are met)

Domestic rate 25%

0% (provided conditions are

met)

No withholding tax

Domestic rate 28%

0% (provided conditions are met)

Capital contribution tax

1% (deductible) 0.5% (deductible) 0.6% on nominal share capital only

0%

Debt/equity ratio No formal one in tax law (but in business law)

7/1 No 4:1

Financing costs Not deductible if participation exemption applies up from 2005 interest payments should be tax deductible in relation with

tax exempted dividend income

Deductible Not deductible Deductible

Tax Comparison - MatrixTax Comparison - Matrix

April 19, 20239

Tax Comparison - MatrixConsiderationsConsiderations FranceFrance

(CIT rate 33.33%)(CIT rate 33.33%)

GermanyGermany

(CIT rate 25%)(CIT rate 25%)

HungaryHungary


IrelandIreland

(CIT rate 12,5%/25%)(CIT rate 12,5%/25%)

Capital gains Taxable at normal rate 33.33% or reduced rate

95% exempt (capital gains realized on shares in foreign and domestic

corporations)

Taxable at 16% (4% for offshore companies) –

planning available to avoid tax

Taxable at 25%

Dividend taxation

95% exempt (Parent regime) 95% exempt (foreign and (domestic

dividends)

Exempt (provided conditions are met)

Taxable + FTC


Domestic rate 25%

reduced rate under conditions

Domestic rate 20%

0% provided conditions are met

Domestic rate 20%

0% possible under EU Directive

Domestic rate 0% (provided conditions

are met)


Nil or fixed stamp duty (230 EUR) (4)

0% None (reg. fee of approx. EUR 320 upon formation and

EUR 130 upon capital increases)

1% (not deductible)

Debt/equity ratio 1.5:1 for direct shareholders loans

1.5:1 3/1 No

Financing costs Deductible Deductible Deductible Deductible but complex conditions

April 19, 202310

Tax Comparison - MatrixConsiderationsConsiderations LuxembourgLuxembourg

(Soparfi)(Soparfi)


LuxembourgLuxembourg

(Holding 1929)(Holding 1929)

(not subject to (not subject to CIT)CIT)

Madeira Madeira

(Licensed after (Licensed after January 2003)January 2003)


MaltaMalta


Capital gains Exempt (if conditions met; subject to recapture

rule)

Exempt Exempt (if conditions met)

Taxable at 35% at company level but full refund or 2/3rds refund at non-

resident shareholder level when profits are distributed depending on whether there is a participating holding or not

Dividend taxation

Exempt (provided conditions are met)

Exempt Non EU Companies: 01% to 3% EU Companies: 100% participation exemption

(if conditions met)

Under the imputation system dividends are effectively taxed once at source

(I.e. at the company level). See refunds above


0% possible under EU Directive and/or treaty

N/A 0% (provided conditions met)

No withholding taxes


1% (deductible) exemptions available

1% - exemptions available

0% Exempt

Debt/equity ratio 85/15 (administrative practice)

3/1 or 10/1 2:1 No debt/equity ratios

Financing costs Limited deductibility N/A Deductible (if conditions met)

Limited deductibility

April 19, 202311

Tax Comparison - MatrixConsiderationsConsiderations SpainSpain


SwedenSweden


SwitzerlandSwitzerland

(CIT rate 14-30%)(CIT rate 14-30%)

The NetherlandsThe Netherlands


UKUK


Capital gains Exempt (provided certain conditions

are met)

Capital gains on shares exempt

(provided certain conditions are met)

Participation exemption

Exempt Taxable (may be exempted where

certain conditions as to participation are

met)

Dividend taxation

Exempt (provided certain conditions

are met)

Exempt (provided certain conditions are

met)

Exempt Exempt Taxable + FTC


Domestic rate 15%

0% (under certain conditions)

Domestic rate 30%, reduced rate under EU Directive and/or

treaty

Domestic rate 35% reduced rate

possible under treaty

Domestic rate 25%

0% possible under EU Directive and/or

treaty

No WHT


1% (deductible) exemptions

available

0% 1% (deductible) exemption available

0.55% (deductible) exemption available

0%

Debt/equity ratio 3/1 only for non EU related entities

No 70/30 3/1 1/1 (administrative practice)

Financing costs Deductible Deductible Deductible (participation

exemption might be reduced)

Deductible, subject to specific anti-base

erosion rules

Deductible, subject to debt/equity ratio

April 19, 202312

Cyprus in comparison+Lowest nominal corporate income tax rate of all EU Member States, no capital

taxes, no withholding taxes

Only EU holding company regime based on participation exemption rules with no domestic tax leakage on holding activities

Tax exempt capital gain on sale of shares irrespective of holding period and shareholding percentage

No thin capitalization rules

No strict transfer pricing rules

Expense level of (financial) service providers

-/-Perceived reputation as a financial service centre (although this has changed

significantly ever since EU Accession)

Advance Tax Ruling (ATR) Practice not adequately developed, as compared to other EU competing member states

Smallest double tax treaty network of competing EU Member States

April 19, 202313

Conclusion

Questions

Documents

Maarten F. Koper Senior Tax Manager Ernst & Young