Treaties for the avoidance of Double Taxation

The existence of these treaties, combined with the low tax paid by a Cyprus company offer the possibilities for effective international tax planning. The main objective of the double tax treaties is to avoid the double taxation of income earned in any of the two contracting countries. This is done through the tax sparing provisions whereby tax is credited against the tax that must be paid in the contracting state.
The treaties also provide for reduced withholding taxes for dividends, interest and royalties. On the table are stated the percentage of withholding tax that has to be paid for dividends, royalties and interest paid to and from Cyprus.

Table of Double tax treaties

The Cyprus holding company - Use of Cyprus Double Tax Treaties

A Cyprus holding company can be used very effectively for international investment purposes. This is through the use of, on the one hand, the tax incentives and, on the other, the treaties for the treaties for the avoidance of double taxation.

The most important advantage of a Cyprus Holding Company is that the dividends received by the foreign company can flow totally tax free in Cyprus through the Holding Company, avoiding in this way the payment of any tax on dividends. For the payments made to non-Cyprus Resident Shareholders there is o withholding tax, so the Shareholder receives the dividends absolutely tax free.

Examples of use of Cyprus companies for investment abroad

Further to the simple use of Cyprus Holding Companies for receiving tax free dividends Holding Companies can be very beneficially used for investment abroad. Further below are two Scenarios of the use of a Cyprus Holding Company:

Scenario A:

A Greek company is to carry out business in Russia and in Ireland and establishes subsidiary companies in these two countries. We have two Irish subsidiaries the first one owned 100% by the Greek company (first Irish company) and the second one owned 25% by the Greek company (second Irish company). According Irish law if the parent company, with interest over 25% over the subsidiary company, is registered in an EU country then there is no withholding tax. In the example, the Russian and Irish subsidiary companies will make a net profit of USD 100,000 each.

This net profit will be taxed at the rate of 12.5% in Ireland and at the rate of 24% in Russia because this is the prevailing tax rate in these countries, so net profits of USD 87,500 for the Irish company after tax and USD 76,000 net profits after tax for the Russian company.

If these profits are to be received in Greece as dividend then, withholding tax at the rate of 0% will apply in the case of the first Irish company, withholding tax at the rate of 24% will apply in the case of the second Irish company and withholding tax at the rate of 20% will apply in the case of the Russian company.

The dividend received in Greece will then be taxed at 35% which is the prevailing tax rate leaving net income of USD 56,875 in the case of the first Irish company, USD 43,225 in the case of the second Irish company and USD 39,520 in the case of the Russian company.

Scenario B:

The Greek company has a subsidiary company in Cyprus which acts as a holding company to its immediate subsidiaries in Russia and Ireland. In this case as you can see from the diagram there is no withholding tax when the Cyprus company receives the profits in the form of dividend from the Russian and Irish companies. This is because of the double tax treaty signed between Cyprus and Ireland and that signed between Cyprus and Russia which so provide. Although Cyprus corporation tax is at 10%, in this case there will be no tax incidence since, as stated previously, dividend income received from abroad is exempt from tax. Moreover, the net dividend received in Greece will not be taxed at 35% as in the first scenario, but at 15%. This is because a tax credit of 15% will be given for the underlying tax on the dividend due to a tax sparing credit provided for in the double tax treaty between Cyprus and Greece. Therefore we will have a final net income of USD 70,000 from the two Irish companies and USD 64,000 from the Russian company.