The first thought that may come to mind when you think about Cyprus is white, sandy beaches, the second, however, for businessfolk at least, may be the 2013 Cypriot financial crisis, when bank accounts were essentially nationalised in the euphemistically termed “bail-in” to prop up the banking system. This disaster made Cyprus a persona non grata as an investment jurisdiction for many years.
However, since then Cyprus has cleaned up its act and is now a very attractive holding company location for many reasons (not including the great location for annual board meetings) and can often work well for South African businesses wanting to internationalise.
Cyprus is part of the European Union (EU), which in itself comes with a number of tax benefits, in particular the EU Parent directives which generally exempts dividend, interest, and royalty payments between subsidiaries in EU countries from withholding tax. This is highly beneficial for a multinational with subsidiaries across Europe.
While Cyprus itself has a moderate corporate tax rate of 12,5%, local and foreign dividend income is fully exempt. In addition, Cyprus does not levy a withholding tax on dividends paid to a foreign shareholder. Therefore, depending on the location of subsidiaries, dividends could flow through a Cypriot holding company free of any tax.
Cyprus also does not levy a withholding tax on interest payments made to non-residents. While the interest income is technically taxable at 12,5%, Cyprus applies a “notional interest deduction” which can significantly reduce the effective tax on interest income (and other income sources) to as little as 2,5%, depending on the circumstances.
Cyprus has also introduced a new IP regime which provides for an 80% deemed deduction if the royalty income falls within the provisions of this new IP regime. This can make Cyprus very attractive for tech businesses or any business envisaging material R&D.
These features, coupled with the fact that capital gains derived by Cyprus resident companies are generally not subject to tax, make Cyprus an attractive holding company location.
Although Cyprus does not have a wide tax treaty network with Africa (other than with Mauritius, Seychelles, and South Africa), and therefore may not be a suitable holding location for African operations, where expansions are being considered from South Africa to Europe (or further afield), Cyprus may be an attractive option to consider.
If you would like to explore whether Cyprus may be a beneficial location for your business to consider, please contact us.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.