Holding companies are created to effectively manage and own multiple businesses, and also strengthen ownership of operating subsidiaries. While tax considerations are not the sole factor in selecting a jurisdiction, businesses often seek the most tax-efficient structure. Cyprus remains a top jurisdiction for establishing a holding company, thanks to its competitive tax framework and extensive double tax treaty (DTT) network.

Since modernizing its tax regime in 2003, Cyprus has maintained its position as a preferred destination for international investors, adapting to global tax trends while preserving its core advantages. As we move into 2025, Cyprus continues to offer one of the most beneficial holding company structures in Europe. Below, we explore the key features that make Cyprus an attractive choice for multinational businesses.

I. Main Features of Cyprus Holdings

A. Extraction of Dividends from Subsidiaries

A Cyprus holding company benefits from reduced or zero withholding tax rates when receiving dividends from subsidiaries. These benefits arise either from Cyprus’ extensive DTT network or the EU Parent-Subsidiary Directive (PSD). For intra-EU investments, the PSD should be prioritized, as it eliminates withholding tax altogether. For investments outside the EU or where PSD conditions are not met, Cyprus’ extensive network of over 65 DTTs provides favourable withholding tax rates, especially for investments in Eastern Europe, the Middle East, and Asia.

B. Tax Treatment of Incoming Dividends

Dividends received from a Cyprus subsidiary are fully exempt from taxation in Cyprus. Foreign-source dividends are generally exempt from taxation unless both of the following conditions apply:

• More than 50% of the paying company’s activities result in investment income.
• The foreign tax burden on the dividend-paying company is substantially lower than the tax rate applicable in Cyprus (i.e., less than 6.25%).

If these conditions are met, foreign-source dividends are subject to a Special Defence Contribution (SDC) of 17%. However, Cyprus’ extensive DTT network and unilateral tax credit relief can mitigate any potential taxation.

C. Tax Treatment of Outgoing Dividends

Cyprus does not impose any withholding tax on dividends paid to non-residents, irrespective of their country of residence or the existence of a DTT between Cyprus and their jurisdiction. This provides significant flexibility for international corporate structuring.

D. Tax Treatment of Capital Gains

Cyprus does not impose capital gains tax on the disposal of shares, bonds, or securities, except in cases where the company owns immovable property in Cyprus. This exemption applies even to the disposal of shares in foreign companies.

E. Thin Capitalization Rules

Cyprus does not impose any debt-to-equity ratio requirements. A Cyprus holding company can be funded entirely through debt, and any arm’s-length interest paid to a parent or affiliated entity is fully deductible.

F. Additional Features of the Cyprus Tax Regime

• 12.5% corporate tax rate, among the lowest in the EU.
• No withholding tax on royalties for intellectual property used outside Cyprus.
• No withholding tax on interest payments made to non-residents.
• Unilateral tax credit relief for foreign withholding taxes.
• Carry-forward of tax losses – Tax-adjusted losses incurred at the company level can be carried forward and offset against tax-adjusted profits for the following five years.
• Group relief provisions, allowing tax-efficient intra-group transfers.
• Tax-efficient reorganization rules, in line with the EU Merger Directive.
• Extensive double tax treaty network, covering key jurisdictions worldwide.
• Favourable permanent establishment (PE) provisions in Cyprus’ DTT network.

II. Participation Exemption and CFC Rules

Under Cyprus tax law, dividend income received by a Cyprus resident is not subject to corporate income tax (CIT) but instead falls under the Special Defence Contribution Law (SDC) at a rate of 17%, unless it qualifies for exemption under the participation exemption rules.

Cyprus has implemented Controlled Foreign Company (CFC) rules in accordance with the EU Anti-Tax Avoidance Directive (ATAD). These rules apply when:

• A Cyprus tax resident entity holds more than 50% of the capital, voting rights, or profit entitlement in a foreign entity.
• The foreign entity is subject to taxation lower than 6.25%.

In such cases, Cyprus will tax undistributed passive income earned by the CFC in the hands of the Cyprus parent company. However, numerous exemptions apply, particularly where the CFC carries out substantive economic activities.

III. Cyprus Reorganization Rules

Cyprus has fully incorporated the EU Merger Directive, allowing for tax-neutral reorganizations, including mergers, divisions, share-for-share exchanges, and asset transfers. These rules apply both to cross-border transactions involving EU and non-EU entities and to local restructurings, providing businesses with flexibility and tax efficiency.

The Cyprus holding company regime remains one of the most tax-efficient in 2025. Key benefits include:

• Favourable tax treatment of dividends received and distributed.
• No capital gains tax on share disposals (except for Cyprus real estate holdings).
• No withholding tax on outbound payments of dividends, interest, or royalties.
• Extensive DTT network providing tax-efficient investment structures.
• Flexible group relief and reorganization provisions.

These features position Cyprus as a premier jurisdiction for holding companies, offering an internationally recognized, EU-compliant, and business-friendly environment for global investors.

Or contact AGPLAW’s expert team at agp@agplaw.com 

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