Introduction to tax planning and cyprus holding company

It is both the duty and the legal right of every tax payer  «to arrange his affairs so that he is subjected to the payment of less tax than that which he would have paid otherwise and to choose amongst alternatives, the most advantageous arrangement with a view to avoid or reduce or postpone the payment of tax ….. and despite the dislike of the Inland Revenue of the ingenuity which he has displayed the tax payer cannot be obliged to pay more tax» (case Frederiki and Roxani Coudounari v Cyprus Republic no. 1/2004 and 2/2004 Tax Tribunal-Cyprus). (Students who are interested in more details about the case are welcome to contact us).

Bearing the above in mind every judicial entrepreneur must try to maximize his profits after tax so that he can set aside for a rainy day and this duty is even more imperative when he is also an employer on whom a number of employees and their families are dependent.  Higher net profits gives the company  the ability to invest in development and technology which may result in the company having a competitive edge.

1.  LOW TAX ZONES

Many alternatives are available to boost profits after tax and there are many low tax zones.

One method is to incorporate a company in a low tax or no tax zone without there being any commercial reason or actual presence.   This solution will not be long lasting.

Another method is to search out those tax jurisdictions that offer genuine tax advantages especially when making overseas investment.  There are circumstances when one can achieve tax savings of up to 25% by making an overseas investment from country A to country B via country C rather than directly from A to B.

2.  HOLDING COMPANY

You will see from the notes that follow, that Cyprus is an ideal location to incorporate a holding company because it can extract profits from overseas investments at a low tax rate due to the many double tax treaties it has signed and can distribute net profits to its non-resident shareholders with no withholding tax. The example that follows is helpful in understanding the principles involved.

3.  EXAMPLE OF CYPRUS HOLDING COMPANY

For instance an Israeli company wishes to invest in a manufacting concern in Rumania and incorporates an Israeli company to purchase the shares of the Rumanian company.  As there is no double tax treaty between Israel and Rumania profits of the Rumanian company can be transferred abroad only after a withholding tax has been paid of say 15%.  If however a third company is interposed between Israel and Rumania in a jurisdiction that has a double tax treaty with Rumania then those profits can be withdrawn in the form of say “royalties” with only 10% withholding tax.

For this system to be effective the intermediate jurisdiction receiving the royalties or dividends must not impose high taxation on the income received.  Ideally it must also not impose tax on the dividends that the intermediary company will pay to its shareholders in Israel.  This is known as the “exit” tax.

Our search must therefore be for a jurisdiction that has signed many double tax treaties with other countries and also imposes nil exit tax.  Luxemburg has the advantage when the country of destination will be paying “passive” interest such as interest on bonds but in all other cases which I have studied the intermediate jurisdiction with the overall advantage for the taxpayer is The Republic of Cyprus because it has signed over 40 Treaties for the avoidance of Double Taxation and has zero exit tax for all non-resident shareholders irrespective of the existence of a double tax treaty.

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