The Cyprus holding companies are widely used in the context of international business structuring for the optimization of the channels of incoming and outgoing investment in/from the countries that have signed an agreement with Cyprus on avoidance of double taxation. Recently, the Tax Department has published a guide to VAT accounting for holding companies, which is designed to provide clarity with respect to the circumstances under which the Cyprus holding companies can receive taxable income.
Definition of taxable activities
The common position and practice regarding the regime for levying VAT on dividends remain unchanged. The simple acquisition and ownership of shares in other companies by a Cypriot company does not constitute a taxable business activity in the sense of exploiting assets for income generation. The reason for this approach is that the dividends received from such ownership of shares are considered to arise solely at the expense of ownership of shares, rather than from the form of business activity carried out for the purpose of income generation. Consequently, an enterprise that simply owns shares or a similar form of a stake in another organization is not considered to be taxable. However, if a holding company goes beyond the simple exercise of its rights as a shareholder and takes an active part in the management of its subsidiaries, directly or indirectly, this may constitute a taxable activity.
The test for determining whether such participation in management exists is objective. There are no decisions in the European Court that set out specific rules or precedents on this issue. Each case must be considered individually on specific facts and circumstances. The instruction states that the term “management” can cover a wide range of activities, from organization and administration to the adoption of strategic decisions. These actions can be taken directly, that is, by a legal entity owning shares or indirectly – by a person hired or connected with a legal entity that owns the shares.
Any evaluation should be based on the essence, not on the form. For example, do the directors of affiliated companies exercise autonomous powers to manage their business, or do they simply mechanically approve decisions made at the level of the holding company? These issues should be resolved on the basis of specific facts, such as the degree of duplication or general powers of the director and decisions of the board of directors.
A holding company that has a controlling interest in a subsidiary company clearly has the right to influence the decision-making process in the subsidiary. If the facts show that the holding company exercises this right, any dividends received can be considered a reward for the provided management services and, therefore, income from business activities.
An additional important factor is that the holding company has the necessary human and other resources to provide such services. The instruction states that in some cases the holding company can not use its authority to influence its subsidiary, therefore it is a passive investor with the sole purpose of obtaining dividends without participation in management.
The current jurisprudence is that the company’s participation in the management of the invested company is recognized as economic activity in accordance with Article 3 of the VAT Law and Article 9 (1) of the EU VAT Directive (2006/112 / EU) and therefore it is subject to VAT in accordance with Article 5 of Cyprus Law and Article 2 of the EU Directive.
A holding company, like other companies, must be registered by a VAT payer if its taxable supplies exceed the registration threshold or it receives services from foreign suppliers that must be taken into account within the framework of the reverse charge mechanism.
Otherwise, the holding company can be registered voluntarily. The amount of input VAT that the holding company can reimburse will be based on the distribution between its taxable and non-taxable activities.
The Cyprus holding companies are widely used in the context of international business structuring for the optimization of the channels of incoming and outgoing investment in/from the countries that have signed an agreement with Cyprus on avoidance of double taxation. Recently, the Tax Department has published a guide to VAT accounting for holding companies, which is designed to provide clarity with respect to the circumstances under which the Cyprus holding companies can receive taxable income.
Definition of taxable activities
The common position and practice regarding the regime for levying VAT on dividends remain unchanged. The simple acquisition and ownership of shares in other companies by a Cypriot company does not constitute a taxable business activity in the sense of exploiting assets for income generation. The reason for this approach is that the dividends received from such ownership of shares are considered to arise solely at the expense of ownership of shares, rather than from the form of business activity carried out for the purpose of income generation. Consequently, an enterprise that simply owns shares or a similar form of a stake in another organization is not considered to be taxable. However, if a holding company goes beyond the simple exercise of its rights as a shareholder and takes an active part in the management of its subsidiaries, directly or indirectly, this may constitute a taxable activity.
The test for determining whether such participation in management exists is objective. There are no decisions in the European Court that set out specific rules or precedents on this issue. Each case must be considered individually on specific facts and circumstances. The instruction states that the term “management” can cover a wide range of activities, from organization and administration to the adoption of strategic decisions. These actions can be taken directly, that is, by a legal entity owning shares or indirectly – by a person hired or connected with a legal entity that owns the shares.
Any evaluation should be based on the essence, not on the form. For example, do the directors of affiliated companies exercise autonomous powers to manage their business, or do they simply mechanically approve decisions made at the level of the holding company? These issues should be resolved on the basis of specific facts, such as the degree of duplication or general powers of the director and decisions of the board of directors.
A holding company that has a controlling interest in a subsidiary company clearly has the right to influence the decision-making process in the subsidiary. If the facts show that the holding company exercises this right, any dividends received can be considered a reward for the provided management services and, therefore, income from business activities.
An additional important factor is that the holding company has the necessary human and other resources to provide such services. The instruction states that in some cases the holding company can not use its authority to influence its subsidiary, therefore it is a passive investor with the sole purpose of obtaining dividends without participation in management.
The current jurisprudence is that the company’s participation in the management of the invested company is recognized as economic activity in accordance with Article 3 of the VAT Law and Article 9 (1) of the EU VAT Directive (2006/112 / EU) and therefore it is subject to VAT in accordance with Article 5 of Cyprus Law and Article 2 of the EU Directive.
A holding company, like other companies, must be registered by a VAT payer if its taxable supplies exceed the registration threshold or it receives services from foreign suppliers that must be taken into account within the framework of the reverse charge mechanism.
Otherwise, the holding company can be registered voluntarily. The amount of input VAT that the holding company can reimburse will be based on the distribution between its taxable and non-taxable activities.