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Why Does Cyprus Remain a Popular Jurisdiction for Holdings?

Cyprus has traditionally been considered one of the key jurisdictions for structuring international business. The main factors that make it attractive for holding companies include:

• Favorable tax system (12.5% corporate tax, exemption from dividend repatriation tax and capital gains tax).
• Extensive network of double taxation treaties (agreements with over 65 countries).
• Stable legal system based on English law.
• Mandatory audit, which increases trust from banks and investors.

However, in 2024, using a Cyprus holding comes with certain nuances. Without proper structuring and compliance with international standards, the real tax efficiency of such a model may be lost.

When Does a Cyprus Holding Actually Work?

1. Real Business Management and Economic Substance

Previously, it was possible to simply register a company in Cyprus and use it to receive dividends at reduced rates. However, tax authorities in countries such as Ukraine, the Netherlands, and Germany are now actively checking the real presence of businesses in Cyprus.

For a Cyprus holding to comply with international standards, it must:

• Rent a real office and have local employees.
• Have local directors who make key decisions.
• Maintain financial records and submit audit reports.

Without this, a Cypriot company risks losing tax benefits, and payments in its favor may be subject to additional taxes due to non-compliance with the Principal Purpose Test (PPT).

2. Consolidation of International Business

If a corporate group operates in multiple jurisdictions, a Cyprus holding can help:

• Maintain consolidated financial reporting.
• Facilitate intra-group financing between companies.
• Optimize corporate governance.

Banks and investors often require a holding structure to attract financing. Cyprus is convenient in this case due to its flexible corporate legislation and access to European banking institutions.

3. Holding for International Investments

Cyprus can be a useful tool for:

• Investing in startups and IT companies.
• M&A transactions (mergers and acquisitions).
• Managing corporate assets.

The key is to avoid using Cyprus solely as a tax tool. If a company is real, has economic substance, and maintains proper accounting, tax benefits will remain available.

What Has Changed? Why Simply “Setting Up a Cyprus Company” No Longer Works?

1. Test of Principal Purpose (PPT)

Now, just having a Cypriot company is not enough to qualify for reduced tax rates on dividends or royalties. Tax authorities in Ukraine and other countries can verify whether the main purpose of structuring was actual economic activity or merely tax minimization.

If a taxpayer cannot justify the business rationale of a transaction, they may face additional tax charges (e.g., Ukraine’s 9% repatriation tax + 5% military levy instead of 5% under the Cyprus-Ukraine tax treaty).

2. Banks Are Asking More Questions

Previously, to distribute dividends to Cyprus, it was enough to provide a certificate of tax residency to the bank. Now, banks conduct their own transaction analysis and may block payments if they do not see real business substance in Cyprus.

3. Automatic Exchange of Tax Information (CRS)

Ukraine has joined the Common Reporting Standard (CRS), meaning that bank account and company structure information can be automatically shared with Ukrainian tax authorities. This eliminates the possibility of using Cypriot holdings as “opaque” structures for tax avoidance.

How to Use a Cyprus Holding Effectively?

To ensure that a Cyprus company complies with international regulations and retains its tax benefits, it should:

• Conduct real operational activities (e.g., own assets or manage other companies).
• Follow substance requirements (local directors, employees, office, financial reporting).
• Document the business purpose to pass the Principal Purpose Test (PPT).

Conclusion

Cyprus is no longer just a “dividend tax haven”. It remains an effective jurisdiction for international business consolidation, attracting investments, and managing corporate assets, but only if the company conducts real activities and complies with modern tax regulations.

If your main goal is simply “saving on taxes” by using Cyprus, this could result in additional tax assessments, penalties, and financial risks. It is crucial to properly structure your business in accordance with modern tax realities and BEPS requirements.