Сompanies in Cyprus are a popular type of business for today’s entrepreneurs.
The practice of paying dividends to Cyprus holding companies is widespread. Such a maneuver allows you to save on taxes. In the past few years, the Tax Services have become actively interested in such operations, and some of them have successfully challenged companies in court. As a result, a foreign company has to not only charge taxes, but also pay fines and / or penalties.
How to prove that you have the right to apply tax benefits, in other words,that you can take advantage of the double tax treaty (DTT)? To do this, you should prepare for a conversation with the tax authorities. Here is a small checklist to make sure that you can correctly answer all the questions. Although we compiled it using the example of Cyprus holdings, with certain reservations, the checklist can also be applied to other jurisdictions.
- Is the foreign company the only participant in the business collaboration?
Most likely, the answer will be yes, but it is important to be able to explain why this particular business structure is chosen.
- Do the same persons appear in the management of the Cyprus company, a subsidiary of the foreign company and the parent company (if any)?
It is better if the personalities in all three legal entities are different.
- Is there correspondence on current (working) issues between the recipient and the source of payments?
It is worthwhile to prepare, in advance, the documents showing the holding's participation in the activities of the subsidiary. A correspondence archive or meeting minutes on approving financial results is suitable.
- Are the dividends received by the holding, including its operating activities, spent or fully paid to shareholders?
In the second case, the tax authority has the full right to suspect that the holding iis used exclusively for tax optimization.
- Does the holding have equipped premises, employees (with labor contracts, insurance, etc.), is there proper document management?
- Does the holding have accounts in local banks whose signature right is held by its director? Are taxes paid, are operations carried out, is the holding unprofitable?
These are two key questions that need to be affirmative and, if necessary, provided with compelling arguments. Get ready to prove that Cyprus is really convenient for your company (for example, because it is more convenient to attract foreign investment). Otherwise, the Tax Services will easily be able to convince the court that the holding company does not conduct independent activities, but was created exclusively for tax evasion. In this case, additional taxes and penalties cannot be avoided.
It will be useful to conduct training for company employees (both from the foreign and Cyprus sides). A correct understanding of business processes, confidence in a conversation with tax authorities is a point in your favor. The lack of awareness of key employees about what is happening in the company and how it can cause suspicion among regulatory authorities. Even if the recipient and payer of dividends are absolutely clean before the law.
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