The Interpretative Circular 222 for Holding Companies (HC) was issued on the 9th January 2018 by the Cyprus Tax Department aiming to explain the tax treatment of companies that are exclusively involved in the holding of shares in other companies.
The circular, clarifies that HC are not considered taxable persons exercising an economic activity, as the mere holding of shares in other enterprises does not constitute an economic activity.
With the introduction of Circular 222, the above tax treatment may be differentiated if it is evidenced that a HC is directly or indirectly involved in the management of the companies in which it holds shares. The dividend income received by the HC may be regarded as a consideration for the direct or indirect management of the companies it holds shares in, having as a result the obligation of HC to register for VAT in Cyprus.
In the above sentence, the words directly or indirectly and management have the following meaning.
- Direct Involvement where Members of the Board of Directors (BoD) of the HC are also members of the BoD of the subsidiary. In this case, it will need to be demonstrated that the HC has the power to affect the decision of the subsidiary e.g. with the appointment of the majority of the subsidiary’s BoD.
- Indirect involvement where although no director’s involvement can be justified in the BoD, the HC is in a position to influence the subsidiary’s decisions in another way e.g. where directors of a fully controlled related company are also members of the board of directors of the subsidiary.
- Management or administration of affiliates has the meaning of managing and coordinating affairs, steering events in a particular direction, organizing and decision making.
Whether or not a HC can provide the specific services required by the subsidiary, will be determined by the actual facts and circumstances. For example, the HC may either have its own human and technical resources or assign the performance of management services to third parties who have these resources. Irrespective of whether a HC has their own available resources or assigns the management and administration function to third parties, the existence of an economic activity is only evidenced if there is a separate consideration for these services.
Having said that, in the event that the HC acquires services such as legal, administrative and promotional services, it will not be entitled to deduct input tax unless it uses them in the context of supplying taxable goods or services. For example, such services are recharged to the subsidiary to which HC provides management and administration services.
If the HC acquires services that are or will be used by its subsidiaries, input tax cannot be claimed unless subsequently recharged to the subsidiaries, and as a result VAT payment liability may arise for HC.
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