Holdings in International Companies
Cross-border shareholdings sit at the heart of most international holding structures. This page explains the main rules that apply to them. It covers what a qualifying participation is, the participation-exemption rules that most modern countries use, how cross-border dividends are treated under the OECD Model Tax Convention, and the EU freedom of establishment that supports holding structures based in Cyprus.
International Tax Law
What is a qualifying participation?
A qualifying participation is when one limited company holds shares in another limited company. Both companies are usually fully taxed in the country where they are resident. The holding is normally at least 10 percent.
This kind of holding can matter a lot for tax. It usually gives the holder a blocking minority at shareholder meetings. It can also open the door to the participation exemption, which many tax systems offer.
A qualifying participation that pays participation dividends usually exists when a limited company in one country holds a business interest in a limited company in another country. Under the methods articles of double taxation treaties, a qualifying participation normally applies when two conditions are met:
- The parent company and the subsidiary are both limited companies. In other words, a parent limited company in one country holds an interest in a subsidiary limited company in another country. Double taxation treaties set this out directly.
- The methods article in most double taxation treaties asks for a holding of at least 25 percent. Some treaties already treat dividends as participation dividends at a holding of only 10 percent.
International participation exemption
The participation exemption usually applies when these conditions are met:
- The participation has been held without a break throughout the assessment period.
- The holding reaches a set minimum share of the nominal capital. This is often around 10 percent to 25 percent, depending on the country.
- The non-resident company earns almost all of its income from holdings.
- Supporting documents can be provided.
The exact thresholds and conditions differ from country to country. Several EU member states run their own participation-exemption schemes.
International rules and the OECD Model
Article 10 of the OECD Model Tax Convention sets an international participation threshold of up to 25 percent. In those cases, the country where the company paying the dividend is resident may charge a maximum tax of 5 percent on dividends paid to beneficial owners in another treaty country. There is one exception. If the person receiving the dividend has a permanent establishment in the country where the paying company is resident, the dividend is treated as belonging to that permanent establishment.
Freedom of Establishment within the EU
An architect, a restaurant owner or a marketing professional can all do the same thing. As citizens of the European Union, they can set up almost anywhere in the EU and work for themselves there. EU directives help make sure that training gained at home is also recognised in the host country. Inside the European Union, every Union citizen has the right to free movement. This covers free entry, free residence, the right to settle freely, free choice of where to study and work, and the freedom of establishment.
Directives also make freedom of establishment easier in the trades and in commerce. Some member states only allow an activity if you can show certain qualifications or diplomas, for example a master craftsman's certificate. In those states, you may be able to replace a missing formal qualification with proof of long professional experience.
The freedom of establishment under Articles 49 to 55 TFEU (formerly Articles 43 to 48 of the EC Treaty, before the Lisbon Treaty) lets people and legal entities, including companies, from EU member states set up in another EU member state. The aim is to carry out self-employed commercial, agricultural or professional work. The condition is that you can reasonably expect lasting and stable integration into that country's economy.
Legal entities must have been formed under the law of a member state, and the registered head office must also be in an EU member state.
These rules form the legal basis for setting up a business in Cyprus, and they apply equally to citizens of all EU member states.
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