The below article describes a simple structure for reducing tax liabilities on gains from the disposal of Czech based property investments.
A simple holding structure involving a Cyprus Holding Company (CHC) and a Czech Subsidiary Company (CSC), through which an international investor (the CHC’s shareholder) can acquire exposure to a Czech-based property investment. Capitalization of the CHC can be done in the form of equity and/or debt.
Czech Structure (Click to View)
As per Article 13, paragraph 2 of the Double Tax Treaty between Cyprus and the Czech Republic (DTT), “Gains derived by a resident of a Contracting State from the alienation of shares or other rights and interests in a company partnership or a trust deriving more than 50% of their value from immovable property situated in the other Contracting State may be taxed in that other State”. In simple words, the sale by CHC of shares of the “property-rich” CSC may give rise to a tax liability in the Czech Republic.
Nevertheless, as per Czech Republic’s local tax legislation, any capital gains derived from the sale of shares of a Czech Company that holds at minimum 10% of a Czech based immovable property for a continuous period of 12 months, will be exempt from taxation in the Czech Republic.
Furthermore, the Cyprus local tax legislation provides for an exemption from taxation in Cyprus of any gains derived from the disposal of shares connected to non Cyprus based immovable property.
Consequently and as opposed to the case that the above structure was not employed, disposal of the property investment through the sale of the Czech Subsidiary shares will not raise any capital gain tax liabilities either in Cyprus or in the Czech Republic.
- If the property accumulates rental income, then this will be regarded as part of the CSC’s ordinary taxable income and will therefore be taxed accordingly.
- Outward dividend payments made from CSC to CHC will be subject to withholding tax in the Czech Republic at the following rates:
(a) Zero withholding tax as per the EU Parent Subsidiary Directive (subject to a minimum holding of 10% for a continuous period of 2 years);
(b) 5% or 0% (subject to a minimum holding of 10% for a continuous period of 1 year) withholding tax as per the DTT.
- Inward dividend payments received from CHC are not subject to any withholding taxes in Cyprus.
- Any dividend payments made by CHC to non Cyprus Tax Resident shareholders (or Non Cyprus Domiciled Investors) will not be subject to any withholding tax in Cyprus.
- No taxes imposed in Cyprus in the case of CHC’s liquidation/sale.