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Cyprus has neither Thin Capitalisation rules nor transfer pricing regulations, making Cyprus an ideal intermediate holding company location.
A company is said to be thinly capitalised if it is substantially capitalised by way of loans from its parent company, in proportion to its share capital.
Returns from share capital (i.e. dividend) are not tax deductible in the accounts of the distributing company. However interest on loan capital is tax deductible. Therefore parent companies are generally incentivised to finance their foreign subsidiaries by way of debt, resulting in a thinly capitalised subsidiary company.
Some countries (in order to protect their tax base) impose thin capitalisation provisions denying tax deductions on loan interest where the loan to equity ratio exceeds for example 3:1 or 4:1.
However Cyprus has neither thin capitalisation rules nor transfer pricing regulations, making Cyprus an ideal intermediate holding company location.