Cyprus Holding + US LLC Structure , VAT, Tax, Participation Exemption, and Substance Issues

[BasedOperative]

Hello OCT,​

I’m currently structuring an online consulting business and would appreciate insights and feedback on whether my setup works from a VAT and tax perspective.

Structure Overview:​

• I’m a Cyprus tax resident, non-dom individual.
  
• I own a Cyprus Holding Company (Cy HoldCo).
  
• The HoldCo owns either:
  • a US LLC (default transparent/pass-through entity), or
    
  • alternatively, a Hong Kong limited company (HK Ltd).
    
• The US LLC or HK Ltd is the company that invoices and provides B2C consulting services to EU clients.
  
• The consulting work is performed by me personally, primarily from my home in Cyprus.
  
• The US LLC/HK Ltd distributes profits to the Cyprus HoldCo as dividends (or intercompany transfers).
  
• The Cyprus HoldCo then distributes dividends to me.
  

​

Key questions I’m grappling with:​

1. VAT on B2C services:
   • Since the US LLC / HK Ltd is outside the EU, and the invoices are issued by those foreign entities, does EU VAT apply or not?
     
   • Does Cyprus VAT apply if I perform the work physically in Cyprus?
     
   • Does Cyprus consider this a “fixed establishment” for VAT purposes?
     
2. Cyprus Corporate Income Tax & Participation Exemption:
   • The US LLC is a transparent entity (disregarded for US tax) , so Cyprus sees the income as earned directly by the Cyprus HoldCo.
     
   • Does the Cyprus participation exemption apply on distributions from the US LLC to the Cyprus HoldCo?
     
   • If not, then Cyprus CIT at 12.5% applies on the US LLC income, correct?
     
   • What about the HK Ltd option? Since HK has 0% CIT, would dividends from HK Ltd to Cyprus HoldCo qualify for the participation exemption and effectively eliminate CIT in Cyprus?
     
3. Director residency and substance:
   • Does the US LLC or HK Ltd need to have a director residing outside Cyprus (ideally in a zero-tax jurisdiction) to maintain the desired tax treatment?
     
   • Can I, as a Cyprus resident, be the director of the US LLC / HK Ltd without causing additional tax or VAT exposure?
     
4. Performing work in Cyprus:
   • Can I perform part or all of the consulting work physically from my home in Cyprus for the US LLC or HK Ltd without triggering VAT registration or obligations in Cyprus?
     
   • Will this create a fixed establishment or PE in Cyprus for the foreign company, thus triggering local tax or VAT?
     

​

My current understanding:​

• No VAT applies because the supplier is outside the EU (US or HK).
  
• Cyprus CIT applies on income flowing through the transparent US LLC unless it elects to be treated as a C-Corp (which may cause US tax filing complexity).
  
• The Cyprus participation exemption likely does not apply to income flowing from a transparent US LLC but may apply for dividends from HK Ltd.
  
• Being a director and performing work in Cyprus may create Cyprus tax residence for the foreign company but is consistent with Cyprus CIT at 12.5% in the transparent LLC case.
  
• Using HK Ltd might reduce overall CIT if dividends are exempt under Cyprus participation exemption.
  

​

I would appreciate your expertise on:​

• Whether VAT really applies here or not?
  
• Does the participation exemption apply for distributions from the US LLC or HK Ltd to Cyprus HoldCo?
  
• Is having a foreign (non-Cyprus) resident director required or advisable?
  
• The risks of performing work from Cyprus for these foreign companies regarding VAT and tax exposure?
  
• Whether switching to a Hong Kong company instead of a US LLC would help eliminate Cyprus CIT completely?
  
• Any other practical considerations I should keep in mind?
  

Thank you in advance!

 

[halaba]

US LLC, no to everything.
HK Ltd, only if you have sufficient substance in HK.‌

So if you do not have any meaningful substance, rather pay the VAT and the‍ CIT, else if might imply tax evasion.

In general, for a small business it might⁠ not be advisable to do a more complex setup, as audit and accounting might bite⁤ you more than Cyprus CIT.

 

[BasedOperative]

Cyprus CIT is not an⁣ issue.

VAT, on the other hand, is a whole different story. I’m looking for a⁢ setup that let’s me avoid it legally. The US LLC came to mind as virtually︀ everyone in the UAE is using it to avoid VAT

 

[halaba]

Sorry, I have no knowledge about why a US LLC would be beneficial if they‌ are UAE residents, normally I would assume nobody cares in the UAE about EU VAT,‍ if they reside there, they probably give a s**t about it. So imo it just⁠ makes auditing more complex if you add one more company to that. (Assuming they own⁤ a UAE company and add this USA LLC to it)

I'm happy to learn if⁣ I missed a benefit of that US LLC.

Anyway, in this forum I've saw few⁢ times this question before, how to not pay EU VAT, but more or less it︀ means you need substance in another country (HK, UAE, .. with director&worker) or the chances︁ are rather bad to run years later into potential issues with tax evasion. Of course︂ maybe nothing happens, but I personally would sleep better without committing tax evasion, especially if︃ I plan to move to central europe back in the next decade.

Maybe someone else︄ can give you better advise.

 

[BasedOperative]

A US LLC gives you︄ better payment processing options compared to a UAE company, and it has better international reputation.︅ For instance, Stripe wasn’t even available for UAE entities up until a couple years ago,︆ and some EU B2B clients refuse to work with UAE companies.
In addition, you could︇ live in the UAE on a remote work visa (costs 300$) and only have the︈ US LLC, paying 0-9% tax. This allows you to save thousands a year (€5k+) on︉ UAE business license fees, setup, accounting, audits, etc. On the other hand, a US llc︊ costs only $200/year to maintain.
A US LLC in the UAE is really a no︋ brainer for me, since you’d probably still need one anyway even if you had a︌ UAE FZ company.

I agree with you saying that having a legal setup is the︍ better choice. I’m looking for something that may even get into grey zones, but definitely︎ not looking to evade tax.

 

[bizman]

Your structure is clever, but VAT may still apply depending on where the service is‌ "effectively" consumed and whether Cyprus sees your home office as a fixed establishment.

The US‍ LLC's income is likely subject to Cyprus CIT due to transparency, while HK Ltd dividends⁠ may qualify under the participation exemption if conditions are met. Having a foreign director could⁤ help argue substance abroad, but your physical presence in Cyprus may trigger tax or VAT⁣ exposure regardless. Switching to HK Ltd might reduce overall CIT, but VAT risks from working⁢ locally remain - get professional advice tailored to your case.