US LLC + Cyprus Holding

[BasedOperative]

Hello OCT,

I run an online consulting business (think infoproducts/coaching) and would appreciate your feedback on whether the following setup works from a VAT and tax standpoint.

Structure Overview:

I’m a Cyprus tax resident and non-dom. I own a Cyprus Holding Company (Cy HoldCo), which owns either a US LLC (default transparent entity) or a Hong Kong limited company (HK Ltd). The US LLC or HK Ltd invoices and provides B2C consulting services to EU clients. I personally perform the consulting work from my laptop at home, mostly from Cyprus. Profits are distributed to the Cy HoldCo as dividends or intercompany transfers, and then from the HoldCo to me.

Key questions:

1. VAT on B2C services:
   

• Does EU VAT apply since invoices are from non-EU entities (US LLC or HK Ltd)?
  
• Does Cyprus VAT apply because the work is done in Cyprus?
  
• Is this considered a fixed establishment in Cyprus for VAT?
  

1. Cyprus Corporate Income Tax & Participation Exemption:
   

• Since the US LLC is transparent, Cyprus sees income as earned by Cy HoldCo.
  
• Does the Cyprus participation exemption apply to income from the US LLC?
  
• If not, does that mean 12.5% Cyprus CIT applies?
  
• For HK Ltd, with 0% CIT, would dividends to Cy HoldCo be exempt under the Cyprus participation exemption?
  

1. Director residency and substance:
   

• Does the US LLC or HK Ltd need a non-Cyprus-based director to preserve the intended tax treatment?
  
• Can I, as a Cyprus resident, be the director without triggering extra tax or VAT exposure?
  

1. Performing work from Cyprus:
   

• Can I work from home in Cyprus for the US LLC or HK Ltd without triggering VAT registration or obligations?
  
• Would this create a fixed establishment or permanent establishment in Cyprus for the foreign company, causing local tax or VAT exposure?
  

My understanding:

No VAT applies as the supplier is outside the EU (US or HK).

Cyprus CIT applies on income from a transparent US LLC unless it opts to be treated as a C-Corp, which complicates US tax filings.

The Cyprus participation exemption likely doesn’t apply to transparent US LLC income but might apply for HK Ltd dividends.

Being a director and doing the work from Cyprus may make the foreign entity Cyprus tax resident, aligning with Cyprus CIT at 12.5% in the transparent LLC case.

Using HK Ltd might help avoid Cyprus CIT if dividends are exempt.

I’d appreciate your expertise on:

• Whether VAT applies.
  
• Whether the participation exemption applies to distributions from US LLC or HK Ltd.
  
• Whether a non-Cyprus resident director is needed or recommended.
  
• The risks of working from Cyprus for these foreign companies regarding VAT and tax.
  
• Whether switching to HK Ltd helps eliminate Cyprus CIT.
  
• Any other practical issues I should consider.
  

Thank you in advance!

 

[Sols]

Technically, VAT applies since you are providing services from within EU to other EU residents.‌ The only reason you might not pay VAT is because of Cyprus' lacklustre enforcement of‍ its tax laws. However, VAT is one area where they do seem to care -⁠ sometimes.

Since the entity is managed and operates from Cyprus, it becomes tax resident in⁤ Cyprus. However, that's practically never checked. This may also be a way by which you⁣ become liable for VAT. You can get around tax residence for corporate tax purposes by⁢ appointing a or majority directors resident abroad, holding meetings abroad.

I'm aware of claims that︀ Cyprus treats LLCs as corporations for tax purposes, which would mean holding company's receipt of︁ distributions should be considered dividends. However, I have not yet come across an official source︂ for this claim. Unless you have a compelling reason for US, I'd go with a︃ traditional company entity, such as the HK LTD you mentioned.

 

[BasedOperative]

Yes, the core idea is that the active company must not be tax resident in︅ Cyprus (easy for US LLC to never get checked).

That said, I’m fine with paying︆ 12.5% CIT with the Cyprus holding, but EU VAT is absolutely out of the question.︇ Hence the need to use a non-EU company to collect payments.

I might avoid the︈ HK company due to relatively high maintenance costs and the uncertainty of CIT exemption. Additionally,︉ the full 0% tax might raise questions (not sure how the Tax Office in Cyprus︊ operates), and 12.5% CIT is not bad at all.

Alternatively to the US llc, I’d︋ even be open to use a UK ltd as a payment agent with a UK︌ director, and pay some UK tax on like 2-3% of the revenue. Just to get︍ good payment processing and still be out of EU VAT nightmares.

What would you guys︎ do?