What is the Cyprus Organschaft?
The Cyprus Organschaft is a specific corporate structure that uses a combination of three Cypriot entities to legally eliminate Austrian income tax on business profits distributed to an Austrian resident. The model leverages a unique clause in the Austria-Cyprus DTA that reclassifies partnership income as 'business profits' rather than 'dividends.' This crucial distinction shifts the taxing rights to Cyprus, which then waives its right to tax non-resident partners, resulting in a 0% tax rate in both countries on that income stream.
Why This Tax Model is a Game-Changer for Austrian Residents
The advantages of this model extend far beyond simple tax reduction. It offers a comprehensive solution for entrepreneurs and investors seeking efficiency and legal certainty.
Tax-Free Income in Austria: The primary benefit is receiving your business profits in Austria with a 0% income tax liability. While this income is declared, it is exempt from taxation (more on the 'Progression Clause' below).
Zero Tax on Investments in Cyprus: The Cypriot operating company pays 0% tax on capital gains from securities and 0% tax on dividends received. This makes it an incredibly powerful vehicle for traders and investors.
Legally Bulletproof: This isn't a grey-area strategy. The Cyprus Organschaft is fully recognized by Austrian tax authorities and its legality has been repeatedly confirmed in court. An update from our sources in 2018 confirmed the model's long-term stability and safety.
Low Corporate Tax Environment: Your operating business in Cyprus benefits from a low 12.5% corporate tax rate and business-friendly expense deduction policies.
How the Cyprus Organschaft Structure Works: A Step-by-Step Breakdown
The magic of the Organschaft lies in its three-tiered structure. Each entity has a specific role designed to ensure compliance and tax efficiency.
1. The Operating Limited: Your Business Engine
At the top of the pyramid is your main business, a standard Cypriot Limited company. This is where your business activities occur, clients are invoiced, and revenue is generated.
Taxes: It pays a 12.5% corporate tax on its net profits. Cyprus is known for allowing generous business deductions, often reducing the effective tax rate significantly.
IP Box Regime: If your business earns income from intellectual property (e.g., software licenses, ebooks, trademarks), you can benefit from Cyprus's IP Box regime, which can lower the effective tax rate on that income to just 2.5%.
VAT: It registers for EU VAT, with Cyprus's standard rate being a relatively low 19%.
2. The Cypriot Partnership: The Tax-Free Conduit
This is the linchpin of the structure. A Cypriot Partnership (similar to a KG) owns 100% of the shares of the Operating Limited. All after-tax profits from the Operating Limited flow as dividends to this Partnership.
Tax Treatment: As a pass-through entity, the Partnership itself pays no corporate tax in Cyprus. Profits are attributed directly to its partners.
Partners: It has two partners: the Austrian resident (as a Limited Partner) and a dedicated Management Limited (as the General Partner).
3. The Management Limited: Ensuring Substance and Legitimacy
This is a second Cypriot Limited company whose sole purpose is to act as the General Partner of the Partnership. It takes on full liability but has no share in the profits. Its key function is to create management 'substance' in Cyprus, preventing Austrian authorities from claiming it's a Controlled Foreign Company (CFC).
Substance Requirement: To be legitimate, this entity must have a physical presence in Cyprus. This is typically achieved with a small, dedicated office space (a lockable room with a desk is sufficient) and often a fiduciary director based in Cyprus. This costs around €300 per month.
4. The Individual in Austria: The Tax-Free Beneficiary
As the Limited Partner in the Cypriot Partnership, you, the Austrian resident, receive the profits. Because of the DTA, this income is treated as business profit from Cyprus. Since Cyprus waives its right to tax you as a non-resident, and Austria must exempt this foreign business profit, you receive the funds 100% tax-free.
Important Note on the 'Progression Clause' (Progressionsvorbehalt): While the income from the Organschaft is not taxed in Austria, it is declared on your tax return. Austrian authorities will use this tax-free income to calculate the tax rate for any other local income you might have (e.g., rental income from an Austrian property). This means any additional Austrian income will likely be taxed at the highest marginal rate.
The Legal Foundation: Why the Austria-Cyprus DTA is Key
The entire model hinges on Article 7 of the Double Taxation Agreement between Austria and Cyprus.
Article 7, Paragraph 1 establishes that a business's profits are only taxable in its home state unless it has a permanent establishment elsewhere.
Article 7, Paragraph 8 is the critical clause. It explicitly defines a partner's share of profit from a partnership as 'business profits'. This prevents the income from being classified as 'dividends', which would be taxable in Austria.
This reclassification gives Cyprus the sole right to tax the income. Because Cyprus chooses not to tax the foreign-resident partners of a partnership, the income becomes tax-free in both jurisdictions.
Is the Cyprus Organschaft Right for You? Costs vs. Benefits
This is an advanced structure, and it comes with setup and maintenance costs. However, for the right person, the return on investment is massive.
Setup Costs: Approximately €13,500 for the first year. This covers the formation of all three companies, legal advice, and administrative setup.
Annual Running Costs: Approximately €7,500 from the second year onwards. This includes all accounting, administration, and compliance for the three entities.
Substance Costs: Add approximately €3,600 per year (€300/month) for the required office premises in Cyprus.
The Break-Even Point: The model becomes profitable if your current annual tax bill in Austria (including personal income tax on business profits) exceeds the annual running costs of ~€11,100. For most entrepreneurs with a turnover of €30,000 or more, this structure provides immediate and significant savings.
Who Can Use This Model? (And Who Can't)
This is the most important consideration. The Cyprus Organschaft is exclusively for individuals who are tax residents in Austria. Due to differences in their respective DTAs with Cyprus, this model is currently not viable for residents of Germany or Switzerland. However, for entrepreneurs and digital nomads committed to living in Central Europe, establishing residency in Austria to leverage this model is a powerful strategic option.
