Recently, the Cyprus Central Bank issued guidance to banks & credit institutions, advising them of the new mandatory refusal to take on new clients or to continue servicing existing accounts with so-called shell or letter-box companies.
This has exemplified the requirement for businesses to have real substance in order to operate and benefit from tax residence in Cyprus. These guidelines are due to be incorporated into the Central Bank’s AML Directive shortly, so what does this mean for Cyprus based businesses? Firstly, its necessary to describe what the Central Banks classifies as a Shell company.
A shell company is defined using the following characteristics:
The key elements of substance are management adequacy and capital, the key steps to establishing physical presence in Cyprus:
The guidelines stipulate that trading companies with no effective place of business or management, and therefore no substance, will not be permitted to maintain bank accounts in Cyprus. Additionally, representation by means of nominee services provided by corporate service providers or lawyers does not count as being physical presence.
As long as the company’s Beneficial Ownership information is revealed, and they demonstrate that they are engaged in legitimate business, these limitations do not apply to the following vehicles:
The optimum degree of presence required for a Cyprus company will be determined by the company’s individual requirements. For example, if a holding company only has one investment and the only decision is to declare a dividend once a year, or if a financing company only has one loan, the physical presence required is much less than for a larger business.
Banks & lenders in Cyprus may choose to take on a shell-company client, however a high risk-based approach will need to be followed in their dealings & servicing. Going forward, Cyprus Banks will be required to carry out a review of their customers to identify such companies, and must have informed the Central Bank (the deadline of which was August 1st) whether they have passed and whether they intend to continue their business relationship with the relevant entities.
A company lacking sufficient management and capital may be entirely disregarded by foreign tax authorities, effectivley rendering any taxes payable by the Cyprus may also be payable to the Beneficial Owners country of residence. The availability of a notional interest deduction in Cyprus incentivises companies to increase their capital and substance, and to benefit from reduced tax rate on new equity.
Read more about creating substance in Cyprus and CFC legislation here.
We have local taxation specialists on hand to assist with any restructuring or incorporations in Cyprus, contact us for more information.