Cyprus Substance Solutions

As a consequence to the latest doctrine of “Substance over Legal Form”, which essentially allows Authorities, including Tax Authorities, to look at the actual arrangements in place of a Company’s operations to prevent artificial structures being used for tax avoidance purposes, it is now becoming imperative that for a Company, to be able to enjoy the beneficial tax regime granted to Cyprus companies, that it provides with certain substance requirements. What’s more, a recent circular by the Central Bank of Cyprus seems to indicate that the lack of substance might prevent legal persons from opening bank accounts in Cyprus.

Cyprus is an ideal country to establish substance for several reasons, including:

• The strategic location of Cyprus, lying at the crossroads of Europe, Africa and Asia
• Full European Union Membership
• Competitive corporate tax rate of 12.5% (one of the lowest in Europe)
• Favourable tax regime with a transparent and developed legal system, in compliance with European Union Standards, and the Organization for Economic Cooperation and Development (OECD)
• Highly educated local workforce
• Developed business ecosystem
• Low costs and high quality of life

Tax Residents in Cyprus are liable to tax on their worldwide income, which is received both in Cyprus and abroad.

According to the Income Tax Law 118(I) of 2002, (Section I, Article 2), a company is tax resident in Cyprus, if its management and control are exercised in Cyprus.

Although “Management and Control” is not a term defined in the Cyprus Tax Legislation, to achieve tax residency and substance, the Cyprus Tax Authorities take into consideration the following factors in general:

• The composition of the Board of Directors (the majority of the Board of Directors needs to be Cyprus residents)
• The secretary of the Company should be Cypriot resident
• Where the Board Meetings take place and whether major decisions are adequately taken during these meetings (they should take place in Cyprus)
• The place where the discussion and approval of the Financial Statements and Audited Accounts takes place (they should take place in Cyprus)
• The Board of Directors must have control over the bank account which must be situated in Cyprus
• The Company maintains employees and an office in Cyprus, through which day to day operational functions are exercised
• Record Keeping: Archiving books and records like minutes, Company seal and share register should be kept in the Cyprus office
• Books and accounting records should be kept in Cyprus

Due to the new regulatory changes, which many countries are incorporating to their legislation to combat tax evasion and tax fraud, there is no guarantee that foreign tax authorities will consider companies as Cyprus Tax Residents if only the above criteria of substance are met. Therefore, it is essential to be well prepared for the challenges of the new regulatory environment and substance requirements that might consider the Company.

Our Substance Solutions Services

In addition to the above, and to avoid any implications by having lack of substance and be threatened by higher tax rates and additional fines, companies need to demonstrate an economic purpose and relevant infrastructure to achieve substance.

Our Firm can provide a wide range of bespoke substance solutions to assist international clients establishing business presence in Cyprus, setting up Cypriot structures and achieve economic substance. Such substance-related services include:

• In-depth review of the current level of substance of already established companies in Cyprus and advise on appropriate measures based on best practises
• Consulting regarding appropriate level of substance prior to the setting up of Cypriot structures
• Management services
• Hiring local personnel, drafting employment agreements, migration formalities and employee services
• Identify suitable office space and office rental agreement
• Insurance policy coverage
• Creation of corporate website, corporate email address, dedicated phone and fax line
• Tax and legal support regarding the redomiciling of companies to Cyprus
• Services provided via our business associates:
  • with respect to ongoing administrative functions of the companies (accounting, payroll and HR solutions)
  • Audit and Advisory services
  • Tax services: corporate, personal and indirect tax compliance and advisory

Each business structure is unique, and so are the substance requirements of each client. With this in mind, we have developed a proposal of specific packages and the costs associated with each package merely outlining the numerous possibilities available for creating substance in Cyprus. Our proposal serves as a solid starting point for the wealth of options open to clients wishing to build and maintain a strong presence in Cyprus. We are here to consult with you in assisting you in reaching an informed decision on your best option and how this can be implemented.

Please feel free to contact us if you have any question and to discuss how we can be of assistance to you.

DISCLAIMER:

PARIS MAVRONICHIS & CO LLC accept no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

The material contained herein is provided for informational purposes only and does not constitute legal advice nor is it a substitute for obtaining legal advice from an advocate.  Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced advocate. PARIS MAVRONICHIS & CO LLC will be glad to assist you in this respect.