In our last article on Economic Substance, we discussed the role of substance in tax planning and how this has become increasingly significant in the global economy. With many companies establishing a presence in Cyprus to benefit from the island’s favourable double taxation treaties, it is of paramount importance to demonstrate that management and control of a Cypriot registered company is exercised in Cyprus, and there is sufficient economic substance and physical presence to validate this.
Cyprus is a well-respected and experienced Tax Incentive country. In a post-pandemic world, the island has set itself up to welcome and cater to foreign investors via its many investment opportunities in key economic sectors such as banking, investment funds, shipping, tourism, innovation, R&D, energy and real estate.
Cyprus currently enjoys double tax treaties (DTTs) with 65 countries, including China, Canada, Germany, France, Saudi Arabia, the UAE, and the USA. This range of DTTs strengthens the country’s popularity as an investment funds destination and a gateway into Europe.
Cyprus is also an important tax incentive jurisdiction, one that abides by international rules on transparency, exchange of information, reporting, and substance. As such, it could offer investors a much-needed respite from the current crisis via its many tax savings opportunities.
Cyprus follows the model outlined by the Organization for Economic Cooperation and Development (OECD), wherein companies can qualify from tax treaty benefits under the following criteria:
- The company is a tax resident of the State in which it is registered
- The company is the ‘beneficial owner’ of the income distribution (i.e., dividends, interests, loyalties).
How does a company achieve sufficient business substance in Cyprus?
It is important to remember that there is no standard approach to achieving substance. Each company and its corporate structure should be reviewed on a case-by-case basis, and each jurisdiction has multiple interpretations to take into account.
As a general rule, however, multinationals operating in Cyprus are urged to adhere to the following governance procedures and indicators of substance in order to support their company’s tax residency position and achieve substance:
- Effective management should take place in Cyprus. This includes investment and operational policies, such as buying and selling of stock or assets, appointing company officers, overseeing and controlling those appointed to carry out the day-to-day business of the company, and handling matters of finance.
- Cyprus company directors must have relevant knowledge and experience of the operations of the company. Directors of a Cyprus company must have sufficient knowledge to make decisions in order to demonstrate that they are the decision-makers. A Cyprus-registered company is not considered to have Cyprus business substance if its decisions are controlled or dictated by outsiders. Cypriot companies should have a local high-level decision-maker to control and direct the company from Cyprus.
- Avoid appointing directors holding multiple positions. Directors who also hold many high-level positions simultaneous in many companies or in other affiliated companies raise red flags with the Tax Authorities, as this creates a structure lacking in economic substance.
- Maintain an office presence in Cyprus. Group head offices, as well as fully-fledged offices with a business phone system and local website employing local staff, should be maintained in Cyprus. An absence of a fully-fledged office may be seen as suspicious unless it can be justified as a credible business decision. For instance, in cases where the company’s activities do not require interpersonal transactions.
- Maintain business records. Original minutes of conferences, general meetings, electronic mail, general administration, and all accounting records must be maintained at the seat of the Cyprus company.
- Maintaining a local bank account. Though a company can have various bank accounts in the different jurisdictions in which it operates, a corporate bank account must be kept in Cyprus as key evidence of substance in the jurisdiction of its tax residency. Bank signatories and banking transactions from this account should also be based in Cyprus.
- Board meetings should be held in Cyprus. These should be held and documented regularly, and at least one meeting should be held per year where all directors (resident and non-resident) are present.
- Manage Intellectual Property Rights (IPR). By transferring intellectual property rights to a Cyprus company, foreign payments to said company can be commercially justifiable. In addition, the Cyprus company may incur regular expenditure, which can add value to the IPR activities.
- Consider a Cyprus Stock Exchange listing. Listing the Cyprus company on the Cyprus Emerging Capital Market demonstrates that said company is actively doing business in Cyprus. Requirements are minimal, listing and maintenance costs are not restrictive, and there is no minimum share capital that needs to be disseminated among the general public.
- Establish a Cyprus International Trust. Setting up a Cyprus International Trust for the shares of a Cyprus company is a step further in securing beneficial ownership.
- Continuous company development. While the above are good tips and tricks for establishing substance, it is important to go beyond just demonstrating the initial reasons for forming a Cyprus company. Rather, the economic substance should be continuously demonstrated throughout the company’s lifetime. There are a number of ways to do this, depending on the company’s operations and structure, and we’re here to help you navigate these requirements and assist in your company’s development.
How can CX Financia assist
Our team of professionals can offer recommendations and package proposals on a case by cases basis to clients who wish to enhance their presence in Cyprus and build up economic substance. This can be through establishing a fully-fledged office in Cyprus with employee relocation, or by adopting other relevant best practices.
Our services include, but are not limited to:
- Identifying suitable office space and residential accommodation
- Assistance with setting up of an office, hiring local personnel, and dealing with visas and work permits for foreign employees
- Support with ongoing administrative functions (fiduciary, accounting, payroll, and HR)
- Tax services including corporate, personal and indirect tax compliance and advisory for domiciling of companies in Cyprus
- Independent IT environment set up
- Creation of websites
Contact us today for a free half-hour consultation.