Cyprus is undeniably a key jurisdiction for the headquarters of multinationals and substance offices of small and medium-sized entities. Cyprus’ strategic location, quality of life, highly educated workforce, and corporate taxation make the country an emerging destination for businesses and high-net-worth individuals.
Over the past few years, there was an enormous step towards the de-offshorization of companies, with many companies shifting to actual economic substance, in which corporate activities are transparent and substance together with rationale is no longer questioned.
Cyprus follows the OECD model convention and offers a favorable 12.5% corporation tax on income generated from tax residents of Cyprus. Companies may also benefit from other schemes related to tax residents of Cyprus which allow companies to have tax relief and thus not be taxed in a group of incomes such as dividend income, interest income, FX gains, gains arising from loan restructuring, and many others.
Substance
Substance is defined as the actual presence of a company in its country of registration. In order for a company that operates in Cyprus to be able to claim double tax treaty advantages and have rights to the EU Directives, the company must have adequate substance.
A company must be able to prove that it has economic substance and that it conducts real business.
A company is considered to be a resident in the country in which management and control is located and implemented. When speaking about where management and control is located, the general idea and also according to OECD criteria are the following:
- Is the location of the board of directors meetings, in which all strategic decisions and major contracts are agreed upon, in Cyprus?
- Are the majority of directors Cyprus tax resident individuals? Directors must be qualified, with the appropriate experience and expertise to take on all business decisions;
- Does the company hold or rent an office in Cyprus in which it maintains employees which carry out daily duties? Company should have a physical address of its space and hire employees for operational activities;
Guidelines:
Along with the above, there is also a list of guidelines for a Cyprus company to follow in order to achieve full substance. Not all the below are requirements; however they are a general parameter that should be followed:
- A full set of all record keeping and administration must be maintained in Cyprus. For instance all agreements must be signed in Cyprus;
- All bookkeeping work, along with preparation of audited financial statements and management accounts should all be performed in Cyprus by local professionals. In addition to this, all invoices issued from the company and all receipts obtained should be kept in the company’s offices in Cyprus;
- Directors of the company should be employed, receive a salary and perform actual duties. The directors salary should be appropriate and in line with their duties. As discussed above, directors must have experience and knowledge.
This is important, since if it is proven that the director does not have sufficient expertise, then this may validate that the director is not the actual decision-maker and therefore the company may be viewed as lacking substance.
- The company should hold or rent an office space in Cyprus. The office should have a business telephone line, an email account, a fax number etc. The office should also have furniture and all other equipment that are necessary for an office to function properly;
- Board meetings should be held in Cyprus. A minimum of 3 board meetings should take place per year and all directors must attend these meeting;
- Business records should be kept in the company’s office in Cyprus. Records such as minutes of meetings, share register, company seal and all other administrative documents;
- The company should hold a tax number allocated from authorities;
- The company’s bank accounts should be managed and controlled in Cyprus. The bank account should have a Cyprus tax resident as a signatory. The bank account statement should show that company’s regular expenditure that was done in Cyprus;
- The company’s profits should flow to its beneficial owners and go through the company’s bank account and not be received on behalf of other parties;
- The Cyprus company should have a logo, a website or any merchandise that can offered complementary to its clients;
- The company should have its team of local professionals. For example the courier companies they work with, the IT company that visits its offices for maintenance etc.;
Economic Substance Requirements
To establish economic substance, a company must demonstrate genuine economic activity and purpose beyond merely reducing tax liabilities. Valid transactions must serve an economic purpose, especially when using a Cyprus bank, which will require detailed transaction information, including purpose and supporting documents.
To achieve real economic substance, a company should:
- Hold assets
- Assume established risks
- Perform real functions
- Set and pursue business goals and targets
Additional methods to ensure economic substance include transferring intellectual property rights to Cyprus, establishing a Cyprus International Trust, or considering a listing on the Cyprus Stock Exchange.
These steps provide significant advantages and contribute to the ongoing development and growth of the company’s activities in Cyprus.
How can CX Financia help?
Our specialist teams have the industry experience to help you set up your headquarters, identify bespoke solutions and use the domestic network to deliver value to your global clients.
Our full suite of corporate services includes:
- Consulting regarding the appropriate level of substance
- Immigration and Management services
- Identifying suitable office space and residential accommodation
- Assistance with setting up your office, hiring local personnel, and dealing with visas and work permits of foreign employees
- Support for ongoing administrative functions of companies (fiduciary, accounting, payroll, and HR solutions)
- Tax services including corporate, personal, and indirect tax compliance and advisory for domiciling of companies to Cyprus
- Independent IT environment set up and creation of a corporate website
- Access to Real Estate Markets and Banking Services
If you are considering Cyprus for your EU corporate headquarters,
To find out how we can help you.