Substance (real presence) in Cyprus saves business ownersRecent news headlines made business owners in Cyprus nervous. The legislation of the island state regarding owners of the business registered there was tightened. A lot of businessmen started being interested in substance in Cyprus for a possible solution to the encountered difficulties. No matter where a business is actually located and where the main activity of a company is carried out, there are circumstances when it is more feasible to re-register a company in a more favourable jurisdiction. Some CIS countries did not adapted to the capitalist model of the state structure in full.
Certain time, skill and political will are needed to establish a favourable business climate. A lot of businessmen faced low profitability, having worked in post-Soviet countries due to the high tax rates of their home country. Substance in Cyprus is becoming a practical concept to continue activities on more favourable terms abroad.

The Central Bank of Cyprus has tightened the rules for business, but substance in Cyprus allows them not to be afraid of them

Recently, the Central Bank of the Republic of Cyprus issued several documents that changed the regulatory policy regarding business. Circular (June 14, 2018), Circular (November 2, 2018) and the EU Directive on the Prevention of Money Laundering and the Financing of Terrorism. Documents indicate the concept of dummy companies, or shell companies. The document indicates that a dummy company is a legal entity which falls under several criteria as follows:

  1. There are no reasonable grounds to presume that a company is physically present in the form of a real office in Cyprus or a room used as an office;
  2. There is no real Director who manages an enterprise;
  3. A company does not operate in the territory of the Republic of Cyprus;
  4. A company can not provide documents confirming that the activity has economic value and is purposeful.

Accordingly, if a company does not use substance, during the audit by the state fiscal authorities, sanctions measures can be applied. Also, the document contains the following strong recommendations for:

  • banks - to avoid client servicing of companies with such criteria;
  • other financial institutions - not to cooperate and avoid supporting business relationships.

Instead of terminating the activities of a company with similar characteristics, you can find a solution in the form of substance in Cyprus.

In these cases, it is not the only way to resolve this problem. Among others, re-registration of a company in a jurisdiction with a simplified tax burden and not having such strict rules for doing business is considered. Depending on the priorities and preferences of a beneficial owner, as well as on the specifics of a real business, there is a range of other mechanisms to optimize the tax costs for the business.

Cyprus innovations are not ground-breaking. There is a number of other countries with the Law «Controlled Foreing Company», legislation on the control of foreign companies. They seek to closely monitor and control entrepreneurs to prevent their using various tax evasion schemes.

What is substance in Cyprus?

Given that fact that large businesses from around the world strive to work at offshore tax rates, substance in Cyprus is a convenient solution for capital preservation. The concept of substance has no analogues for translation into Russian. It is important to understand that this is not a kind of business or a type of taxation, but a doctrine. The term «doctrine» means a set of methodological, legal and strategic principles leading in total to a single outcome. And this outcome is the optimization of tax costs.
The essence of the term substance is the implementation of a real presence; companies acquire all the attributes of a business structure that creates a product or provides a service. During the audit a company shows a clear feasibility of commercial activities.

How is substance in Cyprus is carried out?

If a company in Cyprus is registered but does not have a real physical presence and does not conduct activities on the island, it is worth taking measures to use substance. During the verification of a company for shell-companies features, the following characteristics will be taken into account:

  1. Is there the registration in Cyprus?
  2. Is there confirmation of ownership or rental of the office?
  3. What kind of activity is the company involved in and what is its essence?
  4. Residency of what jurisdictions, other than Cyprus, does the organization have?
  5. What is the location of Meetings of Shareholders?
  6. In which country are the minutes of shareholders' meetings prepared and kept?
  7. In what manner does the official management control the adoption of major commercial and legal decisions in the implementation of activities?
  8. Which country's tax resident is each member of the Board of Directors?
  9. What is the location of Meetings of Directors?
  10. Are there any powers of attorney issued on behalf of the company to represent the interests and manage the organization's processes?
  11. Is financial reporting prepared?
  12. Does delivery of tax returns in the country of registration take place?
  13. Were all necessary tax deductions paid?
  14. Are there any hired employees and what is their role in the company’s activities? Is salary subject to taxation?

The list of these characteristics is not exhaustive. During each audit representatives of the fiscal services will pay attention to all the details related to the activities. Their task is to make sure that the company operates under the legislation and does not use preferences as a scheme. Substance will make it possible to ensure that the answers to all questions raised by the inspection bodies are satisfactory.

Basic requirements for a registered company:

  • Office. An office in Cyprus is the evidence of a real presence of a company in Cyprus. A room equipped with furniture, inventory and facilities based on the specifics of the activity;
  •  Formed share capital. Cyprus legislation does not provide for a minimum limit amount for the formation of share capital. The most convenient sum is 1000 EUR. Thus, 1 share will be valued at 1 EUR, if divided into 1000 shares;
  • Bank account. Transactions must pass through this account;
  • Existence of shareholders. There must be at least one shareholder; an individual or a legal entity. A nominal owner is possible for substance, to whom a beneficiary can trust as to an intermediary, given the need to disclose the ultimate owner;
  • Staff. A manager, as well as an accountant, plays an important role.
  • Registration with the tax service. Company registration must be accompanied by mandatory registration with the tax authority. All the necessary tax payments and reports will be sent to the tax service.

Observance of all criteria must be of adequate quality. Ranging from the professionalism of accounting to the compliance of activities with all the laws of Cyprus.

Substance in Cyprus allows repatriating capital profitably without violating legislation

Another object of monitoring services are companies trying to avoid double taxation. There is an international agreement on the elimination of double taxation signed between some countries. The essence of this agreement is that the participating countries provide an opportunity to their residents, who work in the states parties to the agreement, to pay tax one time. In order to enjoy the benefits, some companies, working beyond the jurisdiction of the agreement, re-register their companies in the signatory state and become fully enjoy the simplified rules for doing business. The state power of certain countries actively fights against such companies, calling them law-breakers. Thus, firms that do not apply substance in Cyprus fall under the category of shell companies and become suspicious to the state bodies. Accordingly, substance is one of the main solutions to minimize the tax on the repatriation of profits or to avoid it at all.

For other countries, substance will be different and will have formal features of real presence. It is necessary to understand in each particular case the specifics of local taxation for residents and parties to international agreements. This information is intended for representatives of companies registered in Cyprus and all those who wish to register a company there.

Law&Trust International has extensive experience of work in Cyprus and in other countries. Our lawyers will take into account all your requests, develop a detailed strategy for preserving your business and its further prosperity within the legislation framework of the Republic of Cyprus. For order service go to link: