Building economic substance in a foreign jurisdiction can be a nerve-racking and a resource wasting process if not done correctly. From the other hand, if you are setting up a structure its of imperative importance to have substance so that to eliminate any tax risks and suspicions from International and Local Tax Authorities regarding Tax Avoidance.
As at the time of writing this article Cyprus has not adopted any specific Economic Substance Rules / Legislation nor there is any definition in the tax legislation of the management and control required, even though it is expected to do in the near future.
2023 Update: From 1/1/2023 Cyprus has also introduced the incorporation test where every Cyprus Company upon incorporation will be considered Cyprus Tax Resident by default, unless the said Company is tax resident in another jurisdiction. The existing corporate tax residency test will continue to apply, so that a company that has its management and control in Cyprus will continue to be considered as a tax resident of Cyprus i.e. its tax residency status will not be affected by the Law amendment.
Guidelines for a strong tax residency case
It is generally accepted and in line with international tax principles that the following conditions should be considered to determine if a company qualifies as a resident for tax purposes in Cyprus:
- All strategic (and preferable day-to-day) management decisions are taken in Cyprus. This is usually achieved by having the meetings of the Board of Directors in Cyprus as well as the signing of written resolutions, contracts, agreements and other relevant company documents relating to the management, control and administrative functions of the Company to take place in Cyprus.
- The majority of the Directors (at least 50%) of the Company are tax residents in Cyprus and exercise their office from Cyprus.
- An actual office is maintained in Cyprus where the actual management and control of the business of the Company shall be exercised.
- The Company also employees individuals who are based and work in Cyprus.
- Hard copies of commercial documentation (agreements, invoices etc) are stored in the Cyprus office facilities of the Company.
- Accounting records of the company are prepared and kept in Cyprus.
- Have a functioning telephone line, domain email address and even website if possible;
- Bank Accounts of the Company are operated from Cyprus even if the accounts are maintained with banks established outside Cyprus. However, we do recommend for Cyprus Company to have bank account with a local bank.
- No broad powers of attorneys are granted to individuals based outside Cyprus effectively empowering them to manage the business affairs of the Company outside of Cyprus.
As a general rule, if you have offices and employees in Cyprus it can help strengthen the substance case of the Company. There is a saying which says that ‘the more you spent the more substance you have’. However, there are smart solutions we can suggest which can strengthen the Economic Substance Case of your Cyprus Company without you overspending.
Asterisk Substance Solutions in Cyprus
Our firm has the experience and capacity to develop the best possible and solid substance tailored to your needs and operations. We provide professional services from incorporation of a Cyprus Company, to partner-level Directors with minimum number of appointments, advisory services for the set-up in Cyprus, opening of bank accounts, assistance with drafting legal contracts, monthly payroll runs, accounting services etc.
Please refer to here for more information on our substance solution services.
*Please note that the above are indicative, does not mean to be an exhaustive analyses of the topic and does not constitute tax advise.