Substance requirements and solutions in Cyprus

In this article we are going to analyze the rules Cyprus follows in order to fulfil substance requirements for companies and how we can offer our substance solutions in Cyprus, as a Law Office. The need for demonstrating “substance” in Cyprus, the EU, or any low tax jurisdiction is not a new concept, despite what some may claim. For that reason we came up with a plan for Substance solutions for Cyprus Companies. The concept of substance has been thoroughly discussed in determining effective management and control and has been applied in various cases, including the Cadbury Schweppes case. It has been established that creating structures solely for the purpose of achieving tax benefits must not be “wholly artificial arrangements,” and there must be genuine economic activities involved.

The idea of substance is fundamental in establishing effective management and control of legal entities, which is crucial in determining tax residency under domestic tax laws and double tax treaties. Moreover, demonstrating substance is also a significant factor in determining “beneficial ownership,” which is a crucial criterion for payments such as dividends, interest, and royalties under double tax treaties.

How is substance determined in Cyprus

In line with the OECD’s Action 5 of the BEPS project, the EU’s COCG investigated certain low or no corporate income tax regimes, requiring them to implement laws addressing economic substance by the end of 2018. Failure to comply would lead to their inclusion in the EU Blacklist of non-cooperative jurisdictions. These rules, alongside other tax substance requirements, including local regulatory requirements, must be considered when establishing substance.

Affected jurisdictions, such as the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, and Jersey, responded to the mandate by enacting economic substance legislation to avoid blacklisting. However, these provisions cannot be used as a benchmark for determining substance requirements in Cyprus or other EU jurisdictions.

According to the COCG, substance is determined by factors such as:

• the company being directed and managed in the relevant jurisdiction,
• an adequate number of qualified employees,
• proportionate expenditure,
• physical presence,
• and core income-generating activity.
  These requirements vary depending on the nature of the business activity and income generated, with holding companies requiring less substance than trading companies to determine residency.

Management and Control of Company in Cyprus

The concept of corporate residency and effective management and control is often seen as two separate issues, but in reality, they are one and the same. When it comes to tax planning, determining residency is crucial, and for companies in Cyprus, it means establishing the place where effective management and control is exercised. This test is also used in most of Cyprus’s double tax treaties (DTTs). Over time, this test has been extensively reviewed by the courts and is now established law. Simply put, a company’s residency is where its central management and control actually abides. In the case of Cyprus structures, such as holding companies, this means:

• having a majority of directors who are Cyprus residents,
• making decisions and implementing them in Cyprus,
• holding regular board meetings in Cyprus, and
• having foreign resident directors attend such meetings in person.It’s important to note that these requirements for substance must be analyzed in the context of the company’s business activity.

The distinction between effective management and control and substance requirements is often misunderstood, but in reality, they are one and the same test. Determining a company’s residency is the first step in tax planning, and in Cyprus, it’s where effective management and control is exercised. This is also the standard set out in most DTTs that Cyprus has signed up to. It is established law that a company is resident “where the central management and control actually abides”. This means that for a Cyprus structure, the majority of directors should be resident in Cyprus, decisions should be made and implemented in Cyprus, and regular board meetings should be held in Cyprus.

Substance requirements are not a separate test but a subset of effective management and control. They should not lead to a different conclusion de jure or de facto. The requirements for substance are essentially the same as those for effective management and control, and they underpin tax residency, residency for DTT purposes, and beneficial ownership requirements. The substance requirements currently discussed in tax planning structures are not greater than the standard test for effective management and control.

Residency Requirements of Company in Cyprus

To satisfy the residency and substance requirements in Cyprus, the following elements should be present:

• The majority of the directors should be residents of Cyprus.
• The directors should possess the necessary qualifications and experience to make effective decisions for the company.
• All board meetings should be held in Cyprus and attended by all directors, including those from overseas.
• All decisions and agreements should be made and signed in Cyprus.
• Full and complete record keeping should be maintained in Cyprus.

Additionally, these elements should further add to the satisfaction of substance, along with the statutory obligations of maintaining books, records, accounts, and relevant registers. It is important to note that each case will turn on its facts, and the requirements for a holding company may differ from those of a trading, operating, financial services, or investment company.

AVZ Law Office Cyprus

In order to build Economic Substance in Cyprus and get benefited from all the advantages, this low tax jurisdiction has to offer for your Company, we can offer you the following services:

• Find an office or other industrial premises to buy or rent in Cyprus (instead you can use our Nominees Services and get a register office)
• Hire a Lawyer from our Office as qualified director who is a Cyprus resident and can make independent choices about the company’s activities
• Provide a working phone line, domain email address, and website (we can also build a Website for you, in cooperation with our reputable web developer partners)
• Open a bank account for your Company with a Cyprus bank
• Hire employees such as legal advisors, marketing officers etc. in order to show payroll activities.
• Comply with social insurance requirements 
• Maintain adequate physical storage of the company’s documentation (agreements, statements, invoices, and so on) in the Cyprus office.
• Accounting and Auditing
• Provide legal advise about Substance requirements
• Prepare all relevant paperwork for Public Authorities
• Hire Employees
• Appoint a Cypriot Director and Secretary
• Registered office
• Safe storage for Companies books and documents
• Introduce and set up accounting services
• Open bank account
• Register with Tax Department and VAT
• Register with social insurance
• Tech Solutions (websites, marketing etc)
• Frequent legal audits of the company
• Make all necessary payments (i.e annual levy)
• Tax planning

Feel free to contact us in order to start working on your case.