The international tax landscape has seen drastic changes the past 6 years, and will continue changing as tax authorities around the world work to curb abusive tax practices and tax evasion. Developments from both a Cyprus domestic law perspective as well as from an EU and international perspective, have given rise to the importance of ensuring legal structures contain the appropriate level of economic substance. The law regarding the role of economic substance is still evolving in most developed and even developing countries. The absence of economic substance in the country where a company is registered is now generally considered as a prominent indicator of abusive tax avoidance practices.
Accordingly, establishing substance in Cyprus legal structures is now of paramount concern in order to minimize the potential risk of disputes by foreign tax authorities seeking to challenge a Cyprus company’s corporate tax residency status.
A company that aims to establish economic substance in Cyprus shall be in a position to demonstrate that it has an economic purpose and the relevant and necessary infrastructure to operate its business, and not only registered with the Cyprus tax authorities for the purposes of obtaining tax benefits.
In addition to tax-related considerations, the absence of substance in Cyprus may restrict a company’s ability to open a bank account, following guidance issued by the Central Bank of Cyprus.
From a Cypriot tax perspective, a company is tax resident of Cyprus if its “management and control” is exercised in the Republic of Cyprus. Although no other substance requirements are formally imposed, international court cases and the global trend demonstrate the necessity to ensure there is no discrepancy between the form and substance of arrangements and the importance of companies being managed and controlled from where they claim to be tax resident.
When analysing substance requirements, the starting point, and by far the most important issue to be considered, is the make-up/composition of the management of a company, which is typically reflected within the Board of Directors. The appointment of directors requires thorough planning. Physical presence in Cyprus of the directors of a company claiming to be a Cyprus tax resident company in the Republic, as well as evidence that the major board decisions have been taken from Cyprus, would serve as a safeguard against future challenges. As a result of these local and international developments, we are now strongly urging all clients to consider adding substance at the level of their Cypriot structures.
Each structure is unique, and so are the substance requirements of each client – this is the simple approach we take. With this in mind, we have developed a proposal merely outlining the numerous possibilities available for creating substance in Cyprus. Our proposal serves as a solid starting point for the wealth of options that exist for clients wishing to build and maintain a strong presence in Cyprus.
In recent years a number of companies have not only strengthened their claim to Cyprus tax residence, but also enjoyed operational and economic benefits by locating regional administrative and headquarter functions to Cyprus, taking advantage of Cyprus’s strategic location, EU membership, low costs and high quality of life.
Seeking more insights or curious about how we may assist you and dive deeper together? We have dedicated ourselves to providing the highest levels of service and tailored solutions to meet the diverse needs of our valued clients. Please get in touch with one of our managers to arrange for your free consultation.