This memorandum aims to investigate and describe in more detail the prerequisites for Substances in Cyprus. Many believe that “substance” is a new buzzword or an emerging concept in Cyprus and other countries that are members of the European Union or have low tax rates. However, that’s not the case. Every single one of these places has the requirement.
Under the Income Tax Law, a corporation is considered to be tax resident in Cyprus if it is managed and controlled in Cyprus. This implies that the corporation must have a physical presence in Cyprus and conduct its operations from there. The Tax Department Circulars provide additional guidance on what constitutes substance in the context of the Income Tax Law. For example, they specify that a corporation must have a board of directors that meets regularly in Cyprus, and that important managerial and commercial decisions must be made in Cyprus.
Substance has long been a contentious issue. According to the Cadbury Schweppes decision and other cases, tax efficiency cannot be achieved by “wholly contrived arrangements” and requires a certain amount of “real economic activity.” This conclusion was reached because it was determined that “genuine economic activities should exist.
Legal firms have always been evaluated for their ability to manage effectively, which is crucial for determining tax residency for domestic tax legislation and double tax treaties. As we will discuss below, “beneficial ownership” plays a critical role in determining the classification of dividends and interest under double taxation agreements.
In order to benefit from tax treaty advantages, a corporation must meet the following two requirements:
- A company is a taxable legal resident in the country in which it is incorporated
- Dividends and interest payments are made to the Company as the “principal shareholder.”
- Tax consultants generally agree that a firm must possess a few essential substantive characteristics.
The specifics are as follows:
- The importance of having a physical presence in Cyprus, whether through a corporate office or a managed business center, cannot be overstated.
- Employees of the Company’s headquarters (part-time or full-time)
- Provide dedicated phone, fax, internet, and email lines, as well as a website and social media accounts
- An account in a Cypriot bank administered by a Cypriot member of the Board of Directors.
- Assuring accurate accounting records are always maintained in Cyprus, including preparing and submitting their yearly financial statements on time.
- To ensure a business is appropriately funded, any Share Purchase Agreements must be completed in Cyprus.
Since boosting Substance is a case-by-case endeavor, this information is intended as a general guideline. Finally, Cyprus has pretty similar restrictions.
The tax authorities may not recognize a corporation or transaction if “substance over form” or the “arms-length principle” applies. In this case, the tax authorities in the country of origin will be more concerned.
A Case for the Establishment of a Substance Control Board in Cyprus
With its strategic location, EU membership, mature legal system, competitive 12.5% corporate tax rate, personal tax advantages, and well-educated locals, Cyprus makes a great investment destination due to its workforce and business-friendly climate. A corporation monitored and maintained in Cyprus is considered a tax resident of Cyprus under Cyprus’s tax laws. Many procedures in Cyprus may reduce tax concerns, such as possible challenges to ownership interests, transfer pricing, or regulations on controlled foreign companies (“CFC”).
Substance rules in Cyprus
Corporations established in Cyprus may take the following actions to develop or strengthen their economic substance status:
Cyprus is the firm’s location.
The corporation should be considered tax resident in Cyprus if it is exclusively taxed in Cyprus.
There is most Cypriots on the board of directors.
Cyprus hosts most board meetings.
Company activities are overseen, and important managerial and commercial decisions are made by the board of directors.
The board of directors’ meetings is prepared and held in Cyprus.
All corporate seals and accounting records are kept in Cyprus.
The company filing and reporting functions are performed in Cyprus by representatives.
Agreements about the Company’s assets and subsidiaries are signed and executed in Cyprus.
The annual meetings of the Company’s shareholders are held in Cyprus.
Additionally, it would be helpful to inquire whether or not:
- A power of attorney has been granted.
- Overdue tax returns have been filed.
- Past-due self-assessments have been paid.
The content criteria being debated in many tax planning structures or other contexts are no more stringent than the standard test for efficient management and control.
Substance and Beneficial Ownership
Our organization believes the following elements must be present to meet Cyprus’ residency and substance standards:
All or most of the directors are Cypriots;
As a result, the board of directors has the appropriate education and professional experience to comprehend complex issues about the Company’s operations and make decisions that are in its best interests.
The board of directors meets only once in Cyprus;
All board meetings are held in Cyprus;
Decisions and actions are made and implemented in Cyprus, which means that contracts, agreements, and the like are also signed there.
Records must also be kept completely and comprehensively in Cyprus.
Furthermore, the items mentioned above should contribute to the fulfillment of Substance in addition to the statutory responsibilities. The application of the law will, however, depend on the circumstances of each case, and in particular, the requirements for proving the existence of a holding company will be less stringent than for proving the presence of trading firms, financial services firms, or investment firms.
Several factors make Cyprus an ideal location for the establishment of substances, including:
Cyprus is strategically located at the intersection of three continents (Europe, Africa, and Asia).
Become a full member of the European Union.
A competitive corporate tax rate of 12.5% (one of the lowest in Europe)
It is essential to have a favorable tax structure and a legislative framework that is open and well-developed and complies with both EU and OECD standards.
There is a well-educated workforce in the area.
The development of a business environment
Maintaining a high standard of living at low prices
Residents of Cyprus are required to pay tax on their global income, including money earned both within and outside the country.
Following Section I, Article 2 of the Income Tax Act 118(I) of 2002, a corporation is considered a tax resident in Cyprus if its management is undertaken within its jurisdiction.
Despite the fact that “Management and Control” are not mentioned in the Cyprus Tax Legislation, the Cyprus Tax Authorities take into account the following considerations in general:
In its entirety or most of its members are Cyprus residents)
The company secretary must be a Cypriot citizen or permanent resident.
Board sessions have to be held in Cyprus, and significant decisions should be made at these meetings on time.
Cyprus should host a gathering of organization members to deliberate and vote on the Income Statement and Reviewed Accounts.
The Board of Directors must be in charge of the bank account, which must be located in Cyprus.
Through its workers and office in Cyprus, the Company performs its day-to-day operations.
The Cyprus office should be used to store archival books and documents, such as minutes, company seals, and share registers.
Cyprus must preserve books and other accounting records.
We can assist you in the following ways:
In order to assist foreign customers in establishing a commercial presence in Cyprus, putting in place Cypriot structures, and achieving economic Substance, our law firm offers a comprehensive array of individualized substance solutions. Services related to substance abuse include:
Based on industry standards, an examination of the current level of Substance possessed by previously formed enterprises in Cyprus.
Consultation about the proper amount of Substance to be used before the establishment of buildings in Cyprus.
The recruitment of local staff, the formulation of employment agreements, the completion of migration paperwork, and the provision of employee services.
A suitable office location and a lease agreement should be signed.
Establishing a corporate website, an email address, and specialized phone and fax numbers.
We offer assistance with taxes and the law regarding the relocation of businesses to Cyprus Services provided by our business associates: accounting, payroll, and HR solutions for companies in Cyprus.
Tax services include compliance and counseling for corporate, personal, and indirect taxation.
Also, for any queries regarding any aspect of substance issue in the Republic of Cyprus, or any other legal matters under the sun our law firm, Simon Zenios & Co LLC, provides comprehensive assistance and support and we are always available. Whether you need assistance with the application process for CASP registration or require any other legal advice, our firm is here to help.