Business Substance in Cyprus

A solid economic presence is essential for large corporations

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Substance in Cyprus

Business Substance in Cyprus. Why setting up an economic presence is essential?

Business substance has become on of the most important tools for international tax planning.
Establishing an economic substance in Cyprus is a mandatory vehicle that can be used to eliminate suspicions regarding Tax avoidance from local and international authorities. International authorities and governments have become more aware and have increase their efforts and mechanisms to fight tax avoidance.

Domestic and EU laws are now aligned in order to minimize tax avoidance.
An inadequate implementation of economic substance of your company in a low Tax jurisdiction can be easily perceived as tax abuse or avoidance from the authorities.

Economic/ Business Substance in Cyprus

Substance is the tax concept where a company moves its operations jurisdiction to another country in order to reduce its tax implications. This model is widely used from international organizations, with no or multiple subsidiaries.

The Special Purpose Vehicle model (SPV). Why to avoid it?

The Economic substance is a thorough tax reduction model, instead of the traditional and risky Special Purpose Vehicle (SPV). SPV’s have shown many disadvantages and are exposed to tax authorities because most of the times they don’t employ the type of staff required in the base of operations, most of the transactions are executed by Power of Attorney, they don’t have significant assets in the country of operations and often money collections are made from a mother company/organization.

A proper business substance solution.

According to OECD model, companies need to meet these basic requirements in order to qualify for tax treaty benefits:

Company is a Tax Resident of the registered state, and
Company is the “beneficial owner” of the income distribution such as interest and dividends

A solid substance solution approach.

When comes to applying an economic substance solution for your company there is no standard and secure approach. Every case is treated differently. Requirements can be more demanding according from case to case in order to show a solid corporate operation in the country.

What to consider before setting up an economic substance in Cyprus?

1. Headquarters and base of operations in located in Cyprus. Is important to have office premises, show rent expenses, landline, fax and email. Have a payroll with employees registered to the Social Insurance department.

2. Managing directors have to be qualified for the position and have understanding of the business nature. I addition, the company director or the majority of directors have to be Cyprus Residents. Having the same directors with the mother company would make the authorities question.

3. Economic substance of the company must be proved through transactions, payments and expenses. Transactions made with Power of Attorneys (POA) should be avoided. A corporate bank account to a local bank with a local resident to act as a signatory is recommended.

4. Accounting, Bookkeeping records and Audited financial statements should be available and archived preferably at the company’s premises.

5. Agreements and contracts should be signed through the company substance, avoiding the power of attorney method.

6. Every transaction has to be thoughtful in order to keep the suspicions of the authorities away.

SPL 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 advisory and suggest solution, provide management services including registered office and address. Setup of accounts and utilities. Secretarial and administration services, employment services, company formation and bank account openings.

Talk to a Tax Expert.

Our Tax Specialists will advice you and monitor the whole procedure.

The Cyprus Company

Tax Residency