Substance defined in Cyprus
The typical definition of an entity having economic Substance is that a transaction or entity located in a low tax jurisdiction (like Cyprus) must have an economic purpose and relevant infrastructure besides being created 'artificially' and only for the purpose of reducing
tax liability. Various steps can be taken to achieve this. This could be accomplished, for example, by ensuring that all entities (including holding companies) have a real physical presence in Cyprus, with independent local offices and staff administering the day-to-day management of the company. Further to the definition of Substance (especially economic Substance), the matter is open to
interpretation and also largely lies in the interpretation of the authorities of the
respective country.
Below is the description of the main factors that can be examined in search of Substance.
The authorities normally will seek to find out whether the foreign entity located in low-tax jurisdiction has:
- It's own (rented or owned) office space/premises / physical address;
- Qualified and knowledgeable directors and managers who are located and employed in Cyprus;
- Other employee/s with relevant experience residing in Cyprus;
- Employer status of the company and registration with the Cyprus Department of Social Insurance where directors and/or other staff are employed (not only nominated);
- Its accounting records maintained in Cyprus and the accounting work performed by local accountants;
- Operative local bank accounts, with local resident signatories/counter-signatories;
- Relevant assets located in Cyprus (i.e., staff, equipment, and all other necessities which are normally required for doing business);
- The substantial involvement of local staff in the operations of the entity;
- An independent local email address and/or website;
- An independent telephone and fax line.
With the above noted, it is increasingly important to make sure that the Substance of a
Cyprus company is
sufficient for foreign purposes. Another country is free to impose its own substance rules (e.g., as a result of local
CFC rules). In such a case, the obligation will lie on the Cyprus company (including its foreign beneficiaries) to demonstrate to the foreign authorities that the company is performing real business from Cyprus.
Maintaining a Physical Office and Substance in Cyprus
A concern often raised for maintaining a physical office is usually that costs for setting up a Cyprus company will increase significantly. However, it is to be also noted that these costs can be
minimized in various ways and that the Substance will secure the clients from the additional tax burden.
Various professional firms provide substance packages to achieve few or all of the above mentioned at reduced prices and most importantly without needing to be actively involved spending a lot of time in the process.
