Monday, 11 January, 2016

Cyprus Tax Concept of Substance and Substance Services

'Substance' is a widely known tax concept, often used in cross-border tax situations. Although the word 'substance' does not normally appear in the text of tax treaties, it is a key theme in international structures and tax planning. Various tax authorities and courts around the world are attacking structures which lack substance.

Since the Organisation for Economic Co-operation and Development (OECD) presented its action plan on base erosion and profit shifting (BEPS), the importance of substance has significantly increased. The ultimate goal of the BEPS initiative is to prevent the granting of double tax treaty benefits where international corporate structures are set up for the sole purpose of accessing those benefits.

If a structure is found to lack substance, an organisation could face a considerably higher effective tax burden as well as investigation by the tax authorities.

The ways a company can demonstrate substance depend on its function: an office and an employee are generally required; furthermore, the staff should have basic decision-making powers. Without this, the tax authorities could conclude that decisions are made outside the jurisdiction in which the corporate entity is set up, resulting in a lack of economic substance.

Cyprus substance rules

Economic substance is not specified in Cyprus legislation. However, a recent form issued by the Cyprus tax office, which needs to be completed when requesting a tax residency certificate, requests the following information: 

i. Is the company incorporated in Cyprus?

ii. Is the company tax resident in Cyprus only?

iii. Are the majority of director board meetings held in Cyprus?

iv. Are the director board minutes prepared and held in Cyprus?

v. Does the board of directors exercise control and make key management and commercial decisions for the company’s operations and general policies?

vi. Are the majority of directors Cyprus tax resident?

vii. Are any shareholder meetings held in Cyprus?   

viii. Has the company issued any general powers of attorney?

ix. Are the books and records of the company maintained in Cyprus?

x. Are agreements relating to the company’s business or assets executed in Cyprus?

xi. Are corporate filings and reporting functions performed by representatives located in Cyprus?

xii. Have all the tax returns due been filed?

xiii. Have all the self-assessments for the tax years that are due been paid?

Reading through this form, one could assume that these legal requirement s and activities must be honoured in order for a company to be considered as having enough substance according to Cyprus authorities. 

However, these Cyprus substance requirements may not be decisive: often there are other tax authorities looking at the substance of Cyprus companies. Another treaty country is free to impose its own substance rules before accepting Cyprus tax residency of a special purpose vehicle and the beneficial ownership of its income.

As a result, it is increasingly important to make sure the substance of a Cyprus company is sufficient for foreign purposes. Various steps can be taken to achieve this. This could be accomplished for example through ensuring that holding companies have real physical presence in Cyprus, with independent local offices and staff administering the day-to-day management of the company. 

How Vistra Cyprus can support your business

As the tax environment changes, it is important your fiduciary service provider continues to offer the support your business needs. For this reason, Vistra Cyprus recently expanded its substance services. 

In addition to our existing substance office space, we now provide fully equipped physical office space for businesses at a prime sea-view location, with a shared full-time secretary, LAN internet and WIFI, CISCO telephone equipment, a landline and a direct number. 

These office facility services can be provided with optional services, such as an executive boardroom, fax services, web domain, courier services, parking spaces, administration assistance, filing support, IT support, legal and secretarial services, accounting and bookkeeping, assistance with recruitment, and payroll services.

For more information please contact Gerard Jan Van Spall.



Key Account Director,
+31 88 560 9665