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Substance – Establishing Real Presence of a Company in Cyprus
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The Republic of Cyprus is rightly considered one of the most attractive jurisdictions for conducting international business in Europe. The country offers a transparent tax system, competitive tax rates, an extensive network of double taxation treaties, as well as an effective legal and financial infrastructure based on English common law.
However, the current international tax policy shaped by the OECD and the EU requires companies not only to have legal registration, but also to demonstrate actual economic presence within the country. This is a key condition for maintaining tax benefits and ensuring a company’s credibility in the eyes of banks, business partners, and regulators.
This is where the concept of substance takes centre stage — the economic substance of a company’s activity in Cyprus, i.e. the organisation of its real presence in the country.
What is Substance?
Substance refers to the concept of having genuine economic activity and presence in the jurisdiction where the company is registered. It serves as proof that the company is not a mere “letterbox” or “shell structure” created solely for tax advantages.
The legal purpose of substance is to demonstrate that the company is effectively managed and controlled in Cyprus, and not elsewhere — a critical factor in determining its tax residency.
As a member of the European Union, Cyprus strictly adheres to all EU standards and substance requirements. Its absence from the EU or OECD “black” or “grey” lists confirms Cyprus’s compliance with international norms and regulations. This provides stability and predictability for international businesses operating in Cyprus.
Why Companies Need to Establish Real Presence in Cyprus
1. Legal Compliance:
Cyprus, as an EU member state and participant in the BEPS (Base Erosion and Profit Shifting) initiatives, has implemented strict substance requirements for companies. Companies that fail to meet these criteria risk: • being struck off the Cyprus company register; • losing their tax residency status; • facing rejection by banks for account opening or ongoing servicing; • being subject to cross-border tax audits under international financial information exchange (CRS); • incurring penalties from Cyprus regulators.
2. Tax Advantages:
Only companies that meet the substance requirements can benefit from the tax incentives offered in Cyprus. • These incentives include: a corporate tax rate of 12.5% (one of the lowest in the EU), exemption from tax on dividends, interest, and capital gains (subject to conditions), and the ability to access Cyprus’s wide network of double tax treaties. • Additionally, compliance with substance requirements enables individual beneficiaries to qualify for Cyprus’s non-domiciled tax residency status, which grants substantial tax benefits for up to 17 years. • Without substance, tax authorities in other jurisdictions (particularly those of the beneficiaries) may challenge the legitimacy of using a Cyprus company and impose additional tax liabilities.
3. Banking Relationships:
Modern banks, especially within the EU, are required to conduct thorough due diligence under AML and KYC regulations. Without clear proof of substance, it is nearly impossible to open a bank account. If a bank has doubts about a company’s real presence, it may refuse to provide services, block existing accounts, or reject transactions. For this reason, establishing real substance in Cyprus is not only a legal necessity but also a practical requirement for operating a stable and credible business.
Core Substance Requirements in Cyprus
There is no one-size-fits-all model for all companies — each business structure requires an individual approach to demonstrate economic presence. However, there are basic criteria that significantly increase the likelihood of recognition of a company’s real presence in Cyprus (substance) by tax authorities, banks, and auditors. Below are the key elements to consider when building a corporate structure:
1. Physical Presence
The company must have an office in Cyprus that is actively used for business operations. A leased physical office demonstrates real presence and management in Cyprus. Corporate governance (shareholder meetings and board of directors’ sessions) should take place in Cyprus.
2. Cyprus-Resident Director
To meet the substance requirements, the company must appoint a Cyprus-resident director with the necessary qualifications or relevant experience. A local director with management powers is a central element of substance.
3. Contact Details
The company should have active contact information, including a telephone line, email, website, and social media presence. The absence of functioning communication channels may indicate a lack of active business, especially during bank or tax audits.
4. Local Employees
The company should employ staff in Cyprus who are registered with the social insurance system and actively involved in the company’s operations. Employees must receive actual salaries paid through Cyprus-based banks. To do this, the company must be registered as an employer with the Labour Department and maintain payroll records with deductions for social insurance and GESY (General Healthcare System).
5. Economic Activity of the Cyprus Company
The company must show evidence of real economic activity, supported by documentation. This includes having active contracts, transactions, and business operations directly related to its core business activities.
6. Corporate Bank Account
A corporate bank account in a Cyprus bank with active transaction history is a crucial component of substance. The account should be used for operational payments, salary transfers, and settlements with partners. Ideally, the account signatory should be a Cyprus-resident director.
7. Bookkeeping in Cyprus
The company must maintain accounting records in Cyprus that clearly reflect all financial transactions and business operations. This includes tracking income, expenses, assets, and liabilities. Records must be accurate, up-to-date, compliant with local standards and legislation, and available for tax and audit checks.
Complying with substance requirements is essential for operating a successful business in Cyprus. It not only ensures legal protection and tax benefits but also strengthens your business credibility.
Our company offers comprehensive services to ensure your business in Cyprus meets substance requirements!
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In 2013, Anastasia Taran graduated with honors from the National University "Odessa Law Academy", earning a Master of Laws degree. She joined Feod Group in 2018 and has since gained extensive experience in international corporate, tax, and immigration law....
In 2013, Anastasia Taran graduated with honors from the National University "Odessa Law Academy", earning a Master of Laws degree. She joined Feod Group in 2018 and has since gained extensive experience in international corporate, tax, and immigration law.
