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Substance – A changing business landscape

The international tax landscape is changing. It is becoming increasingly clear that it is not a matter of moving from one jurisdiction to another. The initiatives undertaken by the G20 and the OECD are global in their reach and wide in their scope. The purpose of this note is to give you some information as to the recent trends and developments, that make it essential for international clients to have proper / appropriate / relevant “substance” in Cyprus.

Substance needs to be an important aspect of clients’ activities and we strongly recommend that clients discuss this issue with their legal and tax advisors. It is important to remain ahead of the developments and be well prepared for the challenges that lie ahead.

SUBSTANCE in Cyprus is vital in order to:

  •  support Cyprus tax residency status
  • avoid creating a taxable presence in another jurisdiction
  • support transfer pricing challenges
  • defend beneficial ownership increased anti-avoidance and anti-abuse provisions
  • exchange information transparently and confidently

The need:

  • Corporate “substance” refers to having appropriate people and assets in place to perform the activities of the company
  • Substance is important due to international trends such as the OECD BEPS work and increasing pressure from Russia in particular to question structures as being artificial
  • If a structure is proved to be artificial, any tax benefits (through access to Double Tax Treaties, EU Directives) may be denied
  • Substance is therefore the key to keeping tax cost at its planned level.
  • To advise on proper substance, it entails reviewing a client’s existing structure and advising on what needs to be done in order to enhance the set-up in Cyprus

Triggering points that more substance is required:

1) Set-up already scrutinized by a foreign tax authority
2) Group is in the public eye and subject to scrutiny either by virtue of its size and/or because of its owner(s), for example PEP shareholder
3) Transactions/revenue flows are (or are expected to be) material and Cypriot company customarily passes the revenue to another entity (dividends/interest/royalties) instead of reinvesting it
4) Company has foreign directors who customarily participate in BoD meetings via telephone
5) Cyprus local directors lack the experience/CV to take decisions and are in essence service providers, servicing a number of companies
6) Company routinely transacts business through written resolutions approved by directors who are abroad when they consider and sign these resolutions
7) Company has issued general powers of attorney with wide powers to non-residents
8) Company is thinly capitalised (high debt/equity ratio)
9) Cypriot company maintains a Representative Office abroad which claims is not a profit-centre
10) Company does not have owned/rented premises, only a registered office address (“letter box company”)

The message is:

“Cyprus still remains a very attractive, competitive and business friendly jurisdiction for setting up international business and headquarters of companies but it is imperative that, going forward, more sophistication is required to ensure appropriate set up (substance) is in place and this is maintained and improved.”

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