Applying Substance in a Cyprus Company

Applying Substance in a Cyprus Company

Cyprus as a jurisdiction is well known for its favorable tax regime with a strong transparent legal system and its compliance with the standards set up by the European Union (EU) and the Organization for Economic Cooperation and Development (OECD).

Under OECD model convention a Cyprus Company will qualify for benefiting the Double Taxation Treaties if the following criteria are met:

  1. The Company is a tax resident of the state it is registered in; and
  2. The Company is the beneficial owner of the income distribution (dividends royalties, interest).

In forming a Company in Cyprus, the entrepreneur will need to take into consideration with his tax consultant how “real” Substance will be implemented thus enabling him to enjoy the low tax rate of 12, 5% corporation tax in Cyprus.

As the tax environment changes rapidly, the Tax Authorities around the globe become more and more aggressive and suspicious of foreign jurisdictions, targeting tax avoidance schemes setup around various jurisdictions.

The Cyprus Company was known for its easy implementation scenario whereby by prove of management and control exercised in Cyprus alongside with payment of the Tax Authorities would consider it as a Cyprus Company.

Foreign Tax Authorities have challenged the above by looking in further detail to the ‘’real’’ Substance of the Company in Cyprus and in many instances proving that the Cyprus Company has lost its role of the Special Purpose Vehicle ‘’SPV’’.


How to achieve Substance in Cyprus

Thus in order to avoid any implications by having lack of Substance and be threatened by higher tax rates one needs to address the main factors of achieving Substance with a Cyprus Company.

  1. The majority of Directors are resident in Cyprus.
  2. The Company maintains its own headquarters in Cyprus.
  3. There is a real economic Substance behind the Company in Cyprus.
  4. The Company has its own employees in Cyprus. These employees must be registered with social insurance and are substantially involved in the operations of the Company.
  5. The Directors of the Company are qualified professionals.
  6. The Company maintains a website with proper email address
  7. The Company has its own telephone, fax and internet lines.
  8. One of the bank accounts of the Company must be held with a Cypriot Bank Institution with a local resident as a signatory.
  9. All accounting records must be kept in Cyprus
  10. Annual audit must take place by local Auditors registered with the Institute of Certified Public Accountants of Cyprus (ICPAC).
  11. Employees and premises must be insured.

Do note that the above list is just an indication of measures needed to be taken when arranging for a proper “substance” plan within the Company. Each scenario needs to be treated carefully and tailor-made solutions to the Owners are given by their Tax Consultants and Accountants.

In doing so, K.P.S. Services Ltd is able to advice entrepreneurs and groups on the proper application of Substance and tax planning.

For your Tax planning solution and further detailed analysis please contact us.


The content of the above article is to provide a general guidance for Substance in Cyprus. Specialized, tailor made advice is given on each scenario and specific needs accordingly.