Applying economic substance in a Cyprus company

Cyprus is known for its competitive tax regime, its transparent legal system and its compliance with the standards of the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD).

Under the OECD Model Tax Convention, a Cyprus company can benefit from Cyprus’s double tax treaties if:

1. The company is tax resident in Cyprus; and
2. The company is the beneficial owner of the income it receives (dividends, royalties, interest).

When forming a Cyprus company, the owner should agree with their tax consultant how real substance will be built, so the company can rely on its Cyprus tax residency and treaty benefits, with corporate tax at 15% from 2026.

Tax authorities around the world are increasingly strict with structures that use foreign jurisdictions, and they actively target tax avoidance.

In the past, showing that a company was managed and controlled from Cyprus, and paying tax in Cyprus, was often enough for it to be treated as a Cyprus company. Since 2026, every company incorporated in Cyprus is tax resident in Cyprus unless a double tax treaty provides otherwise.

However, foreign tax authorities look closely at whether a Cyprus company has real substance. Where it does not, they can challenge its treaty benefits or treat it as resident in their own country.

How to achieve Substance in Cyprus

To avoid these risks, and the higher taxes they can bring, a Cyprus company should address the main factors of substance:

1. The majority of directors are resident in Cyprus.
2. The company has its own office in Cyprus.
3. There is real economic activity behind the company in Cyprus.
4. The company has its own employees in Cyprus, registered with Social Insurance Services and genuinely involved in its operations.
5. The directors are qualified professionals.
6. The company has its own website and email domain.
7. The company has its own telephone and internet lines.
8. At least one bank account is held with a bank in Cyprus, with a Cyprus resident signatory.
9. All accounting records are kept in Cyprus.
10. The annual audit is carried out by local auditors registered with the Institute of Certified Public Accountants of Cyprus (ICPAC).
11. Employees and premises are insured.

This list is only a guide to the measures a proper substance plan needs. Each case is different and needs tailored advice from the owners’ tax consultants and accountants.

K.P.S. Services Ltd advises entrepreneurs and groups on building substance in Cyprus and on their tax planning.

For tax planning and a detailed analysis of your case, please contact us.

This article provides general guidance on substance in Cyprus. It is not tax advice. We give tailored advice for each client’s circumstances.