Cyprus company formation is an attractive option for many businesses due to the country’s strategic location, favorable tax regime, and well-developed infrastructure. When you are looking to set up a Cyprus company, it is essential to ensure substance.
Economic Substance: What Is It And Why It’s Important?
It is becoming increasingly important for companies to have a solid economic presence to maintain and grow their businesses in the current global business landscape. It is especially true for companies in or with countries that have implemented measures to improve tax transparency and combat tax avoidance. One such measure is the requirement for companies to have “economic substance” in the countries where they conduct business.
Economic substance refers to a company’s legal and physical presence, including its management and control, in the country where it is conducting business. It includes a company’s revenue generated from that country and the number of employees in the country. To comply with economic substance requirements, a company must demonstrate that it has a real and substantial presence in the country where it is doing business.
There are several benefits of having economic substance in a country. First and foremost, complying with economic substance requirements demonstrates to tax authorities that a company is conducting legitimate business in that country and is not simply using it as a tax haven. It can help a company avoid being subject to punitive measures, such as fines or shutdown.
Additionally, having a strong economic presence in a country can benefit business growth. By establishing and maintaining a physical presence in key markets, companies can better connect with customers and partners and expand their reach into new markets.
To properly comply with economic substance requirements, companies must take steps to ensure that they are meeting the compliance standards set forth by their jurisdictions.
How To Effectively Establish Economic Substance In Cyprus?
The establishment of a Cyprus company has become one of the most popular and efficient ways for businesses to conduct their affairs in an increasingly complex global business climate. However, several factors must be considered when establishing a Cyprus company, ensuring that the company has adequate economic substance.
One of the main advantages of establishing a company in Cyprus is the favorable tax regime that offers significant tax savings compared to other jurisdictions. However, the Cypriot authorities are increasingly clamping down on companies that do not have adequate economic substance in Cyprus and seek to take advantage of the favorable tax regime.
To ensure that your Cyprus company has the necessary substance, you should consider the following factors:
- The nature of your business and its activities in Cyprus
- The number of employees based in Cyprus
- The level of expenditure incurred in Cyprus
- The size of your operations in Cyprus
- The presence of any other Cyprus companies in your group
If you can demonstrate that your company has a genuine and substantive link to Cyprus, you should avoid any problems with the authorities. However, if there is any doubt about your company’s substance, it is always advisable to seek professional advice.
Board Procedures
The board of a Cyprus company is responsible for ensuring that the company has adequate economic substance. To do this, the board should adopt formal procedures and policies to secure that the necessary expenditure is incurred in Cyprus and that employees are based in Cyprus.
In particular, the board should:
- Approve all significant expenditures incurred by the company
- Approve the employment of all employees
- Monitor the activities of the company and ensure that it is carrying out genuine business activities
If you are looking to establish a Cyprus company, you must have a clear understanding of the requirements for economic substance.
Board Composition
The board’s composition is also essential in ensuring that the company has adequate economic substance. The board should be composed of directors who have the necessary skills and experience to oversee the company’s operations. In addition, it is advisable to have a majority of independent directors on the board to ensure that there is no conflict of interest.
Memorandum & Articles of Association
The Memorandum and Articles of Association are the most important documents prepared when setting up a Cyprus company. They will be used as the basis for determining whether or not the company has adequate economic substance. The memorandum sets out the purpose for which the company is being set up, while the articles outline how you will manage it. It is essential to ensure that all relevant information is included in these two documents.
Company’s Transactions And Financial Operations
The company’s financial operations are also crucial in ensuring good substance. A company must demonstrate that all its transactions are genuine and properly recorded.
Records
In addition, a company must have proper accounting records which clearly show how funds were received and spent during the year. Therefore, it is imperative to have a sound accounting system and ensure that all transactions are appropriately recorded.
Office and Personnel
The office and personnel of a Cyprus company are also crucial in ensuring that it has adequate substance. The company must have an appropriate number of employees based in Cyprus and carry out genuine business activities. In addition, the office should be appropriately equipped with all necessary equipment such as computers, fax machines, etc.
International Trusts
A company must also have a good relationship with its international trust. A Cyprus company cannot be registered as an offshore trustee in another country, but it can have a branch office or subsidiary in that country. To ensure that the trust is properly managed and maintained, the company needs to carry out regular audits of the trust’s operations and ensure that all transactions are appropriately recorded.
POA – Power Of Attorney
It is also essential for a Cyprus company to agree with its bank or other financial institutions. It will ensure that all transactions are carried out following the law and regulations of the country.
Local Bank Account
A company must have a local bank account to facilitate funds transfer between its overseas clients.
Final Words
Establishing a Cyprus company has become an increasingly popular way to do business, but it is essential to ensure adequate economic substance. The board of a Cyprus company is responsible for ensuring that the necessary expenditure is incurred in Cyprus and that employees are based in Cyprus. It is advisable to seek professional advice to avoid any problems with the authorities.