In the last few years, authorities have become more aware and suspicious regarding tax avoidance issues under the substance model in many jurisdictions. The poor implementation of a substance and the lack of proper optimization to the local tax legislation can be possibly perceived as tax abuse or avoidance from the authorities. International and local authorities have underlined the importance of collaboration in order to evaluate and track together any suspicious acts that can reveal lead to tax evasion to jurisdictions.
What is simply a substance?
Substance is widely known as a tax concept where a company in order to enjoy the beneficial tax regime of its jurisdiction, must comply with the substance requirements of each local authority. These requirements may vary from country to country, but at the end is all about the economic substance. There must be substance to the structure of the company and a substance related to the transactions is involved.
The real substance of the structure is a result of different factors that make the company and its transactions genuine and prove the physical presence (office and employees) and economic purpose.
The substance is closely examined by tax authorities, compliance officers, banks and administrative service providers.
Economic substance is becoming an extremely important issue.
A company has to meet these two basic criteria according to OECD model, in order to qualify for tax treaty benefits.
- Company is a Tax Resident of the registered state, and
- Company is the “beneficial owner” of the income distribution such as interest and dividends
The Special Purpose Vehicle practice.
What is it and why is not the solution?
The Special Purpose Vehicles (SPVs) is the usual and common practice to prove a company substance in a jurisdiction. This model is not totally solid because most of these entities do not employ the type of staff that would normally be required to manage the money flows which are being collected by the mother company/organization via these SPVs, either from their foreign wholly-owned group companies or participations such as dividends, capital gains, interest payments or royalty payments, or from their foreign customers (interest and royalty payments). Special Purpose Vehicles also do not usually employ significant assets. The reality is that SPVs often have no 'substance' at all. Yet they are very widely used and not many company owners, even tax professionals seem to fully estimate the dangers that can arise from the Special Purpose Vehicle solution.
In many economical regions of the world, tax authorities are taking a closer look at substance issues than ever before. As a result, Multinational Corporations that use the SPV approach should reconsider their position, in order to avoid surprises in the future.
What is needed for a solid substance solution in Cyprus?
Cyprus can host your company under the substance approach and with a professional advice and proper implementation you can secure and stay away from unnecessary trouble from tax authorities. Although each case of company substance in Cyprus should be treated differently and there is no one stop solution, corporations are advised to meet the following requirements to prove substance and stay away from the shadow.
- The Company maintains its headquarters-base of operations in Cyprus.
- The majority of Directors are Cyprus residents.
- The company uses qualified professionals as directors and not a random person.
- There is economic substance behind the Cyprus company.
- The company employs people in Cyprus that are registered to social insurance and have involvement in the operations of the company.
- The company has contact details such as telephone line, email, fax and a website
- A corporate bank account must be held to a local bank and a local resident to act as a signatory.
- Keep accounting records in Cyprus.
- Must have financial accounts audited by a local Audit firm member of the Certified Public Accountants of Cyprus
- Annual audit must take place by local Auditors registered with the Institute of Certified Public Accountants of Cyprus (ICPAC).
- Registered premises and stuff are insured.
What to consider before you look into a substance solution for your organization?
It is important to remember that there is no standard approach for a sufficient substance has been achieved.
Every business person is advised to get a professional opinion on tax before executing a transaction or establishing any type of structure. Get your advice in advance.
- 1. Managing directors of the company have to be qualified for the position and be able to take decisions and understand the nature of the business. Relevant or similar background is a plus on their CV. Also don’t forget that director has to be resident of Cyprus, or the country of incorporation. Setting up a structure in which directors of the company are the same persons of the source company will definitely put the authorities in a place to question the financial substance and if the management is operated in Cyprus.
- 2. Keep an operating office premises, with rent, landline, fax, website and emails. Have a payroll with employees registered to the social insurance. Being registered as employer to the labor department.
- 3. Keep all business records like accounting documentation, audited financial statements, archive etc to the company premises.
- 4. Make agreements, sign contracts through the company substance, avoiding the power of attorney method.
- 5. Demonstrate and economic substance with lifetime expenses.
- 6. Tax authorities will always question the substance with questions like “Why was this transaction made?”
- 7. That means every transaction and economic move has to be thoughtful.
How KTC Business Consultants can help.
Our advisory team can work closely with you to find the ideal substance solution and anything that you should consider.
There is no a fixed solution for creating substance in Cyprus but having a closer look to your organization will guide us to prepare a tailor-made approach and make it happen. Our firm can provide services like the below and much more in case needed.
- Advisory on achieving the best possible substance
- Management services
- Registered office address
- Rental of office space / separate offices
- Telephone - fax line (dedicated) , emails and Website setup
- Secretarial and administration services
- Employment services – recruitment and registration
- Insurance coverage