Substance Requirements for Tax Resident Companies

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Substance Requirements for Tax Resident Companies in Cyprus


Offered Tax Services in Cyprus Region

  • Safe Taxation Planning
  • Proper Tax Payments
  • Secure Process Environment
  • Consistent Professional Assistance and Support
  • EU Regulation Compliance


Reasons for Tax Planning


In the recent era, tax avoidance issues have made the regulatory authorities conscious of abandoned tax payments and low tax returns. Especially under the substance framework, many jurisdictions are experiencing tax avoidance concerns.


To avoid the risk of tax avoidance, national and international companies try to follow proper substance tracking and documentation for taxation. Similarly, to avoid tax abuse from the government authorities proper substance implementation and optimization is required.


This is the reason that the legislative committees emphasize the need for businesses to collaborate and optimize documents for tax residency on both sides. Substance tracking and implementation in the right way will help both the companies and the government in evaluating possible suspicious activities for tax evasion.


At Efstathios C. Efstathiou LLC, we have a professional team of expert tax substance advisors to help you track your documents and synchronize them according to Cyprus tax residency requirements.


What is Meant by the Term Substance?


The substance is a term widely used in tax law and courtroom language and is defined as all the material necessary to prove a matter’s validity legally.


When a company operates under a jurisdiction and avails tax incentives it must fulfill the document requirements and turn in substance material to the authorities for valid legal implementation. Some of this substance material involve economic and financial evidence related to business transactions. While the other may be about the company’s management and property structure.


The company’s structural substance includes documents that show evidence of the physical presence of a company and the genuineness of money transactions.


The tax regulation authorities along with banks and EU compliance officers carefully evaluate the substance presented by the businesses and provide a tax payment schedule accordingly. The availability of valid substances showing authentic economic details has become a crucial issue these days.


In compliance with the OECD model, a business in Cyprus has to fulfill two main tax residency requirements to be eligible for the tax treaty benefits.


  • A) The company has tax residency in the state where it is registered.
  • B) The company is the sole beneficiary of the ratio of income, dividend, and interest distribution.


SPV Model and The Reason for Its Ineffectiveness


The Special Purpose Vehicles (SPVs) model is although not a very successful practice. Still, it is widely used to prove substance in a courtroom under a jurisdictional rule. The reason for unsuccessful practice is the lack of proper administrative personnel required for money management. As a subsidiary company, SPVs receive funds from the father company or other foreign clients wholly or in the form of dividends such as interest payments, capital funds, or royalty income.


SPVs often have no economic substance and thus don’t own significant financial assets. However, they have become so common nowadays that taxation officers often don’t foresee the potential risks of these companies operations.


Still, the increased financial awareness and past incidents have alerted tax authorities toward evaluating the company’s financial situation more closely. Therefore, it is better for the business owners adopting the SPV model to revisit their approach to secure their financial position.


What are the Substance Requirements for Tax Resident Companies in Cyprus?


Proper advice and financial management will let you avoid sudden surprises from tax authorities. Cyprus jurisdiction will entertain your company having sufficient substance. Instead of staying in the dark, it is advisable to seek professional assistance in fulfilling the following criteria for proving substance:


  • The company operation base should be in Cyprus.
  • Most of the board of directors should be residing in Cyprus physically.
  • The company officials should be professionally trained and not laymen.
  • There should be enough substance present in the company economically.
  • The company has employees having social insurance and are involved in operating the business processes.
  • There is an official website, telephone contact line, email address, fax, etc. allotted to the company.
  • The business bank account of a company should be opened in a local bank and the signatory must be a resident.
  • The records of corporate accounts should be Cyprus-based.
  • The financial account auditors should be residents too.
  • The company should be an audit member of the ICPAC (Institute of Certified Public Accountants).
  • The local auditing staff should perform the annual audit.
  • The company premises and related property should be insured.


Important Considerations for Substance Solution for a Cyprus-based Organization


According to law experts, there is no set rule for substance creation. However, a systematic approach can be adopted if proper guidance is available. Therefore, professional help is required before a full-fledged business structure is established.


  • The company managers and directors should be professionally qualified to give their optimum performance during important business execution. Relevant prior experiences on CV and subject specialty help them understand the nature of business well. Also, the directors should be residents of Cyprus as mentioned before.
  • The directors of the subsidiary setup should be different from the source company or else authorities will doubt the credibility of financial substance due to the offshore company management. Having a proper contact system such as an official email, landline, fax line, rented premises, etc. registered and being operated in Cyprus helps fulfill the substance criteria.
  • The payroll of employees having Social insurance and labor department registration is also important.
  • All business documents such as audits balance statements, etc. should be physically available on the company premises.
  • The company substance method should be used while signing business agreements instead of giving power of attorney to another person.
  • Lifetime expenditure should be listed in the economic substance evidence. Keep in mind that tax authorities cross-question the company owners usually to determine how and why a certain transaction was made. Therefore, substance creation should be very thorough.


How Efstathios C. Efstathiou LLC Can Legally provide the Requirements for Tax Resident Companies?


Our team of exceptional business consultants and tax advisors provides instant support and professional help to resolve all your substance issues in Cyprus. After careful evaluation of your company, our advisor will guide you in creating proper substance in a customized way according to your business requirements.


Our substance solution services include but are not limited to:


  • Advice and consultation for authentic substance creation
  • Substance management
  • Registration of premises and official contact
  • Office rental space setup
  • Official website development
  • Administrative support
  • Employee recruitment and other services
  • Insurance management


Call us Today for Substance Management and Formation!


At Efstathios C. Efstathios LLC, we have a proper panel of tax advisors and substance professionals providing best consultation in Cyprus.


In case of any issues regarding the substance formation of your company in Cyprus contact us now at (+357) 22 755 177 and book a free consultation. Our experts are more than willing to guide you and walk you through the process step by step.