Creating substance in Cyprus to counter CFC regulations

The rising regulations in global tax reforms such as the Base Erosion and Profit Shifting (BEPS) initiative created by the OECD, as well as many localised tax reform efforts, create a negative impact for companies of all sizes; who are under scrutiny from the local and foreign tax authorities, making it harder than ever for them to manage their international tax operations whilst complying with CFC legislation.

Evidently, the environment is becoming more challenging and the need to adopt a proper structure with adequate resources for companies in low tax jurisdictions, which is why the importance of substance has increased considerably in recent years, especially regarding the changing CFC regulations.


What Constitutes Sufficient Substance in Cyprus?

To define a company or entity as having economic substance is to show that a transaction or entity stemming from a low tax jurisdiction such as Cyprus, has a purpose and the relevant infrastructure, without being artificially created and only for the purpose of reducing the company’s tax liability.

Below is a general description of the key factors that are considered as to what constitutes legitimate substance. Tax authorities and governmental bodies typically seek to find out whether the foreign entity located in low-tax jurisdiction has:

  • A physical address: either a rented or owned office space.
  • Qualified Directors & Managers who are living in Cyprus for the majority of the year.
  • It looks good for the entity to employ local personnel with relevant experience and qualifications; with legitimate employer and registration with the Cyprus department of Social Insurance.
  • It should keep and maintain accurate accounting records within Cyprus and to employ local Accountants where necessary.
  • Ownership of operative and fully functional Cyprus bank account, in good standing.
  • Ownership of an independent local email address, website, telephone number & fax line.

Taking the above points into account, it is increasingly important to ensure that the substance of a Cyprus company is established and maintained with sufficient grounds for foreign purposes. Other jurisdictions impose their own substance rules as a result of local CFC rules. For questions on other jurisdictions, refer to our main website.


Maintaining a physical office in Cyprus

A concern often raised for establishing and maintaining a physical office in Cyprus is usually the cost involved, while this is a significant expenditure for any business, however these costs can be minimised in various ways and that once you have achieved sufficient substance, this will secure the business from being liable for any additional tax burdens.


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