Economic Substance Explained

The term “economic substance” refers to the actual financial and operational activities of corporate structures. In the context of international tax law, foreign entities registered in Cyprus are required to demonstrate enough substance in the local jurisdiction to prove that they are based in the country for reasons other than tax avoidance. 

The Base Erosion and Profit Shifting Project

In the wake of the global financial crisis and the Offshore Leaks scandal in 2013, the Organisation for Economic Co-operation and Development (OECD) and G20 jointly introduced a series of measures aimed at preventing tax avoidance by multinational enterprises. The initiative was named the Base Erosion and Profit Shifting (BEPS) Project, after the type of financial instruments it uses to combat tax avoidance.

The BEPS Project ushered in a major shift in the global tax landscape, and further changes are expected in the foreseeable future. The rules governing economic substance were among those that were hit particularly severely. As a result, the lack of economic substance in the local jurisdiction is now a key indicator of potential tax avoidance practices.

Therefore, establishing substance in Cyprus is now a must for tax-resident foreign investors. Otherwise, they risk potential disputes with foreign tax authorities looking to challenge their company’s tax residency status. What’s more, a recent circular by the Central Bank of Cyprus seems to indicate that the lack of substance might prevent legal persons from opening bank accounts in the country.

How to Establish Economic Substance in Cyprus

In addition to registering with the local tax authorities, companies need to demonstrate an economic purpose and relevant infrastructure. What these amount to in practice would depend on each company’s unique circumstances. Examples include:

  • Maintaining an office space in Cyprus that is adequate for the scale and alleged purpose of the company or business
  • Having a functioning telephone line, email, and website
  • Opening a bank account with a local bank
  • Bank account signatories based in Cyprus
  • Signing of agreements in Cyprus
  • Holding shareholder and director meetings in Cyprus
  • Employing or appointing “fit and proper” directors and/or employees
  • Exercising effective management and control of the company in Cyprus

How Savva & Associates Can Help

Savva & Associates provides a full range of services for proposed and existing structures involving Cyprus companies, to establish or enhance substance in Cyprus.

Our services include: 

  • Review of proposed and current structures, to identify tax risks.
  • Advice and recommendations on implementing substance.
  • Locating appropriate office space as per the client’s needs.
  • Assistance with identifying and hiring “fit and proper” directors and employees.
  • Assistance with locating accommodation for foreign employees and directors.
  • Opening of bank account facilities in Cyprus.
  • Payroll services and Social Insurance and annual tax compliance.
  • Organizing board of directors and shareholders meetings in Cyprus.
  • Corporate, Tax, VAT, advisory, legal and audit services via S&A and preferred legal and audit firms.

We would be happy to discuss this important matter with you and offer our preliminary views on a no obligations basis.

Please feel free to let us know if you have any questions regarding the information presented herein. For further details regarding the above memo, as well as our substance service offering, please contact Charles Savva at (+357) 22 516 671, or by email c.savva@savvacyprus.com

Pop up small