1 Introduction

On 2 November 2018, the Central Bank of Cyprus issued a circular (the "Circular") replacing and clarifying its previous guidance issued on 14 June 2018 with respect to 'shell companies' and their ramifications with respect to their relationship with Cyprus banks. The Circular was entered into force immediately on its date of issuance.

2 'Shell Company/Entity' Definition

The Circular revises and clarifies the definition of 'Shell Company/Entity' which refers to a limited liability company or any other legal/business entity with the following characteristics:

  1. it has no physical presence or operations in its country of incorporation (other than a mailing address). It is noted that physical presence is construed as having a place of business or operations (own or rented premises) in such jurisdiction, with an absence of meaningful mind and management potentially being construed as lack of physical presence (with the presence of a third person providing merely nominee services (e.g. corporate secretary) not constituting on its own physical presence); and
  2. it has no established economic activity in its country of incorporation/registration, little or no independent economic value and no documentary proof to the contrary, however noting that the following circumstances could indicate economic activity:

    1. the company/entity is established for the purpose of holding shares of another business entity/ies engaged in legitimate business with identifiable beneficial owners;
    2. the company/entity is established for the purpose of holding intangible or other assets (including real estate, ship, aircraft, portfolio of investments, debt and financial instruments);
    3. the company/entity is established to facilitate currency trades and asset transfers, corporate mergers as well as carrying out asset management activities and trading of shares;
    4. the company/entity acts as a treasurer for companies recognised as a group or manages the activities of the group; or
    5. any other case where convincing evidence can be provided that the company/entity is engaged in legitimate business, with identifiable ultimate beneficial owner(s).

3 Effect of the Circular

Cyprus banks are monitoring their existing and new relationships with respect to their clients and the following seem to apply with respect to 'shell companies/entities'.

  1. If a client falls within the definition of 'shell company/entity' and:

    1. it is registered in a jurisdiction where companies/entities are not required to submit to authorities independently audited financial statements and does not voluntarily prepare audited financial statements by independent auditors; and/or
    2. has its tax residence in a jurisdiction included in the EU list of non-cooperative jurisdictions for tax purposes or the OECD's list of non-cooperative jurisdictions for tax purposes or has no tax residency whatsoever,
    then business relationships with such clients shall be avoided.
  2. In all other cases of companies/entities falling within the definition of 'shell company/entity', each bank shall decide on whether to engage in new and/or maintain existing business relationship applying a risk based approach and providing fully substantiated justification of such a decision, appropriately documented and recorded.

4 Conclusion and Remarks

The Circular undoubtedly clarifies the definition of 'shell companies/entities' and provides more clarity and certainly to banks with respect to their relationships with existing and future clients, especially when these are entities which do not have material substance in their jurisdiction of incorporation.

It is advisable that clients review their existing structures to clarify whether any entities within their group which maintain bank accounts in Cyprus may be considered 'shell companies/entities' and decide on methods of mitigating any impending issues with respect to their activities.

In our experience, the majority of Cypriot companies established and being part of international structures would (if not having material substance in Cyprus in any event), fall under the exceptions of limb (b) of the definition by virtue of them being holding companies (for shares or other assets) and/or being group treasurer within their group. As such, we expect the majority of such group structures to remain unaffected, even though it is strongly advised that steps towards more substantial presence be considered (see our recent publication on this matter: http://kaimakliotis.com/PDF/Kaimakliotis_Establishing%20and%20Enhancing%20Substance%20in%20Cyprus.pdf). Our office is well-equipped to provide advisory services with respect to the above matters.

Originally published December 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.