On the 2nd of November 2018, the Central Bank of Cyprus (the "CBC") issued a circular with the purpose of clarifying the definition of "Shell Companies" and how the service providers and banks should classify them.
The revised definition aims to offer clarity and certainty as to the legal requirements underpinning the shell companies.
As per CBC circular, the term "shell company/entity" refers to a limited liability Company or any other legal entity that:
- Has no physical presence or operations; "physical presence" includes employees, office space, etc. The presence of a third person providing merely nominee services including company secretary duties does not constitute on its own physical presence; and
- Has no established economic activity.
Legal Entities Excluded from the Definition of Shell Companies:
Following the issuance of the circular of the CBC dated 2nd of February 2018, the following legal entities were excluded from the definition of Shell Companies:
- Companies which hold stock or shares or other equity instruments of another business entity with identifiable ultimate beneficial owner;
- Legal entities which hold intangible or other assets including real estate, ships, a portfolio of investments as well as debt and financial instruments;
- Companies established to facilitate currency trades and asset transfers, corporate mergers, including carrying out asset management activities and trading of shares;
- Companies that act as a treasurer for companies, recognized as a group or manages the activities of the group.
- If a legal entity is registered in a jurisdiction where legal entities are not required to submit with the authorities their respective audited financial statements and do not voluntarily arrange for the preparation of the audited financial statements by an independent qualified accountant;
- The legal entity which is tax resident 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
Banking institutions are advised to avoid engaging in a business relationship with such entities.
In all other cases, the banking institutions may decide whether they wish to create a business relationship by applying a risk-based approach, in accordance with the applicable legislation and regulatory framework of the jurisdiction where the company is incorporated.
What this means for clients?
The CBC s circular is in line with the OECD BEPS guidelines and the current antimony laundering framework in Europe whose cumulative aim is to realign taxation with economic substance and value creation and strengthen controlled foreign companies' rules. What this means in practice for clients benefiting from the low tax rate jurisdiction that is Cyprus is that to ensure structures will be protected from the risk of any challenge to their tax residency, economic substance needs to be demonstrated. Arguably economic substance cannot be demonstrated without a local bank account hence clients wanting to ensure they can bank in Cyprus need to restructure their group holdings to remove ' shell companies' as far as possible in order to satisfy the CBCs regulations.
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.