1 Introduction
It is readily apparent that the need to enhance substance in international group structures has become a central consideration in the implementation of such arrangements. It is therefore paramount that specialised, tailor-made solutions are sought and effected by professionals that are experienced in this field.
Evolving requirements progressed by global tax reforms such as the Base Erosion and Profit Shifting (BEPS) initiative implemented by the OECD (its basic goal being to prevent the granting of double tax treaty benefits where international corporate structures are set up for the sole purpose of accessing those benefits), the initiatives taken by the G20 along with local tax rules in a number of key jurisdictions means that multi-national groups but also smaller enterprises with international presence need to be aware of the potential negative tax impact of such rules and plan accordingly in terms of the international group structuring arrangements.
2 What is ‘substance’?
Even though ‘substance’ is a widely known tax concept which is a key consideration in international structures and tax planning, it does not have a specific meaning and it is not something that you can achieve by adhering to a ‘tick-box’ list. Instead, substance is usually considered together with the tax residency test and it is normally associated with effective management and control of a corporation.
Sophisticated and tailor-made tax advice is needed in order to determine the actions (and the extent of which) required in enhancing the substance of a company. A number of key factors must be taken into account, such as:
- the specific sector and industry of operation of the company and that of the group the company belongs to
- the business strategy of the wider group
- the legal and management structure of the group as a whole
- the countries in which the relevant company is investing into or transacting with.
It is also important to note that different approach and emphasis on different relevant matters is needed for companies that are involved in trading, IP, intra-group financing and/or holding structures.
3 Establishing and enhancing ‘substance’
- Substance can be achieved or enhanced in varying degrees depending, as explained above, on many factors. The key steps a company in Cyprus may take to establish or enhance its substance status in its jurisdiction of establishment are the following:
- the majority of directors are residents in Cyprus
- the board meetings and key decisions (or at least the majority of them) take place in Cyprus
- the meetings and decisions of the shareholders of the company are taken in Cyprus
- the directors are suitably qualified and experienced in the sector / industry that the company is operating in. Their tasks should at least concern (i) the decision making on the transactions the company performs and (ii) the proper completion of the transactions the company performs
- the company employs relevant employees with suitable experience. The number of employees employed depends on the value, volume and nature of the transactions the company is involved with. Such local employees are also substantially involved in local operations of the company and also in terms of the company’s interactions with the rest of the corporate group and clients
- the company is registered as an employer with the relevant social security state departments in Cyprus
- the accounting records are maintained and accounting work (including bookkeeping) is performed by local accountants
- the internal registers and books are held in Cyprus
- generally agreements relating to the company’s business or assets are executed in Cyprus
- the company maintains and operates bank accounts with local banks and local resident signatories
- the company has a minimum equity that is in line with its activities carried out (taking into account the assets used and risks incurred).
- The company is established in its independent and separate (rented or owned) office space or premised (as opposed to a mere PO Box address or address shared with a number of other corporations)
- the premises the company is occupying are fitted with relevant equipment and is connected with appropriate infrastructure. These include PCs, fax machines, printers, reception facilities, independent IT environment etc.
- the company has independent local email address, website, telephone line and fax line.
4 Risks of not having substance
If a company is found to be effectively managed and controlled from outside Cyprus (for lack of substance, or due to the decisions being taken by a foreign UBO, or due to the company being deemed to be established to collect intra-group income), the tax authorities of the countries where the income is being generated may take the position that the SPV is not a resident of its country of incorporation but instead is of another (the jurisdiction from where it is effectively controlled). The effect of this is that a corporation stands to face a substantially higher effective tax burden as well
as investigation by the tax authorities.
5 The importance and benefits of having substance in Cyprus
Substance in Cyprus is vital in order to:
- support Cyprus tax residency status
- avoid creating a taxable presence in another jurisdiction
- support transfer pricing challenges
- defend beneficial ownership challenges
- address increased anti-avoidance and anti-abuse provisions
- exchange information transparently and confidently
Aside from the obvious tax advantages and risk mitigation benefits established by having substance in Cyprus, many multi-jurisdictional groups and their employees have benefited from relocating key managers in Cyprus where they stand to benefit from significant incentives the Cypriot government has implemented in recent years for the attraction of key managers and high-net-worth individuals, such as the acquisition of citizenship on a fast-track basis and the establishment of the non domicile regime where individuals can receive income from dividends, rent and interest totally tax free.
6 How can we help?
- Kaimakliotis LLC, together with its associated tax advisory and corporate services firms, is well- equipped to provide practical solutions matching each company’s unique set of facts and operations. We can provide: advisory services on the tax risks associated with existing group and local structures
- recommendations with respect to mitigating steps to be taken and actions for achieving and/or enhancing substance in Cyprus, in conjunction with specialists from other jurisdictions
- assistance with respect to implementation of substance-enhancing proposals including:
- locating suitable premises and arranging for establishment of appropriate
infrastructure and equipment - sourcing and hiring suitable employees and registration with social security authorities
- advice on optimisation of taxation and social security liabilities with respect to the employees
- advisory and support services with respect to insurance in Cyprus
- legal advisory services on employment matters, including drafting of employment contracts and acquiring relevant work and immigration permits
- provision of continuing corporate and administrative support of the Cypriot
companies (accounting, bookkeeping, tax compliance, audit, interaction with local and central government authorities) - general advice on Cypriot law matters in terms of commercial contracts and other key transactions of the company.
Key contacts
For further information, please contact:
Pavlos Kaimakliotis
Partner
Tel: +357 24 01 01 02
pavlos.kaimakliotis@kaimakliotis.com
Koula Fili
Counsel
Tel: +357 24 01 01 03
koula.fili@kaimakliotis.com