One of the main objectives of the ever-growing body of anti-avoidance legislation in Cyprus is the prevention of companies without any significant substance (referred to as 'brass-plate' companies) from unfairly benefitting through the Cyprus tax regime. A way in which Cyprus combats/ faces issues with fictitious transactions/structures is through its 'substance over form' and 'business purpose test' doctrines. Such doctrines apply to both local and international transactions for resident and non-residents.
Example: Where a Company acting, as an intermediary, is set up between an operating Company and its ultimate holding Company (for the purpose of savings in withholding taxes). In such a scenario the tax authorities may now apply a general anti-avoidance doctrine.
With respect to holding companies, Cyprus law requires that the company is able to demonstrate that it is a resident in Cyprus for tax purposes through the focus of management and control which is generally accepted as the place where key strategic decisions are made – rather than where the day to day management takes place. Needless to say, business substance must also be considered and taken seriously as there have been a number of substance related cases over the past few years.
One should ensure that the adequate substance (or lack of) is present in relation to the Company and should bear in mind factors such as the nature of the business; the commercial nature of the transactions; the target jurisdiction of the investment at hand; resources needed by the Company for the activities carried out; where tax is payable etc.
Some practical measures which may be taken to assist in enhancing substance and hence mitigating risk of a challenge by the tax authorities include:
- Set up of an independent and fully resourced office in Cyprus – not simply an office meeting the absolute minimum requirements.
- Employ personnel in Cyprus to work for the company and staying in compliance with the relevant tax and social insurance obligations.
- Open local bank accounts for the settlement of expenses incurred by the company
- Maintain accounting books in Cyprus and ensure that the company discharges all its statutory corporate and fiscal obligations on time.
From 1 January 2016, an anti-avoidance rule applies that allows the tax authority to recharacterize corporate reorganizations and reject the tax neutral treatment available for reorganizations if it is shown that the main purpose was the deferral, reduction or avoidance of tax. The tax authorities are also allowed to impose conditions on the number of shares issued in a reorganization and set a minimum holding period for the shares up to three years.