Recent developments highlight the importance of substance for companies in Cyprus who wish to operate and benefit from the advantageous Cypriot tax rates. A lack of substance can mean that the benefits of having a presence in Cyprus disappear – and also that the company no longer has a bank account in Cyprus.
On 14 June, the Central Bank of Cyprus issued a circular instructing credit institution to stop opening new bank accounts for companies considered as ‘shell’ or ‘letterbox’ companies.
What’s the definition of a ‘letterbox’ company? One that is not publicly traded and meets any of the below criteria:
- The company has no physical presence in the country of residence other than a postal address
- The company has no established economic activity, little to no independent (own) values and no evidence to the contrary
- The company is registered in a jurisdiction where companies do not have to submit audited financial statements.
- The company is registered in a country known as a tax haven or has no tax residence whatsoever
A physical presence requires not only an office but also proper management in Cyprus, executed by persons with the necessary expertise for this task. The presence of employees is another indication of substance. The representation of the company by lawyers or corporate service providers does not mean a physical presence.
The new guidelines stipulate that companies without effective management in Cyprus – and therefore without substance – are not allowed to maintain a bank account in Cyprus. Companies from tax havens must first move their domicile to Cyprus in order to continue their banking activities in Cyprus.
These restrictions do not apply to holding companies that have their own investments in shares, intangible or other assets (such as real estate or ships), companies that finance affiliates or treasurers, or companies that are established to handle currency transactions or mergers. Another condition for this exemption is that the final beneficiaries are identifiable and they demonstrate that the transactions are legal.
It could be that banks choose to do business with a mailbox company. However, the banks must justify their decision and present evidence of their justification in their customer file. Therefore, they will take a risk-based approach and do a thorough due diligence to better assess customers.
The opening of bank accounts in Cyprus has just become much more complicated and difficult.
The requirements of opening a bank account will increase and many customers will simply be rejected, because banks are too bureaucratic for a high-risk bank account. Other banks will introduce sensitive fees for “downsizing” bank accounts. In addition, the costs associated with procurement and the preparation of documents for the customer will increase. The only solution for a businessman looking to open a bank account in Cyprus will be to seek professional help. Having a local consultant organising the application makes for an easier process and a more successful outcome.