What is Economic Substance and how to establish Economic Substance in Cyprus?
More information about Substance and Virtual office – Ebusiness services.
What is Economic Substance ?
- Economic substance is a doctrine in the international tax law under which a transaction must have an economic
purpose aside from reduction of tax liability in order to be considered valid.
- Economic substance characterized as combination of factors that specifies the operational reality of a corporate
structure which has been established to benefit from foreign jurisdiction tax regime or in order to benefit from the
bilateral double taxation treaties.
- Economic substance = physical presence, actual activity of the independent management within the jurisdiction of
incorporation and /or tax residence of the corporate structure.
Why substance is important?
- BEPS & EU Directives: OECD action plan on Base Erosion and Profit Shifting and changes to the EU Directive on Parent
and Subsidiary companies – with the ultimate goal to prevent harmful tax practices – have significantly increased the
importance of the substance.
- CFC rules & Double Taxation Treaties: anti-abuse measures in national legislation with implementing so-called
Controlled Foreign Company (CFC) rules, substance requirements & anti-abuse provisions under double tax treaties.
- Banking compliance: implementation of regulatory requirements with regard to check the nature of the transaction and
avoid making payments that have no economic sense.
How to Establish Economic Substance in Cyprus?
In addition to registering with tax authorities, companies need to prove their economic presence in Cyprus. This can be implemented in the following steps. Examples include:
- Rent/buy an office space in Cyprus;
- Appoint a qualified director – resident who will make independent decisions on company’s activities;
- Having a functioning telephone line, email, and website;
- Opening a bank account with a local bank ;
- Ensure proper physical storage of corporate documents, contracts, business and official correspondence in the office;
- Hire employees in the company and become an employer;
- Providing effective management of the company in Cyprus.
We draw your attention to the fact that this article is for informational purposes only. For more advice, contact us at the contacts listed on the site.