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Cyprus Seeks To Prevent Letter-Box Companies

Cyprus Seeks To Prevent Letter-Box Companies
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Cyprus Seeks To Prevent Letter-Box Companies

The
Central Bank of Cyprus has caused something of a stir in the country’s investment and financial services communities after it issued a circular to the country’s banks earlier this year instructing them not to do business with companies failing to meet a new physical presence test. The key points of the new rules are outlined in this blog.

Reason For The Changes

With this circular, sent to banks in June 2018, Cyprus appears to want to discourage investors from setting up corporate structures whose main purposes is to benefit from the favourable tax rules on offer in Cyprus and other low-tax jurisdictions. It is also thought that Cyprus is keen to be seen internationally to be cracking down on tax and other financial crimes.

The Detail

Specifically, the circular notifies financial institutions of the Central Bank’s intention to update the Directive on the Prevention of Money Laundering and Terrorist Financing and directs banks to “avoid” engaging or renewing business relationships which fail a physical presence test, i.e. is a shell company.

A shell company is defined as a non-publicly traded limited liability company or other entity which meets one of the following conditions:

  • it has no physical presence in its country of incorporation;
  • it undertakes no significant economic activity;
  • it is registered in a jurisdiction with no requirement for audited financial reports to be submitted;
  • its is registered in a jurisdiction recognised as a “tax haven” or has no tax residence.

 

 

 

The circular stipulates that entities cannot be considered to have a physical presence merely because they engage a trust or corporate services provider or other third party in the jurisdiction to provide nominee services such as acting as the company’s secretary. The absence of employees would also indicate that the company lacks a sufficient physical presence, according to the circular.

Related:

Exemptions

Importantly, holding companies are excluded from these restrictions, including those holding shares, intangibles or other assets including real estate and ships, those facilitating currency trades or undertaking group financing treasury activities, and those carrying out asset transfers or corporate mergers. However, these companies must demonstrate that they are undertaking legitimate business and can provide adequate information on their ultimate beneficial owners.

International Context

While this move may have been an unexpected one, it is certainly not out of step with the global movement, driven largely by the OECD and the European Union, for increased transparency around the tax affairs and beneficial ownership of corporate entities, particularly those with cross-border arrangements.

Within this context, jurisdictions have been keen to demonstrate their cooperation with this campaign by adopting internationally agreed tax transparency standards and strengthening anti-money laundering legislation. Cyprus is no different in this respect. However, the implications are that investors are more likely to face scrutiny from the tax and financial authorities about their legitimate business affairs.

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