The Central Bank of Cyprus has warned that so-called ‘shell’ or ‘letterbox’ companies with no effective place of business and management should not be able to open bank accounts or continue using existing ones on the island.
Further, trading companies incorporated in jurisdictions recognised as tax havens must become tax resident in an appropriate jurisdiction in order to continue banking in Cyprus, according to a central bank circular.
Guidelines on substance checks will be incorporated into the central bank’s anti-money laundering directive in the near future, according to Michalis Loizou, a tax consultant with local law firm Elias Neocleous & Co.
What is a shell company?
In the circular, issued on 14 June, a shell company is defined as an entity that is not publicly traded and:
- has no physical presence in its country of domicile, apart from a mailing address;
- has no established economic activity, little to no independent economic value and no documentary evidence to the contrary;
- is registered in a jurisdiction in which companies are not required to file independently audited financial statements; or,
- has a tax residence in a jurisdiction recognised as a tax haven or has no tax residence.
To avoid being labelled as a shell company, firms must demonstrate they have sufficient management and capital.
This means having adequate corporate governance arrangements and directors with the skills, knowledge and experience to run the business, who demonstrably make the important business decisions in Cyprus.
The management must spend adequate time on the business of the company and have real decision-making powers. They must not be directed by shareholders, but should act independently in the interests of the company.
Having an office in Cyprus, the company’s facilities and number of employees can all count towards substance, Loizou stated.
Certain exclusions apply
Companies that own investments in shares, intangibles or other assets, including real estate or ships, are exempt from the clampdown.
Other exclusions include companies undertaking group financing activities or acting as group treasurer.
Also carved out of the restrictions are firms set up to handle currency trades, asset transfers or corporate mergers, provided that their beneficial ownership is identifiable and they demonstrate they are engaged in legitimate business.
Banks were instructed to carry out a review of existing customers to determine whether or not they were shell companies.
A deadline of 31 July 2018 was given for banks to inform the central bank of the results of the review and whether or not they intended to continue their business relationship with the entities concerned.
Despite the clampdown, the central bank stated that financial institutions can choose to service shell company clients but must be able to justify their decision and record that justification in the client file.