Recently, many people associate Cyprus with the massive closure of accounts of foreign companies, as well as with the slowness of managers, leading, to put it mildly, a leisurely pace of life. Many Cypriot companies were left without a bank account, and, accordingly, without the ability to operate. Some companies were able to open accounts in banks and payment systems of other jurisdictions, while others were simply left by the owners to await deletion from the register.
But the situation changes dramatically if a Cypriot company has an economic presence in Cyprus, that is, a substance. Having done everything right, you can safely knock on the doors of Cypriot banks (as well as some Luxembourg and Swiss banks) and apply for a corporate account. Moreover, everything goes to the fact that there will be practically no normal banks in the world ready to serve shell companies.
In this article, you will get acquainted with the definition of substance in Cyprus, as well as with the reasons for changing the policies of many banks that have decided to introduce new requirements for the availability of substance in companies. We hope it will help you understand whether it is possible to revive your Cypriot company with the help of the Substance. The information will also be useful to those who plan to register a Cyprus company and open a bank account in Cyprus.
HISTORY OF SUBSTANCE IN CYPRUS
The summer of 2018 was remembered by Cypriots not only for drinking and eating on a warm evening to the sound of the surf. Like a bolt from the blue, the Circular of the Central Bank of Cyprus thundered, banning local banks from opening accounts and servicing shell companies at one point. Such companies, as a rule, have no office, no employees, no assets (except funds in a bank account), no real activity in Cyprus - only the registered address of a local agent and a nominal Cypriot director, who in most cases only knows about the company information provided by the client.
The circular was adopted after the visit of the American delegation led by the Deputy Secretary of the US Treasury for Counter Terrorism, Marshall Billingsley. By the way, Billingsley has vast experience in combating financial crime. At one time, he tracked the origins of the financing of large terrorist organizations.
Judging by how quickly the Central Bank of Cyprus reacted, the Cypriots immediately decided that they did not need the problems of Latvia, which arose a few months earlier - in February 2018.
Let us remind you that there was a similar situation in Latvia. The same Marshall Billingsley flew to Riga, after whose visit, Latvian banks began to massively close accounts of shell companies and pledged to reduce the share of their non-resident clients in Latvia to 5%. As a result of this visit, as well as a report from the Financial Crimes Enforcement Agency (FinCEN), ABLV bank was liquidated, which was charged with aiding money laundering for the implementation of North Korea's nuclear program.
Another large bank, Rietumu, refused to service the accounts of more than 4 thousand "high risk" companies. At that time, it was mainly British companies and partnerships that came under attack.
By the way, since October 2020, the Swiss CIM Banque requires companies to have a Substance in the country of registration.
Billions of Euros of non-resident clients' deposits floated to banks in other European and Asian jurisdictions, including Cyprus. But with Cyprus, the story did not last long.
In recent years, Bank of Cyprus has closed or blocked about 5,000 accounts of Ukrainian and Russian citizens, losing more than 3 billion Euros in liquidity. And this is about 60% of clients from Eastern Europe. Almost three thousand companies were denied opening an account. Cyprus Hellenic Bank, among other things, has reduced the number of deposits to 55%.
SUBSTANCE IN CYPRUS. WHAT IS IT?
Substance or "economic presence" - is proof that your Cypriot company is doing real business in the territory of the country of registration, that is, in Cyprus. Your company must have a substance if it plans to open accounts in Cypriot banks (and not only Cypriot ones). And, based on what is happening in the banking sector, we conclude that in the near future banks of other jurisdictions will also be required to check the availability of substance among corporate clients.
Economic presence is a prefabricated concept. Below we have provided the minimum set of components of an economic presence:
- physical office;
- hired staff;
- local e-mail, separate telephone line, website on the Cypriot domain.
As a confirmation of the office lease, the bank requests a lease agreement, as well as confirmation of its payment in accordance with the terms of the agreement. In some cases, the manager may request an invoice for utility bills or telephone services at the address of the office location.
The bank checks the hired staff by requesting documents confirming the registration of the employee with the Cypriot social insurance authorities. Bankers also check the payment of wages, taxes and social contributions from bank statements.
COST OF AN ECONOMIC PRESENCE ORGANIZATION (SUBSTANCE) IN CYPRUS
The cost of organizing an economic presence in Cyprus will differ in each individual case, since each case is unique and requires a detailed analysis and selection of the constituent elements of substance.
Below we have provided an approximate calculation for your better understanding in general terms:
- A dedicated telephone line, as well as the service of receiving calls, with subsequent informing you, will cost 550 EUR per year (if calls are sent abroad, an additional fee will be charged);
- Office space lease contract - 280-300 EUR per month (prepayment is required 12 months in advance). It is important to note that here we are talking about a “non-dedicated office”, that is, you cannot actually use the rented space without the permission of the property owner;
- Employee - 380 EUR per month (the cost also includes contributions to social funds). Payment must be made on a quarterly basis;
- Registration of a company by an employer, as well as registration of an employee in the public services of Cyprus - 300 EUR + VAT;
- Email address - the price will be the same as the cost of the email address;
- Forwarding correspondence to the address indicated by you - the cost of this service will be calculated based on the number of letters sent;
- Website on a Cypriot domain - the cost of website development will depend on many factors. Usually it starts from 200 EUR.
It should be noted that before registering an employee with the social insurance authorities, the company must be registered as an employer in Cyprus and receive an appropriate identification number. This is usually the longest-running part of the procedure for establishing an economic presence in Cyprus. If the company is just registered, the procedure will take less time - approximately 2-3 weeks.
If the company is already active, the social insurance authorities will request a large package of documents, which includes audit reports and much more. In this case, the registration of the company as an employer takes at least a month, since the employees of the social insurance service will need more time to analyze the submitted documents. Sometimes, in the process of analyzing, they send additional requests, the preparation of answers to which takes a certain amount of time.
As soon as the company becomes an employer and hires an employee, it is obliged to pay the salary and pay social contributions on time. Otherwise, the company faces the accrual of fines and penalties.
ADVANTAGES OF SUBSTANCE IN CYPRUS
Our experience has proven that today a business needs to be started according to the following scheme:
Country of the bank = Country of incorporation of the company = Principal place of business = Tax residency of the beneficiary.
Many banks from other jurisdictions are already asking about the presence of an office and staff. Some have clearly determined that they will not serve companies without a real economic presence and have given time for existing customers to either withdraw the balances or organize a subsistence before the New Year. Cyprus banks have adhered to this policy since 2018.
Summing up the above, we can say that today Cypriot companies do not have so many options for cooperation with banks:
- If a Cypriot company exists without an economic presence in Cyprus, then it is impossible to open an account with a Cypriot bank. In this case, we recommend organizing a subsistence and still open an account with a Cypriot bank;
- If a Cypriot company for some reason cannot organize an economic presence in Cyprus, we recommend to choose payment systems of other jurisdictions as a temporary alternative.
To ensure that the bank's compliance request does not catch you by surprise, and that the company's operations are successfully conducted without sticks in the wheels, we advise you to get ready today.
Click on the button below, leave a request, and we will advise you on all aspects of implementing the necessary elements of an economic presence in Cyprus.