Sovereign Cyprus - Economic Substance

Management and Control

Central management and control is not the same as the day-to-day management of the business. The place where a company is centrally managed and controlled is the location where the highest level of decision-making in the company takes place, such as approving budgets, entering into major contracts or adopting corporate policies.

If the management and control of a company is found to be in a different jurisdiction to the one in which the company is incorporated, it may be found to be tax resident in another jurisdiction. The foreign tax authorities may then require it to pay tax there, as well as interest and penalties on any unpaid tax.

To establish substance, the majority of the Board of Directors must be Cyprus residents. The directors should have effective management and control of the company, and make decisions concerning the company’s strategic and operational activities in Cyprus.

Any restriction of the directors’ discretion in favour of the shareholders may suggest that shareholders control the company and, therefore, that the location of the shareholders could dictate where the company is deemed to be centrally managed and controlled.

If central management and control of a company is exercised outside board meetings by other parties, or at other times and places, the locations of these events could also determine the tax residence of the company.

The directors can delegate administrative or other day-to-day tasks associated with running the business without risking relinquishing central management and control of the company. But any delegated functions should be subject to adequate supervision and review by the directors.

If a company is controlled by its directors, the place of central management and control will be the place where directors meet to manage the company’s business. To show that significant decisions are taken in Cyprus, board meetings should be held in Cyprus and this should be also reflected in the effective record-keeping. The company secretary should be a Cyprus resident and maintain comprehensive records.

Meetings should be held regularly and at least every quarter, to demonstrate the working authority of the board. The board should make all strategic decisions, such as those concerning:

• Significant company contracts.
• Approval of financial statements.
• Approval of budgets, forecasts, cash flow and other projections.

A company can be centrally managed and controlled by professional local directors where those directors are seen to properly consider their decisions and take advice where appropriate. The directors of a Cyprus company must be qualified, have sufficient knowledge to make independent decisions and be able to demonstrate their role as decision-makers.

All legal documents and corporate records should remain in the Cyprus office or be accessible in the office at any time. Books and accounting records should be included and management must approve each of these to assert that vital business operations and core income-generating activities are indeed occurring within the jurisdiction. The company’s bank accounts should also be operated and managed in Cyprus.

Sovereign provides Cyprus resident directors for many of the companies that we incorporate to ensure that their affairs are properly managed and controlled from their place of incorporation. This service is often combined with our other company administration services.

Sovereign resident directors are experienced and knowledgeable individuals. Before appointment they will need to have a thorough and comprehensive understanding of the company’s operations and its business so they can properly exercise independent judgment.

Failure to meet economic substance requirements can result in the loss of Cyprus tax residency status, the loss of tax incentives, the potential application of financial penalties by Cypriot regulatory bodies and foreign tax authorities, increased scrutiny and potential banking restrictions or loss of banking services.

The outsourcing of CIGA is generally permitted provided that the outsourced activities are still performed within Cyprus and the company can demonstrate an adequate level of control or supervision of the outsourced activities.

Sovereign can guide clients on compliance with Cyprus and EU regulations and offers a comprehensive suite of services to ensure that your company meets the Cyprus economic substance requirements effectively and efficiently.