On 2 November 2018, the Central Bank of Cyprus issued a Circular setting out a revised definition of “Shell Companies / Entities”. The Circular was addressed to AML officers of all Credit, Payment and E-Money Institutions in Cyprus.
Why is it important?
Whether you plan to open a company bank account in Cyprus or you already have one, then you should be aware of this development, determine whether your company falls within the definition of a Shell Entity, consider potential implications for your business (e.g. in case your existing Cyprus bank account may be closed) and what actions are available to you.
What is a Shell Entity?
A Shell Entity is an entity that in its country of incorporation:
- Has no physical presence (largely meant no offices and employees); and
- Has no established economic activity and little to no independent economic value;
To our understanding, both tests should be met for a company to be considered as Shell. If one test is met but the other is not, then the entity should not be considered as Shell Entity.
You can find below certain clarifications on the terms ‘physical presence’ and ‘economic activity’.
The Circular provides that the presence of a third person providing nominee services (e.g. secretarial) does not constitute on its own physical presence. Whereas the existence of own or rented premises and mind and management in the company’s country of incorporation indicates physical presence.
Emphasis is placed on the mind and management (which to our view refers to the senior decision making) being situated in the jurisdiction where the company is incorporated.
The Circular provides that the following circumstances indicate economic activity:
- Holding Companies: Companies holding stock or shares, or other equity instruments of another entity engaged in a legitimate business with identifiable Ultimate Beneficial Owners (UBOs);
- Asset Holding Companies: Companies holding intangible assets (e.g. trademarks), Real Estate, Ship(s), Aircraft(s), Portfolio of investments, Debt and Financial Instruments;
- Special Purpose Vehicles: Companies facilitating currency trades and asset transfers, corporate mergers, carrying out asset management activities and trading of shares,
- Group Financing Companies: Companies acting as a group treasurer;
- Group Coordination Companies: Companies managing the activities of a group;
- Other legitimate business with identifiable UBOs and convincing evidence;
To our view, a significant number of companies should not fall under the definition of a Shell Entity by virtue of their activities. This should apply even in cases where the physical presence test is not met. In any case, we strongly suggest for tax and other reasons for all companies to maintain relevant substance in their country of residence (whether in Cyprus or elsewhere).
What happens if my company does not fall under the Shell Entity definition?
In theory business as usual. The opening of a new bank account or the existence of a bank account should not be affected by this Circular. This provided that your company meets all necessary due diligence measures and checks including the identity of the UBOs, the source of funds, the transactional behavior of your account and the bank’s internal guidelines at the time.
Having said that, recently we experienced several Cypriot banks declining to accept offshore companies as customers, even though such entities were not qualifying as Shell Entities and had relatively straightforward operations.
What happens if my company falls under the Shell Entity definition?
If a company falls in the above definition, and:
- it does not prepare audited financial statements by independent qualified accountants; and/or
- it’s tax resident in a jurisdiction included in the EU (currently including American Samoa, Guam, Samoa, Trinidad, and Tobago and US Virgin Islands – see here) or OECD list of non-cooperative jurisdictions (which currently has no countries – see here) or has no tax residence whatsoever,
then the Circular says that the banking relationship with such an entity shall be avoided. In other words, no Cyprus bank should open an account to such an entity.
In such case, to improve the profile of your company, you should consider preparing audited financial statements and redomiciling the company in a jurisdiction which is not included in the EU or OECD list of non-cooperative jurisdictions.
If on the other hand, the entity meets the definition but also:
- prepares audited financial statements and
- is tax resident in a jurisdiction which is not included in the EU or OECD list of non-cooperative jurisdictions,
then the bank should decide whether to open an account (or maintain the existing one) by applying a risk-based approach and fully substantiating and documenting its decision towards the regulator.
In such case, to improve the profile of your company, you should consider implementing relevant substance at the level of the company and improving the documentation of the business activities and the legitimacy of the operations.
To better assist our clients to determine the status of their companies under the Circular, we prepared the below table showing the questions raised by the Circular and the relevant outcomes. The Questionaire should be read in conjunction with this article.
Should you need any clarifications on the above, feel free to contact us.
Head of Tax Services