Cyprus targets tax avoiding letter-box companies
Cyprus Central Bank wants to prevent firms from using EU single market freedom-of-establishment rules to set up letter-box companies for tax benefits in the country.
The regulator underlined the need for businesses to have real substance in order to operate and benefit from tax residence in Cyprus.
The warning states that so-called ‘shell’ or ‘letter-box’ companies – that lack of proper substance – may not only be denied benefits under double tax agreements or EU directives, but may also mean that the company is unable to operate a bank account in Cyprus.
On 14 June 2018 the Central Bank of Cyprus issued a circular to credit institutions that it regulates, advising them against opening new bank accounts or continuing existing accounts with companies that are regarded as ‘letter-box’ companies.
A letterbox company seeks to minimize tax liability by establishing domicile with a mailing address in a country that is more tax-friendly, while conducting business elsewhere.
These guidelines are due to be incorporated into the Central Bank’s Anti-money Laundering Directive in the near future.
The guidelines stipulate that trading companies with no effective place of business and management, and hence no substance, will not be permitted to maintain bank accounts in Cyprus. Further, trading companies incorporated in jurisdictions recognised as tax havens must become tax resident in an appropriate tax jurisdiction in order to continue banking in Cyprus. (continues…)