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The term “Substance” has been adopted by the government of Cyprus in response to regulatory convergence taken by the Organisation for Economic Cooperation and Development (OECD) on Base Erosion and Profit Shifting, together with the European Union’s Code of Conduct Group. 


The concern of the OECD, the EU and national governments in many jurisdictions is that low-tax jurisdictions such as Cyprus can be abused by companies shifting profits out of a higher-tax jurisdiction, such as France or Germany. 


The solution to this is “substance”: a company can benefit from the Cyprus tax jurisdiction only as long as they have “genuine economic activities” in Cyprus, and are not based in Cyprus for wholly artificial reasons. 


This measure has been adopted within the entire European Union, including other low-tax jurisdictions such as Malta, Bulgaria, Ireland and Estonia. 


There is no precise definition for what constitutes substance. However, the following basic principles apply: 


Management Control

The company must prove that it is controlled and managed from Cyprus. This means that at minimum, Board of Directors meetings must take place in Cyprus. Presumably, this also means that owners / directors must be prepared to show evidence that they have travelled to Cyprus and spent a minimum number of days there. 


Composition of the Company Board of Directors


The Board of Directors must include at least one Cypriot resident or citizen. Ideally, the majority of Board members should be Cypriot citizens or residents. Residence would be verified by a residence permit (the “yellow slip”) and evidence of residence in Cyprus: rental contract, utility bills, telecom bills, etc.




The company should include at least one employee registered permanently in Cyprus. This could be the Company Secretary or other staff member. Evidence of this would presumably be a residence permit (if needed), employment contract and evidence of salary and social security contributions. 


Physical Presence

The company should have a physical office with evidence of activity, i.e. rental contract, electricity bills, water bills, telephone or internet lines, etc. 


Business Activity

Although not mandatory, a company should show signs of business activity in Cyprus. This could include: 


  • Holding conferences, meetings or training programmes in Cyprus; 

  • Having a part of income originate from within Cyprus

  • Showing other social media or website activity relating to Cyprus. 


Physical Presence of Key Shareholders or Directors

In many jurisdictions, the ultimate test of residence is where children are enrolled in school. If a family, for example, lives in Paris, but the husband claims to be working for a Cypriot company and is based in Paris, then the French tax authorities will probably rule against the application of the double tax treaty and impose additional taxes or surcharges. 


Please note that the application of double tax treaty requirements as regards substance are still relatively uncertain. A more aggressive government, for example, could decide to impose stricter conditions on Substance than a less aggressive one. 


Our recommendation to shareholders wishing to register a company in Cyprus is to comply with both the spirit and the letter of the law. The global environment for tax compliance is becoming increasingly hostile forwards low-tax jurisdictions. A real physical presence in Cyprus is becoming a necessity. 


NavInvest Cyprus supports clients in complying with Cyprus substance through office rental and management, staffing, payroll management and other support. This is implemented directly by us as well as in conjunction with qualified and licensed counterparties. 


For further information, please contact us.

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