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Introduction
The European Union, through Directive (EU) 2015/849 and its subsequent amendment, Directive (EU) 2018/843, mandated the establishment of national UBO registries across member states, including Cyprus. In recent developments, Cyprus has taken significant strides to fortify its financial regulatory framework, particularly with the implementation of the Ultimate Beneficial Owner (UBO) registry. This move is not just a regulatory formality; it's a foundational step towards enhancing corporate transparency and accountability within the European Union and beyond. The UBO registry initiative, mandated by EU directives aimed at combating money laundering and terrorist financing, underscores Cyprus' commitment to global standards of financial integrity.
As Cyprus implements its final solution for UBO registry compliance to align with international standards, we have taken the opportunity to create a basic guide in regards to the responsibilities and obligation of entities registered in the Republic of Cyprus.
UBO (Ultimate Beneficial Owner) Registry Compliance
As it can be deduced from the above introduction, a recently new obligation has arisen for Cyprus established corporations. The directive (KPD112 / 2021) aimed at preventing money laundering and terrorist financing mandates all Cypriot entities to disclose their Ultimate Beneficial Owners (UBOs)to the UBO registry which is under the administration and safekeeping of the Registrar of Companies. This reporting requirement emphasizes timeliness and accuracy, serving as a compliance checkpoint for entities to continually assess and affirm their ownership structures. It aligns with international standards and practices aimed at enhancing transparency and accountability in business operations, facilitating the detection and prevention of financial crimes.
UBO= individuals who ultimately own or have significant control over a company, specifically those 25% +1 shares of the ownership or control rights.
Timeframe of reporting= Changes in UBO information must be filled within 14 days since change or otherwise penalties shall apply accrued daily.
Corporate Documentation Maintenance
Cyprus companies are directed under the Companies Law (Cap.113) to hold and accurately maintain their statutory documents at their registered office. This duty entails the systematic upkeep and storage of critical records at the company's registered office. These documents encompass the Registers of Directors, Secretaries, Shareholders, Debenture-Holders, and Charges. Moreover, the legal framework necessitates the inclusion of other pivotal documents within the company's archives. These include the certificate of incorporation, details pertaining to directors and secretaries, shareholder information, the location of the registered office, and the memorandum and articles of association. Also crucial are audited financial statements, copies of annual returns, and minutes from general meetings, all of which serve to provide a comprehensive overview of the company's operational and financial standing.
Timeframe of reporting= Any modifications or changes in the above documentation/information must be filled within 14 days since change or otherwise penalties shall apply accrued daily.
Financial Reporting and Auditing
Companies are obligated to prepare financial statements in line with International Financial Reporting Standards and have them audited according to International Standards on Auditing. An Annual Return (Form HE32) accompanied by the previous year's financial statements must be filed with the Registrar of Companies. Newly incorporated entities have an initial grace period of up to 18 months of incorporation to have their Annual General Meeting (AGM) and subsequently proceed with the annual Return accompanied by the financial statements for the first 18 months of operation.
Timeframe of reporting= The Annual Return accompanies with audited Financial Statements of the previous year needs to be submitted to the Registrar of companies within 42 days of the AGM taking place.
Corporate Meetings and Record-Keeping
The law requires companies to conduct an AGM to make significant decisions, such as approving financial statements and electing directors. As the acronym suggests the AGMs are held on annual basis. These meetings must comply with legal notices, and minutes must be properly recorded and stored at the registered office. Additionally, written resolutions and board meeting minutes should be maintained at the company's registered office.
Economic Substance Requirements
To comply with international tax laws, companies must demonstrate real economic activity in Cyprus. Economic Substance Requirements represent a crucial component of Cyprus's legal framework, designed to ensure that companies conducting relevant activities are not merely shell entities but have substantial operations within the jurisdiction. These requirements were introduced in response to global initiatives led by the EU and the OECD to combat harmful tax practices and ensure that profits are taxed where substantial economic activities and value creation occur.
For a company to satisfy the economic substance requirements, it must meet the following criteria:
Directed and Managed: The company must be directed and managed in Cyprus. This involves holding board meetings in Cyprus with a quorum of directors physically present, making strategic decisions within the country, and keeping board meeting minutes and records in Cyprus to document these decisions.
Core Income-Generating Activities (CIGA): The company must conduct its core income-generating activities in Cyprus. This means that significant functions, assets, and risks associated with the relevant activity are managed within the jurisdiction. The entity must either perform these activities itself or outsource them to a Cyprus-based service provider, ensuring the outsourced activities are closely monitored and controlled.
Adequate: There must be an adequate level of qualified employees, expenditure, and physical assets in Cyprus to conduct the relevant activity. "Adequate" is interpreted in relation to the level of activities performed in Cyprus, requiring entities to have a tangible presence in terms of office space, staff, and expenses proportionate to their business activities.
In addition to the above other governance procedures that are indicative of economic substance and tax residency in Cyprus is the following:
Ensure the availability of a local operational phone line
Establish a domain-specific email
Create a company website
Open a bank account with local based bank
Register the company and its employees with social insurance.
Annual Government Levy
All registered companies are required to pay an annual fee of €350. Group companies can allocate the total fee across entities, provided the combined fee does not exceed €20,000.
Timeframe of reporting= The Annual Government Levy needs to be paid by June 30th, with late payments incurring additional charges.
Taxes & Social Insurance
For companies registered in Cyprus, adhering to tax and social insurance requirements is both a legal obligation and a critical aspect of operational compliance. These requirements are designed to ensure that companies contribute fairly to the national economy and provide adequate social security benefits to their employees. Here's a more detailed exploration of these obligations:
Tax Compliance Obligations:
Registration and Reporting: Companies must register with the Cypriot Tax Department upon incorporation or commencement of operations to obtain a tax identification number (TIN). This registration is pivotal for the company's tax affairs, including income tax, VAT, and other relevant taxes.
Corporate Income Tax: Cyprus companies are subject to corporate income tax on their worldwide income if they are tax residents of Cyprus, determined by their management and control being exercised in Cyprus. The current corporate tax rate is competitive and companies are required to file an annual tax return detailing their taxable income.
Provisional Tax Payments: Companies estimate their taxable income annually and make provisional tax payments in two equal instalments, typically due on July 31 and December 31. Adjustments can be made if the initially estimated income changes, ensuring that the provisional tax accurately reflects the company's financial performance.
VAT Obligations: Companies engaging in taxable supplies of goods or services within Cyprus, or conducting intra-community acquisitions or imports, must register for VAT. Regular VAT returns, usually quarterly, must be filed, and any VAT due is payable to the tax authorities.
Social Insurance and Employee Contributions:
Employer and Employee Contributions: Both employers and employees are required to make contributions to the social insurance fund, calculated as a percentage of the employee's salary. These contributions cover a range of benefits, including pensions, sickness, maternity, and unemployment benefits.
Registration of Employees: Companies must register themselves and their employees with the Social Insurance Services upon the commencement of employment. This registration is crucial for the administration of social insurance contributions and benefits.
Monthly Payments: Social insurance contributions are due monthly and must be paid by the end of the following month. Timely payment is essential to avoid penalties and ensure employees are eligible for social insurance benefits.
Health Insurance Contributions:
General Healthcare System (GHS): In addition to social insurance, employers and employees contribute to the General Healthcare System (GHS), providing access to a wide range of healthcare services. These contributions are also calculated as a percentage of the employee's salary and are paid monthly alongside social insurance contributions.
Compliance with these tax and social insurance filings is monitored closely by Cypriot authorities, with penalties for late submissions and underpayments. Companies are advised to maintain accurate records, make timely payments, and consult with tax professionals to navigate the complexities of the Cypriot tax system and ensure full compliance.
In Summation
Navigating the regulatory landscape of Cyprus, with its comprehensive tax, social insurance, and corporate documentation requirements, is a complex yet vital aspect of running a successful business. Compliance with these obligations not only ensures legal operation within the jurisdiction but also positions companies to take full advantage of Cyprus's favourable business environment. Particularly, adherence to the Economic Substance Requirements and the meticulous maintenance of UBO registry compliance underscore the importance of transparency and accountability in today's global business practices.
For businesses operating in Cyprus, managing these obligations can be daunting, especially when the focus should be on core business activities and growth. This is where our services come into play. Partnering with us means gaining a trusted advisor who can navigate the complexities of Cypriot corporate compliance on your behalf. Our goal is to provide peace of mind, allowing you to focus on what you do best - growing your business. With our comprehensive suite of services, expert knowledge, and commitment to excellence, we are well-equipped to support your company's journey in Cyprus, ensuring compliance, efficiency, and success in the local and global marketplace.
Let us be your guide and partner in navigating the intricate requirements of operating a business in Cyprus. Together, we can achieve compliance, foster growth, and unlock the full potential of your business.
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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