Fight with the shadow

20/ 11/ 2018

Author: the Law Agency “Absolute”

This year, the close attention of business is riveted on developments in the banking sector of the European Union (EU). After all, the banking crisis in the Baltic States has affected many customers, which, in turn, led to a wave of serious changes to the approach of assessing the business and riskiness of non-resident customers.

Baltic clients (someone forced, due to the loss of a bank account, and someone playing proactively), began in large quantities to open corporate accounts in other jurisdictions, one of which was Cyprus. Banks of Cyprus received a huge influx of new customers and many of them, regardless of the company’s jurisdiction, were successfully accepted for service.

It seemed that the problem was solved and, including, offshore companies could continue to work quietly further. However, the changes have not bypassed Cyprus.

OFAC claim

At the beginning of May 2018, OFAC (Office of Foreign Assets Control) came to Cyprus to OFAC filed a claim to Cyprus, the essence of which was unsatisfactory work on client activity, insufficient fight against money laundering and the financing of terrorism.

In Cyprus, which until the arrival of OFAC remained virtually the only financial center of the EU, freely opening accounts for offshore companies, banking activity was virtually frozen.

Banks took a waiting position: they stopped opening accounts for new non-residents, frantically began to study the origin of funds of already existing customers, requesting supporting documents in the intervals of the last 10 to 15 years.

Turmoil and uncertainty continued until the official recommendations of the Cyprus banking regulator.

Recommendations of the Cyprus Banking Regulator

In May, the Banking Regulator sent instructions on the need to ban the opening of new and closing existing accounts of the vast majority of offshore companies, as well as a thorough check of the origin of funds in customer accounts.

Moreover, after the appearance of information about the prescriptions in the media, the regulator denied the information about the existence of this prescription as such. However, in June, after all, he officially formulated his position – there are no empty shell companies (shell companies) in the banking sector of Cyprus, a tough policy is being pursued to combat illegal means.

For your information, a similar law, which essentially closed off entry into Latvian banks for dummy companies, was also adopted in Latvia.

New rules of banks of Cyprus

According to the new rules, banks of Cyprus open corporate accounts only to companies that have a physical presence in the country of their registration.

In addition, a non-resident company must necessarily submit reports and have an economic connection with Cyprus (Cyprus counterparties in the payment structure, asset ownership, etc.).

Physical presence, including, concerns companies registered in Cyprus. It is important to understand that this is not about the legal address issued by the registrar, complete with the package of documents of the shelf company. We need a real office with expenses for its maintenance, staff, etc. This requirement of banks is called “Substance” and this is only one side of the coin.

The second is the MLI Convention, to which both Ukraine and Cyprus have joined. After ratification of the convention, the use of preferential taxation when paying dividends (interest, royalties) from Ukraine to Cyprus will cause a serious obstacle – passing the test of the main objective “Principal Purpose Test”.

The tools for passing this test are somewhat similar to the requirements of “Substance”, but have a deeper and more complex nature.

The tax authorities will need to show that the Cyprus company actually operates, has a physical office in Cyprus, and the management has the appropriate education, experience and is empowered with the necessary powers to manage and dispose of the company’s funds.

The main point of the “Principal Purpose Test” is to prove to the tax authorities that the tax benefit received is not the main purpose of the structure.

Service of non-residents

The situation was predictable. Therefore, in June, against the background of the Baltic and Cypriot events in the banking sector, both I and the international department of the Law Agency “Absolute” formed my position on working with non-resident business for clients.

Inexpensive universal tools for conducting non-resident business are in the past. Today’s business should be transparent, legal, real.

In addition to everything previously described, Ukraine in the foreseeable future will be included in the program of automatic exchange of tax information CRS.

Therefore, the ownership of a company by citizens of Ukraine must be properly declared and lawful from the point of view of the currency legislation of Ukraine. The company must conduct real activity and bear real risks, pay taxes.

Save can and should be on taxes, but only with the mandatory compliance with the requirements of banking institutions, regulators, fiscal authorities.

In addition, taxes must be paid, in the end, and the beneficiary of the company is an individual. And, if you are not satisfied with the income tax rate in the country of tax residency, you should think about changing it.

Many EU banks are becoming a kind of tax agent, identifying and preventing tax evasion schemes or not allowing them to serve customers with dubious origin of funds.

Part of the business was previously ready for these challenges. However, being in constant dialogue with customers, I note that the majority of customers did not respond to the changes, but took an expectant position in the hope of a wonderful and inexpensive solution from their registration agent. But the miracle was not and never will be.

Cyprus Support

At a meeting with colleagues from Cyprus, our points of view coincided. Cyprus is ready to help and support Ukrainian business in every way, provide benefits, ensure security and provide comfortable conditions for doing business. However, the business must meet the new requirements. First of all, it is necessary to evaluate the benefits from the use of benefits with the costs of life support structure.

“Organize an office, hire qualified personnel in Cyprus, transfer your employees from Ukraine to work in Cyprus, ensure the transparency of activities and then enjoy all the benefits of Cyprus tax benefits. Yes, it is expensive, but today this decision has a high chance of a long and successful work”, – says Cyprus.

In conclusion

Summing up the described events and new requirements related to the maintenance of non-resident business in Cyprus, I draw your attention to the fact that the same situation exists in other EU countries, Europe and the world as a whole.

More and more EU countries servicing non-resident corporate accounts require confirmation of the presence of interests in the country of the serving bank, physical presence of an office in the country of incorporation of the company and confirmation of the existence of economic business benefits.

Countries dependent on the US and the EU will continue to tighten methods to combat shadow capital and tax evasion.

Based on the foregoing, the maintenance of a non-resident company will now cost significantly more, and the processes associated with servicing the company and doing business will require more time-consuming and even better preparation. And, unfortunately, quite a bit of time is left to restructure the old business models.

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