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Shell companies and the 60 days tax residency scheme.
The Minister of Finance has stated recently that the model where Cyprus encouraged the opening of bank accounts of companies, that had just deposits at the banks, with no physical presence is no more welcomed. He said that “This is over, its finished. Even if we wanted to continue with such a model we can’t, and there is no desire for such model anymore,”
As I have explained in another article , this is a political decision aimed against Russians that have deposits in Cyprus banks. In fact this policy has brought results since according to the latest updated data from the Central Bank of Russia, Cyprus has seen €10bln of Russian money being repatriated over the last 15 months.
Even the Russian ambassador in Cyprus has expressed concerns about the impact of this new policy yesterday.
Cyprus Mail reports today a study made the Frank Research Group about the repatriation of the money of Russian billioners back to Russia. The reports states that two-thirds of Russia’s millionaires and billionaires’ capital is still outside the country. According to the study, Cyprus is the only country to have lost out compared to other competing countries (Luxembourg, the Netherlands, the Bahamas, Bermuda, Virgin Islands).
Leaving the political aspects of this aside, one question that arises is how is this shell company policy compatible with other government policies like the 60 day tax residency scheme or even the citizenship program?
Let us take the 60 day tax residence scheme.
This scheme was introduced to attract high net worth individuals in Cyprus. The essence of the scheme is that a foreigner is given the status of the tax resident in Cyprus provided he stays on the island at least 60 days per year. The tax resident status gives a number of tax benefits to the individual. One of the conditions is that the applicant must show ties with Cyprus. This criterion that is satisfied if the applicant carries out out any business in Cyprus or is employed in Cyprus or holds the office of the director in a Cyprus tax resident company.
In practice, what happens is that applicants register a Cyprus company, they are then appointed directors of that company and also register as its employee. This is done to obtain the maximum of the tax benefits. Such a company may rent office premises, but as a matter of fact and in most of the cases , it does not carry out any real economic activity. After all it was registered to give its shareholder the status of the employee and/or director and enable him to show ties with Cyprus.
Now, the owner of such a company stays in Cyprus , the most, 60 days a year. That is, two months. And everybody knows this. Such a company cannot be reasonably considered to have real economic activity in Cyprus and is not expected to have any!
Thus, with this example the company in question will be deemed as a shell company according to the new Circular and as such it should not be acceptable as a client of any bank since it as no real economic activity.
So we have an oxymoron situation here. The government having in place a tax resident scheme which clearly contradicts the new policy on shell companies.
The same could be applicable – in some instances – for companies incorporated by persons that apply for Cyprus citizenship.
If somebody buys a villa in Limassol worth of €2m- via a company – just to get citizenship why would that company be considered to have economic activity?
And why should such a foreigner be treated differently from someone that has €2m in a company that sit in the bank and does not want citizenship?
Of course there is no answer to the above questions. As I have indicated the shell company rule is a political decision targeted at Russian depositors, which has already produced measurable results.