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What are shell companies?
The Central Bank of Cyprus issued on 02/11/2018 a Circular to the commercial banks of Cyprus defining the term “shell company”.
This Circular comes following an earlier Circular dated 14/06/2018 which signified the intention of the Central Bank to adopt a definition of shell companies. The June Circular caused a lot of unrest and uncertainty in the market due to its vagueness and blanket provisions.
The November Circular is the result of dialogue between the Central Bank and the industrial partners and it is considered to be more balanced and takes into account business reality in Cyprus.
The Circular is not without problems. It contains some ambiguous provisions and lacks clarity in certain critical respects.
In a nutshell the key provisions of the November Circular are the following:
- it is applicable for Cypriot registered companies as well as companies registered in other jurisdictions.
- it gives the discretion to the commercial banks to decide whether a company is engaged in economic activity using a defined set of criteria.
- it imposes the obligation on all companies (whether Cypriot or not) to have audited financial statements.
- It also gives the commercial banks the discretion whether to accept clients from zero tax jurisdictions , provided that the specific company prepares voluntarily audited financial statements.
The November Circular is reproduced in full below:
“1. The term “shell company/entity” refers to a limited liability company or any other legal/business entity that bears the following characteristics:
- It has no physical presence or operations in its country of incorporation/registration (other than a mailing address);
Physical presence of a company/entity is construed as having a place of business or operations (own or rented premises) in the country of registration/incorporation. Also, absence of meaningful mind and management could be construed as lack of physical presence. The presence of a third person providing merely nominee services including company secretary duties does not constitute on its own physical presence
- it has no established economic activity in its country of incorporation/registration, little to no independent economic value and no documentary proof to the contrary.
Notwithstanding the above, however, the following circumstances could indicate economic activity:
(i) the company/entity is established for the purpose of holding stock or shares or other equity instruments of another business entity or entities engaged in legitimate business with identifiable ultimate beneficial owner(s);
(ii) the company/entity is established for the purpose of holding intangible or other assets including real estate, ship, aircraft, portfolio of investments, debt and financial instruments;
(iii) the company/entity is established to facilitate currency trades and asset transfers, corporate mergers as well as carrying out asset management activities and trading of shares;
(iv) the company/entity acts as a treasurer for companies recognised as a group or manages the activities of the group;
(v) any other case where convincing evidence can be provided that the company/entity is engaged in legitimate business, with identifiable ultimate beneficial owner(s).
2. If an entity falls within the above definition and
(i) it is registered in a jurisdiction where companies/entities are not required to submit to the authorities independently audited financial statements and does not voluntarily prepare audited financial statements by independent qualified professional accountants who are licensed or regulated and/or
(ii) it has a tax residence in a jurisdiction included in the EU list of non-cooperative jurisdictions for tax purposes or the OECD’s list of non-cooperative jurisdictions for tax purposes or has no tax residence whatsoever,
then business relationships with such an entity shall be avoided.
3. In all other cases of companies/entities falling within the definition in 1 above, the institution shall decide on whether to engage in or maintain a business relationship applying a risk based approach in accordance with the legal and regulatory framework and providing fully substantiated justification of such a decision which should be appropriately documented and recorded.
4. The customer acceptance policy of the institution should be appropriately revised by the Money Laundering Compliance Officer in order to comply with this circular with immediate effect.
In any event, institutions are reminded of their obligations under all applicable legislation and directives to conduct all necessary due diligence measures and checks, among others concerning the identity of the ultimate beneficial owners, the source of funds and the transactional behaviour of their customers.
The above shall be incorporated in the relevant CBC Directives.”
The actual Circular can be downloaded at the link below: