Entrepreneurs looking to make savings on their tax bill had in the past used Cyprus as a tax-friendly spot, however the recent scandals involving Russian oligarchs squirreling away their assets after the Ukraine invasion has left Cyprus with the full beam of EU scrutiny.
After the controversy, Cypriot authorities have promised to investigate and strengthen controls especially involving offshore structures, promising a zero-tolerance approach to unscrupulous financial dealings. All of this means that any entrepreneurs wanting an easy ride on tax when coming to Cyprus will now have to navigate stricter controls when starting a company.
In fact, after the Ukraine invasion and the huge amount of Russian money filtering through Europe, the EU authorities and associated countries are all tightening up their controls when it comes to foreign finance and investment. Governments and banks will be charged with making sure all the legal boxes are ticked when it comes to international entrepreneurs deciding to move their money or businesses to different locations.
Any company formation expert worth their salt would advise business owners who are looking to expand abroad to more lucrative and tax-friendly zones to choose a country that not only provides a good rate of corporation tax, but actually has some solid link with their business.
Jean-Baptiste Puyraud, the director of Euro Start Entreprises, one of Europe’s leading company formation experts, said: “Cyprus could be a very good choice for businesses that trade in Europe who want to expand towards the Middle-East and North Africa. However, Cyprus is now, due to its EU membership and the latest scandals, very strict about banking regulations and tax reporting. You also need to be aware that without a real substance in Cyprus (real business activity, offices, a local director and up-to-date accounts) you won’t be able to have a company that can trade, and ultimately you won’t be able to keep your company. Don’t see Cyprus as an offshore country anymore. Cyprus is a serious country for serious businesses.”
Since his election in February, the president of Cyprus, Nikos Christodoulides, has been working hard to bring the financial services sector into line after decades of lax regulation which led to unscrupulous business owners using the country as a tax haven. (See our article on Why Cyprus is so popular with tax savvy entrepreneurs).
His government tightened controls on Russian capital earlier this year when the US and UK imposed sanctions on 23 Cypriot passport holders and more than a dozen companies registered in Cyprus, including an offshore services company who assisted a Russian oligarch in transferring assets to family members before being added to the sanctions list after the Ukraine invasion.
As it’s not just Cyprus that’s clamping down on foreign business owners, and most of the EU are now reviewing their due diligence policies on the entrepreneurs they allow into their countries, before you start scanning the global corporation tax rates and deciding which country offers the lowest charges, think about whether you are really invested in the country and what it will bring to your particular market. Because if you can’t prove your worth in a country, the likelihood is that no government or financial institution will allow you open a company or bank account.
If you cannot provide invoices from local or national customers, and you have no real substance in the country, then this will send alarm bells to the tax offices and you have a very real threat of an audit on your hands. Most company formation agents do their own due diligence to weed out the possible money-launderers or tax-dodgers but, as with the case of Cyprus and the unlawful agents who opened offshore accounts for those oligarchs, there will always be people who try to get around the law. But as it’s been shown, the law catches up with everyone in the end. By all means choose a country that has sensible tax rates to suit your expansion, but your best bet is just to be honest from the get-go.
If you’re interested in setting up a legitimate company in Europe, you can download our free guides below that give you all the information you need on how to expand your business the right way. Or if you’re still interested in the benefits of Cyprus, take a look at our article Starting a business in Cyprus in 7 steps