CYPRUS & LIECHTENSTEIN BANKS. Economic Substance policy 2020
In line with the new Central Bank of Cyprus directive with regards to the cooperation with “shell” companies, all offshore and onshore companies that maintain Bank accounts with Cypriot banking institutions will have to provide to the banks:
- documents confirming their economic substance
- audited accounts which should be prepared by an EU orthird country applying equivalent AML measures regulated auditor for the last two years
- if no audited accounts are available on request, then the customers should provide an engagement letter from EU or third country applying equivalent AML measures regulated auditor confirming its intention to prepare audited accounts for the company
- a letter from the said auditor as to where the revenue generated income of the company is taxed.
Please be also informed that Audited or Management Accounts are now a requirement for all offshore companies which maintain bank accounts in the Republic of Cyprus.
Within the context of tightening Anti-Money Laundering regulations, the Central Bank of Cyprus has amended its AML Directive requiring thereby the clients of Credit Institutions in Cyprus to prepare and submit recent audited or management accounts.
This obligation concerns the following:
1. Legal entities of any kind (Companies, Foundations, Institutions, Trusts etc);
2. Individuals who receive income from any company they might control in any way.
In case of Offshore companies, that it is not subject to a statutory obligation to prepare audited accounts, management accounts are required. By management accounts, we refer to the Profit & Loss and Balance Sheet of a company. The Profit & Loss shows the results of a company for a certain year. It includes the income earned and expenses incurred. The Balance Sheet shows the financial position of a company for a certain year (the company’s Assets, Liabilities and Shareholders’ Equity).
Following the revision of § 165 Criminal Act, from July 1, 2019, the usage of active (services, production, trade etc.) companies without physical substance will be seen as a measure to save tax and hence potentially classified as tax fraud. Therefore, such companies effecting bank transfers must be documenting:
- their physical substance at the place of effective management
- existence of an adequate number of qualified employees
- availability of adequate office space / storage facilities with appropriate infrastructure
- existence of reasonable expenses according to the company’s activity
(the above can be accomplished by providing employment agreements, lease agreements, utility bills and/or financial statements showing wages/insurance/rental expenses)
- their tax registration or tax conformity (if applicable, i.e. if requested by the jurisdiction in which the place of effective management is located)
- in case of unavailability: tax opinion etc.
- the economic sense of their transactions.
It must be taken into consideration that the provision of these documents does not guarantee the fulfilment of the requirements.
Another innovation is that companies classified as active under CRS (ANFEs) without sufficient evidence of their status will be seen as an indication for money laundering.
In case of doubts as to the tax conformity of the business relationship, a temporary conversion to passive non-financial entity (PNFE) is permissible for the duration of obtaining the documents.
The classification as PNFEs for commercially active companies points to inadequate documentation or incorrect classification, which per se gives rise to particular caution.
Evidence of active ANFE are:
- Financial statements
- Trade certificate/trading license
- Extract from company register/commercial register, or
- Invoices and trade contracts
Please note that non-compliance with the above mentioned regulations can lead to non-execution of bank transfers after July 1, 2019, or even the closure of accounts beforehand.
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