03 May 2017, 15:16

How Cyprus “Laundering” Has Made Things Difficult for Entrepreneurs

Over a number of years, Cyprus has been a jurisdiction widely used for tax efficiency purposes not only by holdings, but also by small companies. Today, it is a common practice to use a prestigious European jurisdiction (i.e. Luxembourg, the Netherlands or the United Kingdom) as a parent company. However, this does not mean that there will be no low-tax and offshore jurisdictions in a company structure. In particular, we analysed structures of a number of famous agricultural holdings and it turned out that over 50% of them are still using Cypriot companies as a parent company.

Advantages, disadvantages and peculiarities of Cyprus have been widely discussed and analysed. However, recent trends oblige us to raise the issue of a small though attractive from a number of viewpoints island country one more time.

Under the pressure of European and global community, from time to time Cyprus introduces certain regulations relating to money laundering, terrorism financing and tax evasion. Furthermore, it became more expensive to maintain a Cypriot company. Therefore, we’d like to point out the complications in cooperation with Cypriot banks which have been lasting for about six months. The changes are quite notable. The days are gone when money could be easily transferred to any part of the world in one click or agreements could be vague and cover two pages. For instance, incoming and outgoing payments to/from a number of countries (i.e. the Baltic states) became subject to significant restrictions. Cypriot banks follow the policy providing for the above payments to be effected only if there exists a fully functional office and actual operations are conducted in the country from/to which the payment is made.

Moreover, upon the transfer of funds it is necessary to submit (apart from the agreement and the invoice) the fullest information possible on the substance of transactions and on the counterparty, which information should include not only the name and contact details of the company, but also the type of company’s operations. The company’s web-site is always an important detail. However, the owner does not always consider it appropriate to spend money on its development, while nowadays most of the bank employees share the “no web-site – no company” idea.

Due to the increase in the number of requirements imposed by Cypriot banks, compliance departments have been significantly expanded. Unfortunately, in this situation, quantity does not reflect quality. Our experience allows questioning the qualification of employees at such departments. In general, they rarely pay attention to detail and do not show necessary diligence while reviewing submitted information. For instance, when the bank indicated incorrectly the name of a company (e.g. LLP instead of LLC) while researching the information on it, it found out a fair amount of compromising information and immediately filed claims to the client. Naturally, the situation was clarified and settled, however, such incidents give an idea of what approach should be adopted towards one’s job – patience.

The quality of agreements has also substantially improved. It is advisable that they be specific and fundamental to reflect the nature of relationship between the parties and they should not overuse general phrases (e.g. the subject of the agreement is the provision of financial or legal services). At the moment, we witness a situation where a bank’s decision may vary depending on the circumstances when totally similar cases may result in granting different decisions by the bank as to the possibility to effect a payment. Let’s take a loan agreement, for example. The overall policy applied by Cypriot banks is that they refuse to transfer funds under loan agreements between non-related companies, save for the companies with one and the same beneficiary. Furthermore, practice shows that when a person decides to obtain or extend a loan, it should be ready to disclose the information on the beneficiary of the counterparty and submit the passport, trust declaration, directors certificate, shareholders certificate, etc. If we speak of the agreement itself, it must contain provisions on the amount of the interest rate, warranties, liabilities, settlement mechanics, governing law and purpose of funds. For example, if the funds are to be invested in real estate, the agreement must provide for the location and type of the real estate property. If the funds are used to acquire a participatory interest in the charter capital of a private company, the name, registration details and types of activity must be specified.

Also, one should note that if a Cypriot company conducts no operations for a while, and then suddenly it starts receiving huge amounts of money on its accounts, one should be ready that the bank may freeze the accounts. The activation of such accounts would most likely involve the conduction of quite a complicated banking audit, which would require clear explanations and information on a large range of issues as to the company, its beneficiary, types of activities, counterparties, etc. Once such a process is initiated, it is necessary to stay calm and cautious, since the information would need to be repeatedly adjusted upon request of bank employees. As an example, lets consider information on the types of activity. Previously, one needed to submit a clear and detailed list for the future transactions not to be a surprise for the bank. While today we may face the requirement to shorten and limit such a list. Also, upon change of the beneficiary the bank may sometimes require to conduct the due diligence similar to the one carried out while opening the account. In such event, apart from the information package regarding the new beneficiary and a company’s business plan, a personal meeting within the established timeframe is mandatory. In any case, during an audit one must cooperate with the bank in good faith, since the failure to observe instructions may lead to a warning stating that due to the non-compliance with the bank’s policy the company’s accounts will be closed.

Actually, one shouldn’t forget that though Cyprus is a European economic harbour, its legislation imposed a number of obligatory requirements which must be strictly observed. Let’s take the annual fee, for instance. It is quite small as compared to the amounts which are typically dealt with by a Cypriot company, however, the non-payment may lead to imposition of fines, the failure to pay which may, in its turn, result in liquidation by exclusion from the register. Besides, regulatory base of Cyprus provides for preparation of financial statements and their annual submission with registration authorities. Here, it is important to note that the failure to comply with this provision may result in criminal charges against directors. Therefore, one should not mess around with nominees and Cypriot laws, since at any moment the beneficiary may become a director or a shareholder.

It should be also pointed out that in 2016 the Central Bank of Cyprus introduced amendments to the Directive on the prevention of money laundering or terrorist financing. Subject to the amendments, offshore companies which are not obliged to prepare financial statements but have an account with a Cypriot bank must provide management reporting. The important thing is that it slightly differs from the financial reporting, while its preparation is quite expensive in Cyprus. As an alternative, one can contact Ukrainian auditors, whose services will cost less.

In order to take advantage of the tax system of Cyprus a person need to be subject to the provisions of the double tax treaty. This requires obtaining a certificate confirming that the company is a tax resident of Cyprus, which would not be so easy if, for instance, a general power of attorney has been issued to a person who is a resident of, say, Ukraine. Nevertheless, practice shows that the above certificate may be obtained, but there still exist some risks.

In conclusion, we would like to emphasise that the agent company must chosen very carefully, and the size and publicity of a company do not mean anything as can be proved by a criminal sentence that had shaken not only the whole Cyprus, but also the far-away countries. As a result, the deputy prosecutor general and one of the most famous and reputable Cypriot lawyers were punished due to the fact that they attempted seizure of multimillion assets of a Russian company “Rosinka”. They were found guilty in a whole number of crimes, including, in particular, bribery, corruption, conspiracy to commit fraud etc.

In addition, one should not forget that no company is immune from bankruptcy. Here it is necessary to take into account the fact that there are approximately 4,000 lawyers in Cyprus and only 300 of them are licensed official receivers. It is not so simple to obtain such a license, therefore, having at least one of such specialists would be an unconditional plus for the service company. Moreover, in order to ensure additional protection, the ability to represent the client in court and relevant experience are crucial. In particular, in our practice there was a case when the court judgement required our client to present evidence related to the disclosure of important information, however, our Cypriot representative succeeded in appealing the decision.

Therefore, the reality is as follows: the work became harder, and the rules became stricter. Cypriot banks now play a new role having become a kind of a regulator that dictates its own policy. However, it is evident that Cyprus is not interested in loosing its flexible position which is beneficial for investors of the jurisdiction. Lets at least take the fact that the procedure for obtaining citizenship has been simplified, which proves that nowadays Cyprus attracts not only those who want to take advantage of certain tax benefits, but also those looking for a new place of residence. Therefore, we can expect that the transformation process will end soon and the situation will stabilise.

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