Bank of Cyprus Overseas Companies' Account Closures: What to Do?

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Bank of Cyprus Overseas Companies' Account Closures: What to Do?

On June 14th 2018, the Central Bank of Cyprus sent a letter to all financial institutions in which he urged Cypriot banks to close down bank accounts for sham companies. This letter was another step aimed at “global deoffshorisation”.

I would like to note that around that time, Latvian banks received a similar letter from the Latvian banking regulator. Most likely these actions were all carefully coordinated by the ECB. In light of the facts, there is no reason to assume that these actions are stacked against Russia only: it just turned out that Cyprus is very popular among Russians; and accordingly they will be affected by the continuing crackdown in Europe mostly. In terms of Cyprus, local banks hold a significant number of tax-free haven companies’ bank accounts. For such business structures, the consequences of this letter will be very sad.

Fortunately, at the moment, not all countries have such strict requirements for the opening and maintenance of bank accounts. For example, Singapore does not necessarily require an office in Singapore and staff inside it, although this virtually guarantees the opening of a bank account in Singapore.

So, I suggest to analyse the Central Bank of Cyprus letter first, and then consider possible steps to resolve the current situation. The main message of the above mentioned letter is to stop bank accounts opening for the so-called dummy companies (also known as Shell or Holding Companies).

In its letter, the Central Bank of Cyprus gives an explanation as to what is considered to be an offshore dummy company. The Cyprus Central Bank lists four indicators by which it is possible to identify an offshore dummy company. It should be noted that the presence of even one of the four specified characteristics entails recognition of the offshore company as a sham or fraudulent one and accordingly leads to account closures in Cyprus.

Before proceeding with the dummy company characteristics listing, it should be noted that in the original letter in English, the subjunctive mood was used. Therefore, arguably the Central Bank of Cyprus is recommending, rather than ordering to stop servicing offshore dummy companies and refusing to open future accounts for new overseas companies.

The parameters for classifying an offshore company as a dummy one are as follows:

  1. Absence of a physical office in the country of offshore company incorporation and the presence of only a registered legal address.
  2. Absence of a commercial and / or economic component in the activities of the offshore company.
  3. Company registration in a jurisdiction where mandatory annual audit is not required. It also should be noted that bookkeeping is mandatory for almost all offshore jurisdictions, although to a greater extent this requirement is ignored in “tax-free harbours”.
  4. Company registration in one of the “tax-free harbours”, such as: BVI, Seychelles, Belize, etc.

At the moment the main factor for identifining the offshore company as a dummy one is the absence of its own office. At the same time, one employee bored in the Cyprus office may not be taken into account if there is no real business conducted through the Cyprus office.

How the activity of the foreign companies’ offices that have bank accounts in Cyprus will be checked is not clear yet. It’s easier for us as our Singapore-based company, Eltoma (Singapore) Pte Ltd., has an account in euros in a Cyprus bank and a real office with employees in Singapore; all these factors greatly facilitates the settlements with customers in the Eurozone.

Moreover, the Central Bank of Cyprus offers Cypriot banks to assess the servicing of offshore companies with passive income (dividends, interest and royalties) once again, but do not rush to close bank accounts for such offshore companies. In particular, the Central Bank of Cyprus recommends Cypriot banks to take into account certain types of offshore companies that fall under the following definition in accordance with Article 58A of the Cyprus Anti-Money Laundering Act:

  1. The offshore company is a holding company which shareholders own shares of the other companies engaged in commercial activities with a transparent ownership structure.
  2. The offshore company has intellectual property, real estate or ships with a transparent structure.
  3. The offshore company acts as a treasury within the group of companies taking into account that in the structure of the companies there is complete clarity and reliable information about the beneficiaries of the holding group.

We believe that as Cyprus has its ”hallmark” the easing of some requirements could be expected:

  1. Regarding the holding companies there is tax exemption on transactions with securities, almost no taxes on incoming and outgoing dividends, etc.
  2. Regarding the companies that function as treasuries all the attempts has been made to remain Cyprus as a significant regional financial centre.
  3. Regarding the investment companies that own assets in various jurisdictions there is capital gains tax exemption, etc.

And now the Central Bank of Cyprus asks Cypriot banks about the following:

  1. To conduct an analysis of existing customers and decide on wether to maintain business relations with them or close bank accounts of those offshore companies that did not pass the test for not being distinguished as dummy companies.
  2. To decide whether to close or continue provide such customers with the bank accounts services and then to write the arguments in the client files.
  3. Until July 31st, 2018 to report to the Central Bank of Cyprus on the decision made and back it up with a report on the work done and on reasons why the decision was made.

Possible consequences & ways out of the situation

Now let’s move on to how this could affect everyone:

  1. There is a high probability of bank accounts closing for companies located in so-called tax-free haven locations. Having my own office in Cyprus since 2006, as well as having knowledge of the Cyprus corporate services market, I can say that for some service providers, the number of companies from tax-free harbours in the client portfolio is about 60%-70%. This means that after the closure of bank accounts for such companies, the service providers may lose a significant share of profits.
  2. Most likely, “looking through” the EU countries in an attempt to open a bank account for the offshore companies from the tax heaven won’t do any good especially if we consider that both Latvian (and we are sure that banks of other jurisdictions in the EU) have already received the same letters from their banking regulators.
  3. Many companies will have to look for a bank to open an account and transfer all the money from the closed Cypriot accounts as soon as possible. At the same time, the opening of a new account takes about 2 months and the bank that closes the account gives the company only a month. Someone may say that you can get a check, which should be provided to another bank but in such case you may experience losses as well; and it is almost impossible to cash this check. Alternatively, you can buy a ready-made company with an open bank account. In this case you should watch out for it is worth worrying if the service provider controls the bank account. I wrote about this not long ago and you can read about it here: Acquisition of an offshore shelf company with bank account.

Ways out of the situation that have arisen:

  1. To change the jurisdiction of an offshore company from a tax-free harbour to Cyprus. The procedure is simple, but it takes time and requires costs. We sometimes do this for our customers. More detailed information about this you can find on our website: changing of of the offshore company jurisdiction to Cyprus;
  2. To open an office in Cyprus to indicate the necessary presence. The only thing is to understand that the cost of offices in Cyprus, as well as rented apartments, grows every day. The second point to do is to hire a local or foreign employees. To hire a foreigner in Cyprus you need to register a Cypriot company in the migration department. To do this the company must have an authorized capital of between 171,000 euros. More details on the process of obtaining a work permit in Cyprus: the procedure for obtaining a work permit in Cyprus;
  3. To register a company and open a bank account in a low-tax jurisdiction, which does not yet require establishment of a real office and hiring of employees in the country of incorporation, for example, such as Singapore – a company and a bank account in Singapore;
  4. To consider options for opening accounts in more exotic jurisdictions with potential risk of taking financial hits. Today service providers offer even Kazakhstan as a location destination. We are not risk averse and do not offer such options to our clients.

How Eltoma Corporate Services can help you:

  1. To change the jurisdiction of an offshore company from a tax-free harbour to Cyprus.
  2. To register a company in Cyprus and open an account in Cyprus.
  3. To make a work permit in Cyprus for foreign employees or find personnel for an office in Cyprus or in Eastern Europe: recruitment of personnel and work in Cyprus in Russian or English.
  4. Accounting, taxes and audit in Cyprus.
  5. To find an office and accommodation for employees in Cyprus or take advantage of the co-working office in Cyprus.
  6. IT support at offices in Cyprus.
  7. To obtain CySEC licenses – CIF, AIF, etc.

By the way, Eltoma Corporate Services also has offices in the UK, Hong Kong and Singapore.

For further information you may visit our websites:

  1. Free webinars from Eltoma Corporate Services.
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