Cypriot company without business substance are watched by foreign tax authorities
A recent judgment of the Russian Court has extended the concept of beneficial owner, in addition to dividends, interest and royalties, also the capital gains produced by the sale of company shares.
The story arised with a invastigation carried out by the Authority Tax Russian concerning a sale of shares between a Russian company and Cyprus companies, in its turn, this company has resold, after a few months, the shares to another Russian company and distributed dividends to the head office situated in the BVI. It is noted that the Cyprus company, making use of the convention to prevent double taxation between Cyprus and Russia, had not deposited any tax on capital gains.
The above-mentioned transactions made the Russian tax authorities suspicious that, after a series of findings, It concluded that the Cyprus company was not anything more than a "shell",.
Therefore, it ‘s advisable to check the beneficial owner of the capital gain for the application or disapplication of conventional benefits.
The decision of the Russian Court was dictated by the following circumstances:
- The Cyprus company hadn’t profits from commercial operations earlier and had not especially of their funds to buy shares;
- The Cyprus company hadn’t business substance;
- Cyprus's companies didn’t pay the taxes in Cyprus and had neither a bank account nor its offices;
- The Cyprus company had been liquidated immediately after the distribution of dividends without having other operations or transactions.
So, otherwise from the past , the concept of the beneficial owner, now, incudes to cases of insider trading, focusing on the real substance of the seller if the latter appears as the Cypriot company a "Shell ".
The result is that a corporate structures without a appropriate business structure, aren’t recognized by the tax authorities and are subject to tax recovery and additional costs.
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