Understanding Substance Requirements in Cyprus 2025: What Foreign-Owned Companies Must Know

As global tax authorities increase their scrutiny of cross-border structures, economic substance has become a critical requirement for any company operating internationally - especially those headquartered or incorporated in Cyprus.

For foreign-owned companies, understanding the substance requirements in Cyprus in 2025 is essential for maintaining tax residency, avoiding challenges from other jurisdictions, and ensuring access to double tax treaties and EU directives.

At LCK Financial Services, we help companies build the right level of operational, financial, and decision-making substance to remain compliant and confidently positioned in a fast-changing regulatory landscape.

What Are Substance Requirements?

Substance requirements ensure that a company operates genuinely and effectively within the jurisdiction it claims to be tax-resident. This means having real:

• People (management, decision-makers, employees)

• Premises (office space, infrastructure)

• Activities (core business functions taking place in Cyprus)

• Governance (board meetings, decisions, documentation)

In other words, Cyprus companies must demonstrate real economic presence, not just formal registration.

Why Substance Matters More in 2025

International tax reform has tightened expectations around substance. Key global developments include:

• BEPS (Base Erosion and Profit Shifting) standards

• OECD Pillar II minimum tax rules

• Enhanced information exchange between tax authorities

• Stricter banking and AML due diligence

• Growing pressure on low-substance structures used for treaty benefits

For foreign-owned companies operating in Cyprus, this means tax residency will increasingly depend on substance evidence, not merely incorporation.

Core Substance Requirements in Cyprus (2025)

1. Management and Control in Cyprus

To be considered Cyprus tax-resident, a company must show that strategic decisions are made in Cyprus. Evidence includes:

• Board meetings held in Cyprus

• Majority of directors being Cyprus-resident

• Directors actively participating in decision-making

• Minutes documenting real discussions and decisions

Passive or “signature-only” directorships no longer meet modern standards.

2. Presence of Qualified Personnel

Depending on the nature of the company, substance may require:

• A minimum number of employees in Cyprus

• Staff with skills relevant to the company’s actual activities

• Employment contracts, payroll records, and social insurance contributions

For holding, financing, and intellectual property structures, demonstrating functionally relevant staff is increasingly important.

3. Physical Office Space

A local registered address is not enough. Many foreign-owned companies will need:

• A dedicated office space

• Telephone/internet infrastructure

• Office presence sufficient for their operational activities

Virtual offices are generally considered insufficient for companies expecting treaty benefits.

4. Business Activities Conducted in Cyprus

Substance requires core income-generating activities to take place locally. Examples include:

• Contract negotiation

• Risk management

• Portfolio management

• Administrative and back-office functions

For financing entities, this also includes assessing credit risk and managing loans.

5. Financial Substance – Costs and Expenditures

Tax authorities expect local expenditures to match operational reality, including:

• Employee salaries

• Rental costs

• Professional services fees

• Operational expenses

A company with zero expenses is a red flag, signalling possible lack of substance.

6. Proper Documentation and Corporate Governance

Substance must be visible on paper, including:

• Realistic business plans

• Signed board minutes

• Resolutions and decision records

• Up-to-date statutory registers

• Compliance with AML, tax filings, and annual returns

Authorities assess both actual activities and documentary evidence.

Common Substance Challenges for Foreign-Owned Companies

Many companies underestimate their obligations. Frequent issues include:

❌ Directors who do not understand the business

❌ Board meetings held outside Cyprus

❌ No staff or insufficiently qualified staff

❌ Virtual offices instead of physical premises

❌ No local risk management or real operations

❌ Inconsistent or incomplete documentation

These gaps can lead to:

• Loss of Cyprus tax residency

• Denial of treaty benefits

• Banking challenges

• Investigations from foreign tax authorities

• Reputational risk

What Level of Substance Do You Really Need?

Not all companies require the same level of substance. Requirements depend on:

• Nature of activity (trading vs holding vs financing vs IP)

• Risk profile and income type

• Country of counterparties

• Claiming of treaty benefits

• International group ownership

A holding company may need lighter substance; a financing or IP company typically needs stronger operational presence.

At LCK, we assess substance requirements case-by-case, ensuring proportionality and compliance.

How Banking, AML, and Tax Authorities Review Substance

Banks and regulators routinely evaluate substance through:

• “Know Your Customer” (KYC) reviews

• Source-of-wealth and source-of-funds assessments

• Business purpose tests

• Ongoing monitoring

• Annual tax filings and reporting frameworks (CRS/FATCA)

A lack of substance can result in delayed onboarding, rejected applications, or account closures.

How LCK Helps Foreign-Owned Companies Build Strong Substance in Cyprus

At LCK Financial Services, we support foreign-owned companies in creating robust, appropriate substance frameworks that align with both Cyprus and international expectations.

Our services include:

✔ Substance assessment & gap analysis

We review governance, operations, tax residency, and compliance standards.

✔ Local director and management support

Professionals who understand the business and participate in real decision-making.

✔ Office, staff, and operational setup

Guidance on hiring, payroll, and selecting suitable premises.

✔ Governance and documentation systems

Ensuring board minutes, resolutions, and decision-making evidence meet international standards.

✔ Ongoing compliance support

Including AML procedures, tax filings, CRS/FATCA, and regulatory updates.

✔ Alignment with global frameworks (OECD, EU, Pillar II)

Ensuring your structure remains sustainable and defensible long term.

With LCK, your company can operate confidently, maintain Cyprus tax residency, and demonstrate substance that stands up to regulatory scrutiny.

Final Thoughts

Substance is no longer a formality - it’s a strategic requirement shaping how foreign-owned companies operate in Cyprus and the EU. With increasing international transparency and higher compliance expectations, companies must be able to demonstrate real presence, real activity, and real decision-making.

At LCK Financial Services, we help clients navigate substance requirements efficiently, ethically, and with a long-term view - ensuring their Cyprus operations remain compliant, credible, and aligned with global standards.