In short
- From 2026 a company incorporated in Cyprus is tax resident there, unless a treaty says otherwise.
- Form T.D.98 asks 13 yes-or-no questions on the board, the records and the tax returns.
- A bank must refuse a shell company with no audited accounts or no tax residence.
- No law sets a minimum of staff or office space: the test is what the company does.
In this guide
What economic substance means for a Cyprus company
Economic substance is the evidence that a company does in Cyprus what it says it does there. Its directors decide there, its records are there and its income comes from a real activity. No Cyprus statute carries the name. The requirement comes from four tests, each applied by a different body.
| Test | Who applies it | What it asks |
|---|---|---|
| Tax residence, Article 2 of the Income Tax Law | The Tax Department | Is the company incorporated in Cyprus, or controlled and managed there |
| Tax residency certificate, form T.D.98 | The district tax office | Thirteen questions on the board, the records and the tax returns |
| General anti-abuse rule, Article 33A | The Tax Department | Was the arrangement made for valid commercial reasons that reflect economic reality |
| Shell company test, Central Bank directive of 2025 | Every bank and payment institution | Does the company have a physical presence and a business activity |
The tax side of the answer, from the residence test to the yearly returns, is the work of our tax services in Cyprus. This guide sets out each test and the evidence that meets it.
Tax residence: incorporation counts from 2026, and management and control still matters
A company is resident in Cyprus in two cases. Either its control and management are exercised in Cyprus, or, from 1 January 2026, it was incorporated in Cyprus under the Companies Law, unless a double tax treaty provides otherwise. A company that moved its registered office or seat to Cyprus counts as incorporated there. A resident company pays 15% corporate tax on its income from Cyprus and from abroad.
The second case made a Cyprus registration enough for Cyprus. It did not settle what other countries think. Where the directors take the decisions in another country, that country can treat the company as its own resident. The words of the law, unless a treaty provides otherwise, hand the question to the treaty between the two. Management and control in Cyprus is still the fact to prove. For a company formed abroad it is the only way to Cyprus residence.
The guide to Cyprus tax residency covers the rule and the certificate for persons and for companies.
The 13 questions of form T.D.98
A company that claims a treaty rate abroad shows a tax residency certificate. The Tax Department issues it for a country that has a double tax agreement with Cyprus, for a fee of €80, on form T.D.98 of 2015. The form is a questionnaire answered yes or no. It is the nearest thing Cyprus has to an official substance checklist.
| Part of the form | What the Tax Department asks |
|---|---|
| Incorporation and residence | Is the company incorporated in Cyprus. Is it tax resident in Cyprus only |
| Board of directors | Do most board meetings take place in Cyprus. Does the board exercise control and take the key management and commercial decisions. Are the minutes prepared and kept in Cyprus. Is the majority of the board tax resident in Cyprus |
| Shareholders | Are the shareholders' meetings held in Cyprus |
| Powers of attorney | Has the company issued a general power of attorney, and on what terms |
| Books and records | Are the seal and all accounting books and records kept in Cyprus. Do representatives in Cyprus carry out the company's filing and reporting. Are agreements on its business or assets executed or signed in Cyprus |
| Tax returns and payments | Have all tax returns been filed. Has all self-assessed tax been paid |
A director signs the form and declares that the management and control of the company are exercised in Cyprus. The form itself warns that a false statement is a criminal offence under the Assessment and Collection of Taxes Law. The company attaches its certificate of incorporation and the latest certificate of directors, and sends the form to the district office that holds its tax file.
The five elements of substance, and the evidence for each
The same five elements answer the tax office and the bank. How much of each a company needs follows what it does.
| Element | What it means | Evidence |
|---|---|---|
| Office | Premises of its own or rented, fit for the activity, beyond a mailing address | Lease or title deed, utility bills |
| Staff | Employees registered with the Social Insurance Services, in number and roles that match the business | Contracts, payslips, social insurance returns |
| Management | Directors resident in Cyprus who know the business, and board meetings held there | Minutes, resolutions, travel records |
| Spending | Rent, salaries and professional fees in Cyprus in line with the size of the business | Invoices, bank statements |
| Records | Accounting books and corporate documents kept in Cyprus and kept up to date | The books, the registers, the audited accounts |
What shows that the activity is real
- The directors prepare for the board meetings, attend them in Cyprus and take part in the decisions.
- The company runs its banking and its finances from accounts in Cyprus.
- It meets clients, suppliers and partners at its Cyprus office where it can.
- It uses accountants, lawyers and other providers in Cyprus.
- It has a Cyprus telephone number, an email address and, where it trades, a website that shows where it operates.
Staff are the costliest element. An administrator on €1,500 gross a month costs the company €1,731 with the employer's contributions of 15.4%. The guide on how payroll works in Cyprus gives the rates and the registration as an employer.
We do this for you Cyprus corporate tax services from €290 a month with accounting
What a bank calls a shell company
A bank is usually the first to test substance, when the account is opened. The Central Bank of Cyprus set the test in its directive of 2025 on the prevention of money laundering. A shell company is one with no physical presence or activity in its country of incorporation beyond a postal address. So is a company with no established business activity and little or no economic value of its own.
Physical presence means a place of business, owned or rented. The absence of real management can itself count as a lack of presence, and a person who only provides the services of a representative or a company secretary is not presence.
Business activity is recognised where the company holds shares of businesses with identifiable owners, holds assets such as property, ships or an investment portfolio, or acts as the treasury of a group. A company that sells, produces content or provides professional services remotely can be taken out of the definition, where the bank verifies the activity.
To verify it, the directive tells the bank to collect six kinds of evidence.
- The company's financial statements
- Active bank accounts that show commercial transactions
- Tax returns
- A business website, an online shop or other points of sale
- Details of customers and business partners
- Contracts and the documents of purchases and sales
One case leaves the bank no choice. It must refuse or end the relationship with a shell company that also has no audited financial statements. The same holds for one that is tax resident in a jurisdiction on the EU list of non-cooperative jurisdictions, or nowhere.
In every other case the bank decides by risk and records its reasons. The guide to the Cyprus company bank account lists what goes into the application.
How much substance a holding, a trading or an IP company needs
No Cyprus or EU rule fixes a minimum number of employees or of square metres. The EU's proposal for such tests, the Unshell directive of 2021, was set aside: in June 2025 the Council reported that work on it would not continue. What a company needs follows its income.
| Company | Where the weight lies |
|---|---|
| Holding company | The board, the records and the audited accounts. Holding shares of real businesses with identifiable owners is a recognised activity in itself |
| Trading or service company | Staff, premises and spending in Cyprus that match the turnover, and contracts signed there |
| Company with intellectual property | Development paid for by the company itself: the IP Box deducts 80% of the qualifying profit in proportion to that spending |
| Group financing company | Loans priced as between independent parties. A transfer pricing file is due once financing passes €10 million a year |
The guide to the Cyprus holding company covers the first case, and the guide to the Cyprus IP Box the third.
Keeping substance: what to review every year
Substance is not shown once. The Tax Department, a bank at its yearly review, or a tax authority abroad can ask for the proof at any time. Four checks a year keep the answers on form T.D.98 true.
- Board: the meetings and the decisions are still centred in Cyprus, and each meeting has its minutes.
- People: the contracts and the payroll records of staff and directors are current and correct.
- Spending: what the company spends in Cyprus still matches the level and the nature of its activity.
- Records: the corporate documents, the accounts and the correspondence are in order and at hand in the Cyprus office.
The yearly filings carry much of the proof: the audited financial statements, the corporate tax return, the annual return to the Registrar and the confirmation of the beneficial owners. We keep the books in Cyprus and prepare these filings as part of accounting in Cyprus, from €290 a month before VAT.
What happens when substance is missing
- The treaty rate is at risk. It is claimed abroad with the certificate, and the certificate rests on the director's signed answers.
- Two countries claim the company. Where the decisions are taken abroad, that country can tax the company as its resident, and the treaty then allots the residence.
- The arrangement is ignored. Under Article 33A the Tax Department computes the tax as if an arrangement that is not genuine did not exist.
- The bank says no. A company that fits the Central Bank's definition is refused, or keeps its account only at the bank's discretion.
- A false declaration. Signing form T.D.98 with untrue answers is a criminal offence.
Cyprus law sets no fixed fine for a lack of substance. The cost is tax in another country, a lost account and a director's liability for what was signed.
Thin substance is repaired in the order of the questionnaire: the board first, then the records, then the office and the staff. As part of tax services in Cyprus we compute the tax, file the returns and tell you before a decision how Cyprus will tax it. A new structure starts with the guide on how to register a company in Cyprus.
