Shell Company Classification Criteria

The main questions to ask are the follow:

  • Does the company have physical presence in country of incorporation?
  • Does the company have economic activity in the country of incorporation?
If one of the above is ‘YES’ the company is not a “shell” company. However, care must be taken on the question whether the ‘meaningful mind’ of the company is in the country of incorporation.

If both answers are ‘NO’ the company is a “shell” company unless it falls in one of the following exceptions that indicate economic activity:

I. The company/entity is established for the purpose of holding stock or shares or other equity instruments of another business entity or entities engaged in legitimate business with identifiable ultimate beneficial owner(s);

II. The company/entity is established for the purpose of holding intangible or other assets including real estate, ship, aircraft, portfolio of investments, debt and financial instruments;

III. The company/entity is established to facilitate currency trades and asset transfers, corporate mergers as well as carrying out asset management activities and trading of shares;

IV. The company/entity acts as a treasurer for companies recognised as a group or manages the activities of the group;

V. Any other case where convincing evidence can be provided that the company/entity is engaged in legitimate business, with identifiable ultimate beneficial owner(s).

Consequences of classification as shell company:

  • If the company is considered shell company and is registered in a jurisdiction where it is not required to submit audited financial statements to the authorities and does not voluntarily prepare audited financial statements then the banks should avoid business with such companies.
  • If the company is considered a “shell” company and has no tax residency or is tax resident in a jurisdiction that is included in the list issued by the EU for non-cooperative jurisdictions for tax purposes then the bank shall avoid business with such companies.

In all other cases for companies falling within the definition of “shell” company the bank may decide to maintain or engage in business with the company by applying a risk application fully substantiating and justifying their decision.

To review the Central Bank of Cyprus circular please click here.

 

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