Why is opening a bank account so difficult now?

In the good old days it was easy to open a bank account – select your bank, turn up at a branch with your passport, proof of address and suitable reference letter, and an account would have been opened for you the same day or next. Unfortunately, all that is now history. Banks, like reformed sinners, are determined to learn from their past mistakes and now choose their clients carefully. They will even shut down accounts if extensive due diligence procedures are not followed. Compliance, once a back-office function, is now firmly in charge of commercial banking policy and practice.

The global financial crisis of 2007 – 2008 has been widely blamed on the banks and their willingness to give credit and cheap loans to people who could not, once interest rates increased, be able to service their debts and repay their loans. At the same time, the role of major banks in money laundering activities and the financing of terrorism has come to prominence, with leading institutions such as HSBC, BNP Paribas and Standard Chartered just a few of the banks who have been convicted of such crimes, and had sanctions running into billions of dollars levied on them for their misdemeanours.

As a result banks have become highly risk averse and unwilling to lend money to clients without intense scrutiny beforehand as to the purpose and terms of the loan, and without strict repayment terms being applied. Existing customer accounts are closely monitored and, in some cases, can be shut down without adequate warning, or explanation. And new account procedures have been tightened to the extent that KYC (Know Your Client) policies have become so stringent that they represent a serious barrier to entry for some banking customers.

There is a strong argument to suggest that banks have now forsaken one of their fundamental purposes – to be a facilitator of global trade and commerce – in favour of a role more akin to that of an international policeman, regarding all clients with inherent suspicion, ready to penalise them at the first sign of impropriety.

Regrettable as this may be, however, this is now the new economic reality and needs to be accepted, if not embraced.

This is not to say that it is impossible to open a bank account; just be prepared to answer a lot of questions and provide substantially more documentation than once would have been the case.

For an individual customer, as a bare minimum, a bank will require a copy of your ID or passport, a recent utility bill in your name and at your address (not less than 3 months’ old), and a reference letter from a suitably qualified person – such as accountant or lawyer. They may also require you to disclose information about your income, employment and personal circumstances – age, marital status, dependents etc. Be prepared to give them all they ask.

In case of a corporate account, all the company registration documents – Certificate of Incorporation, Memorandum & Articles of Association, List of Directors and Secretary, and proof of Registered Office Address – will be required. If the company is part of a structure, then you will need to present the equivalent documents for all the companies in that structure.

From the bank’s viewpoint, one of their paramount objectives is to be able to identify and verify the Ultimate Beneficial Owner (UBO) behind any company or group. It is vital that this is disclosed, along with all their personal information (passport/ID, address, profession etc.). If, for any reason, you do not want to disclose the UBO, then you can forget any hopes of opening a bank account at all.

Providing the requisite documentation is only one part of the account opening process, however. The bank will need to have a very clear idea of the nature of your business and with whom you are likely to trade – customers and suppliers.

For example, if your business involves gambling, casinos, alcohol, tobacco or the arms industries, you may find it hard to get any recognised commercial bank to open an account for you. Equally, if your activities are regulated and you do not hold an appropriate licence (or your licence has been issued by a non-European jurisdiction or body), you are likely to have difficulty finding a banking partner.

The same goes for the geographical nature of your trading parties. There are some countries which are on the proscribed list for most banks and will automatically disqualify you from holding a bank account with them. These include any country which is subject to international sanctions. or associated with terrorism, civil strife or perceived criminal activity. It is probably best to check with the bank first to see if any of your trading partners fall into one of these categories; if so, consider replacing them.

For any financing activity, the bank will need to know the source of funds and the nature of the company’s financing arrangements. Equally, loans between unrelated parties should be avoided. A bank would always expect a loan transaction to be made either at arm’s length on commercial terms, or to be made amongst parties trading within the same group or under the same beneficial owner. Money lent to friends, associates or family members will always arouse suspicion.

For substantive loans, the bank may well ask to review the loan agreements, including purpose, repayment terms, interest rate charged and security.

Equally, for major transactions, the bank may ask to see contracts, invoices or bills of lading to verify their validity. In the case of services, make sure these are fully described on any invoice, and avoid generic terms such as consulting, advertising or referral fees.

Promissory notes should be avoided. These have been extensively used for money laundering activities in the past, and, therefore, have been classified as high risk investments by many Central banks.

Above all, be ready to advise your bank of any major change in your company’s activities – if, for example, you begin trading with a new partner, expand into a new territory or open another line of business. Failure to do so could lead them to place your account (s) under review, and lead to a lot more scrutiny of your activities.

For all the money that they spend on expensive advertising, banks are a lot more difficult to do business with now, than they were in the past. Undoubtedly they are subject to much greater regulatory pressures now – something that, many would say, they brought on themselves. Their response has been to emphasise compliance at the expense of the commercial imperative.

This is the new reality – the tail is wagging the dog. So, if you want to open a bank account with a commercial bank – unless you have and want to main high credit balances you can forget the private banks – get all your documentation in order, make sure there is nothing in your activities that will sound any alarm bells, and be prepared to answer all the questions that will be thrown at you.


Forming a Private Limited Company in Cyprus

The most popular type of company in Cyprus is a private company limited by shares (Ltd) – also known as a private limited company. There are a number of relatively simple steps which must be followed when incorporating such a company, and which, depending on workload at the Registrar, can take as little as 4 to 6 weeks to complete from start to finish.

Name Approval

The first step is to get the proposed name approved by the Registrar of Companies. When proposing a name, it is important to make sure that the name is unique, that it is not similar to any existing name, trademark or brand and that, if initials are used, then the definitions of those initials can be explained to the Registrar. It is recommended that you check with the Registrar’s website (http://www.mcit.gov.cy/mcit/drcor/drcor.nsf/index_en/index_en?opendocument) first to check if the name you want to use is potentially available.

Memorandum & Articles of Association (M&A)

Every company must have both a Memorandum and Articles of Association. The Memorandum outlines the objective of the company; the Articles its internal regulations and procedures. The M&A is signed by the subscribers being the first shareholders of the company.

The M&A has to be drafted in Greek – although an English version is often recommended as well for international companies – and must be signed by a qualified company lawyer, and a copy deposited with the Registrar when the company registration is filed. Although an individual company have its own M&A requirements, time and money can be saved with the use of a generic template. AJD Consultants can assist both with this and with the provision of an appropriately qualified lawyer.

Share Capital

There is no minimum share capital requirement for the establishment of a private limited company in Cyprus, although €1,000 is frequently used (which does not need to be paid-up). Although the share capital can be in any currency, the Euro (the currency used in Cyprus) is employed by the majority of companies.


Under Cypriot law, the Directors have responsibility for the operations and day-to-day management of a Company. By law, the minimum number of directors is one – this does not need to be an individual, however; corporate directors are allowed.

Although a director can be of any nationality, their tax residency can be important when determining the status of the company. To be regarded as a Cypriot resident company, eligible for the 12.5% corporate tax rate, and protection, by double tax treaty and other relevant legal provisions, from taxation in another jurisdiction (potentially with higher tax rates), at least one of the directors needs to be a Cypriot tax resident (not national). AJD Consultants can help with the provision of a suitably qualified Cypriot resident director if required.

Registered Office

A company also needs a registered office address in order to receive legal notices and to serve as the company’s home. Whilst this may not be in the Republic, choosing an office outside Cyprus will make the company non-resident, and thus it will not avail of the benefits of a resident private limited company.

Having a registered office address does not mean renting an office space, however. It simply requires an address in Cyprus where mail can be sent, and, if need be, phone calls can be directed. Again, AJD Consultants can help with the provision of a suitable registered office address is required.

Incorporating a private limited company in Cyprus is relatively easy, and there are a number of favourable benefits to doing so, either as a stand-alone entity or as part of a broader group structure. Provided that the steps outlined are followed, a company can be incorporated in a matter of weeks and can begin to start trading. For further information or help with incorporating your new Cyprus company, please contact us directly.

Controlled Foreign Company (CFC) Rules

A controlled foreign company is a company which is registered and conducts business in a different country or jurisdiction than that of the controlling owner. Tax authorities around the world generally have in place rules to prevent the use of such structures as a tax avoidance strategy, whereby profits are diverted from a higher to a lower tax jurisdiction, often with the use of an offshore tax haven.

Legislation preventing the use of such overseas tax havens as a means of reduce corporate and income tax has been in place in many countries for a number of years, including the US, the UK and most other European countries. Basically these rules operate on the same principle – if profits are diverted to a CFC, then profits are apportioned and charged as if they were earned in the country in which the owner is tax resident, and charged at the appropriate tax rates.

There are a number of tests used to determine if a non-resident company is controlled by a person or persons from a different tax jurisdiction. These again differ from country to country, but, in the UK, for example, control is determined by reference to:

  • Legal control;
  • Economic control;
  • A joint venture test; and
  • Accounting standards.

CFC rules apply not only to large corporations but also to medium and small companies as well, all of whom may find themselves under scrutiny by local and foreign tax authorities.

Cyprus does not have any CFC rules at present, but that does not mean the impact of such legislation can be ignored if a Cypriot company is part of a wider international group. Of course, Cyprus is not a tax haven but, with its low corporate tax rate, there may need to be prove that any operation established in the country has “substance”, and has not merely been created as a tax avoidance mechanism.

in essence, if a foreign structure appears to lack substance, tax authorities may challenge its validity, and seek to tax profits in higher tax rate jurisdictions. Substance is not precisely defined in any Double Tax Treaty or other legislation, and can be open to differing interpretations. Nevertheless, substance is something that needs to be defined by reference to practice and concrete examples.

Typically, the definition of economic substance is if a transaction or entity based in a low tax jurisdiction has an economic purpose, and there is an infrastructure to support it, such infrastructure being real and not an artifice created for the purpose of reducing tax. This can be achieved by various means.

For example, ensuring that all entities, including holding companies, have a real physical presence in Cyprus, with a local office and staff employed, administering the day-to-day management of the company. This means employing local staff, for example, and paying social security and payroll tax, as applicable.

Such demonstrations of economic substance may include the following:

  • The company with its own office (rented or owned) and physical address in Cyprus;
  • There are qualified directors and managers who are located in Cyprus and other relevant Cypriot employees;
  • The company maintains local bank accounts with local authorised signatories;
  • The accounting records are maintained in Cyprus with the accounts’ work performed by local accountants;
  • Regular Board meetings are held in the country and minuted;
  • There is a website, email address and telephone number.

Whilst Cyprus may have no CFC rules itself at present, this does not mean the issue can be ignored. Local CFC rules imposed by another country may require a Cypriot company to demonstrate for foreign tax purposes that it has real economic substance. In such cases, the obligation may be on the Cypriot company to demonstrate that it is performing genuine business in Cyprus.

This can raise genuine concerns about the increased cost of establishing and maintaining a Cypriot company because of the need to maintain a physical office etc. This does not necessarily need to be the case. AJD Consultants, for example, can provide a registered office address, resident director and company secretary. and offer other advice to ensure that the test of economic substance can be passed. In addition, we can provide advice as to means of structuring the company so that tax can legitimately be minimised.

Please contact us directly if you required further information as to how we can help you comply with CFC rules.


The new rules on transfer pricing

One of the key action areas from the OECD BEPS (Base Erosion and Profit Shifting) initiative is the introduction of new rules on transfer pricing. Put simply, transfer pricing relates to how companies, which form part of the same group, pay each other for goods, services, intangible assets and similar transactions.

Traditionally, companies have used transfer pricing as a means of reducing their overall tax burden, and look to move profits from higher to lower tax jurisdictions, structuring their operations to ensure that the tax they pay is minimised. There has been nothing inherently illegal in this – it was part of business strategy to take advantage of differing corporate tax rates and treaty provisions to reduce the overall tax paid by a group.

However, all that is now changing, and the practice of multinationals allocating income to lower tax countries and expenses to higher tax jurisdictions is now coming under increased international scrutiny and censure.

The OECD, through BEPS, which has not only been approved and endorsed by the G20 Group of Finance Ministers, but also been supported by laws and recommendations adopted by many developed countries and the EU, wants companies to align where they pay taxes with where they have economic substance i.e. where they have operations and employees.

This means an end to the practice of allocating too much value to low-tax countries, where a group has few (or even no employees), and too little to those higher tax regimes where they many employ most of their people and sell the bulk of their products and services.

For multi-nationals, this marks a substantial change.

There will be much greater transparency required regarding the transfer pricing practices of a business, and a correspondingly greater risk of challenge from local tax authorities where the profitability of a jurisdiction is not sufficiently aligned with its economic substance. Greater focus will be placed on the attribution of capital and intangibles, and the alignment of profit with the location of key decision-makers and company management.

Under the new framework, a heavy emphasis will be placed on documentation, with a requirement for companies to provide a detailed country-by-country overview, and specific transfer pricing information for each country in which they operate.

This documentation will need to provide as much transparency as possible to tax authorities regarding a company’s activities, and how profits are aligned with tangible economic substance, with a much greater emphasis placed on tangible physical assets and employees.

The additional reporting and compliance burden for companies is going to be significant, and there are also concerns that what has, hitherto, been confidential commercially sensitive information will now be disclosed in a wider public domain. Nevertheless, these changes are coming and companies need to prepare for them.

BEPS is also going to force a radical change as to how IP (intellectual Property) is treated. Currently, a company may choose to have its IP located in a low (or favourable) tax jurisdiction with few employees, such as Switzerland, Luxembourg, or the Caribbean. However, such “brass-plate” operations will no longer be allowed under the new rules. Companies will need to have employees, and key decision-makers, in jurisdictions where IP is based.

This is a significant departure for companies who may need to consider where their IP is located.

One option would be to spread it around places where they already have senior people based, but this could include high tax countries.

Another alternative is to move people to low tax jurisdictions – such as Cyprus – where there IP may be already based, or to structure operations so that staff and IP are shifted to such a jurisdiction.

The new transfer pricing rules will dictate a major shift in the way that multinationals structure their operations, and will place a much greater emphasis on the alignment of economic activity and value creation with the payment of tax. Not only will the involve a reorganisation of operations in some cases but a considerable increase in reporting and the cost of compliance.

The corporate tax landscape is changing, and with the increased requirements for transparency and the need to justify economic decisions, groups have to accept that what, why, and how they do things will become a matter of public scrutiny and debate.