Roman Bielic, Co-Founder and Risk Manager @IC Realty Ltd
6th March 2025
Cyprus has reached a critical point in its economic evolution. For years, the island has carried the uncomfortable label of being a conduit for Russian wealth — a jurisdiction better known for facilitating paper companies than for attracting real business investment. This reputation has become more than a nuisance. It actively harms the standing of Cyprus in European political circles, in banking compliance discussions, and in the wider global investment community.
The ghost companies — corporate shells incorporated in Cyprus but controlled remotely with no local presence — have played a central role in shaping this reputation. Although these structures were once associated with international tax planning in general, the reality is that many of these companies were (and still are) controlled by Russians, including sanctioned ones, or on behalf of such people. In practice, Cyprus became home to a fleet of “Flying Russians” ghost companies — companies that In practice, Cyprus has become a haven for a fleet of “Flying Russians” ghost companies — entities that exist solely on paper, while the actual business decisions, operations, and management occur elsewhere. Although it is not only Russians who utilize Cyprus for such purposes, they undoubtedly represent the largest share.
Now, however, Cyprus claims its readiness to break with this legacy — not through grand public statements but through the careful use of tax tools already being introduced as part of the ongoing tax reform.
The first tool is the introduction of a new personal tax residency test inspired by France’s example. This test would allow Cyprus to claim tax residency over individuals whose “centre of business interests” is located in Cyprus, even if they only spend limited time on the island. In other words, if your wealth and corporate structures are anchored in Cyprus, Cyprus can claim you as a tax resident — regardless of where you physically live.
This residency test could serve as the missing link that allows Cyprus to reach beyond corporate structures and tax the ultimate owners directly. Once an individual is classified as a Cyprus tax resident under this rule, a much broader set of tax powers becomes available. This is where the substance test shows its power.
Alongside this residency shift, Cyprus is also preparing to tighten its corporate substance rules, most probably showing its willingness to align with ATAD3, the EU’s latest directive designed to eliminate so-called “shell entities”, which is still struggling to be approved by all EU members. Under these rules, companies without genuine economic presence — real offices, staff, and local governance — could lose access to tax treaty benefits and domestic exemptions.
But Cyprus might go one step further. By combining the new residency test with the substance test, the authorities could adopt a look-through approach:
• If the company fails the substance test, Cyprus could disregard the company entirely for tax purposes.
• Instead, its profits would flow directly onto the personal tax return of its ultimate owner, who — thanks to the centre of business interests rule — would now be fully taxable in Cyprus.
This combination — residency capture and corporate look-through taxation — would effectively make it impossible to hide behind a Cyprus company. For structures that serve only to hold assets, Cyprus would cease to recognise the company as a separate taxpayer. Instead, the owner would be taxed personally at Cyprus’ progressive personal income tax rates of up to 35% .
This is not a threat for legitimate businesses with a real presence in Cyprus. But for the asset-holding shells that haunt Cyprus’ corporate registry, it could spell the end. The cost of keeping such companies alive would rise dramatically, and with that, the economic rationale for their existence evaporates.
The case for this shift is not only reputational. Yes, it is damaging for Cyprus to feature in every money laundering blacklist discussion and to carry the burden of historical suspicion. But even more importantly, these shell companies do nothing for the real economy. They do not create jobs. They do not rent office space. They do not pay meaningful taxes. In fact, their existence crowds out the development of a genuine, substance-driven investment ecosystem.
By sinking this fleet of ghost companies, Cyprus can make room for a better class of investors — businesses that see Cyprus not just as a tax location but as an actual operational base. With green transition incentives, tech investment deductions, and tax relief for reskilling, Cyprus has the chance to become a hub for forward-looking companies rather than a parking spot for anonymous capital.
The question for Cyprus is simple:
• Does the island want to remain Europe’s cheapest mailbox?
• Or does it want to become a trusted, respected business centre — a place where compliance and competitiveness coexist?
The tools are there. The residency test, the substance requirements, and the look-through taxation mechanism form a complete policy package that can modernise Cyprus’ tax landscape without abandoning its attractiveness.
What’s needed now is the political courage to use these tools fully and finally sink the Ghost Fleet once and for all.