5 Risks you might face when closing down
your Company in Cyprus
There are many reasons you might decide to close down your Company but whatever the reason, there are some measures you need to take to protect yourself, your credit, and your reputation, but also to make sure that your Company is closed down legally and permanently.
Things that might go wrong:
1. Not meeting the deadline
Whatever the reason for wanting to close down your Company, it is normally a matter of urgency. There is usually the need to quickly release the assets attached to the Company, whilst also minimising any expenses and taxes for the final maintenance of the structure and ensuring that such costs are not incurred for more time than is absolutely necessary. Therefore, it is important that the procedure starts immediately once the decision is taken to close down.
Also, with regards to timing, it is essential that the time between the commencement and the end of the procedure does not take more time than it should, otherwise you become exposed to various risks that may delay the process even further.
2. Not doing it correctly
Having established that time is of the essence, we may go on to say that ‘doing things correctly will actually save you time’.
Firstly, if the Company was compliant with all its statutory duties during its life span, then it is possible that about 60% of the timing issues are already under control, which is good news. However, most of the time delays are caused because there are returns pending submission with the Companies Registrar, the Tax Authorities, the Social Insurance, etc. Such pending issues could take a significant time to bring up to date, thus delaying the commencement of the closing down procedure.
Another matter that may cause delay is the disposal of the assets of the Company. Again, issues of compliance may come in to play here, which will depend on the work that was performed during the life of the Company, and not just at the end.
Moreover, choosing the procedure that is appropriate for your case may also prove to be time saving. Usually, the first response to a request to close down a Company quickly would be to proceed with a ‘strike-off’, which in most jurisdictions is considered as the “fast track” closing down procedure. However, if one knew beforehand that in Cyprus the waiting period for a Company’s application to be reviewed for strike-off takes on average 3 years, plus a couple more months for a Certificate of Dissolution to be issued, one could reasonably conclude that the “fast track” is not actually ‘fast’ after all. On the other hand, voluntary liquidation takes an average of 6-9 months from start to finish, depending on the complexity of the case, and is often highly more efficient and can bring lower risk exposure.
In reality the two options do not differ a lot, considering that up to a point the procedures are the same, at least if they are followed correctly. Whether the Company is going for strike-off or for voluntary liquidation, there is still the requirement to update the financial statements of the Company, request tax clearance, update the Companies’ Registrar records, to send notices, etc. After submitting everything, when going for strike-off, you simply wait for the certificate of dissolution, which as we mentioned earlier may take at least three years to receive. When going for voluntary liquidation, there are a few more steps that the Liquidator must perform, such as settling the Company’s affairs, informing the Shareholders, sending out notices, etc., all such matters could be completed within 6 months, depending on the complexity of the affairs. In addition, when considering that the disbursements for voluntary liquidation are less, the scales definitely tip towards choosing this procedure.
Liquidation ‘Vs’ Strike-off – an overview
Liquidation
Strike-Off
Timing 6 - 9 months from the date of disposal of assets 2.5 - 3 years from the date of disposal of assets
Cost Slightly higher initial costs, but maintenance costs are borne for a shorter period
Lower initial costs, however maintenance costs are applicable for a greater period
Sustainability Right to appeal to court to revoke the liquidation within two years from dissolution
Possible to reinstate company after the request of creditors, Registrar or other authority within 20 years from dissolution
Procedure Several steps involved Very few steps involved
From experience, we have noticed that Company owners usually prefer the liquidation procedure because it is a permanent solution, but mainly because it is completed within a year (sometimes less, if the disposal of the assets is done promptly), even though the fees might be a little bit higher than as for strike-off.
Closing down a Cyprus Company – methods as handled by Fiducenter
3. Unexpected requests from the Taxman
The management of your Company affairs up to the point you decide to close it down, is of paramount importance, both from a compliance and diligence point of view and especially with regard to tax liabilities. A fact that is usually overlooked is that the tax assessments are carried out by the Tax authorities with an approximate three year delay (from the date of the filing of the tax return). This means that, in the future, there is a chance that the Taxman may come with a tax claim and surprise you, because one or more treatments adopted in the tax returns was incorrect in his view. For example, there is an overarching principle that expenses are allowable for tax purposes only if they are incurred ‘wholly and exclusively’ for the purposes of the trade. The Tax authorities might question even the simplest of expenses, either in total, or to a partial extent. That is why it is best to obtain tax rulings, especially in more complex instances.
4. The return of unhappy Creditors
As with unexpected tax liabilities, the same goes for Creditors that perhaps you had a dispute with or who didn’t get the chance to invoice everything due for their services rendered; they may show up unannounced. Also, liabilities might arise because of different interpretations of agreements, because of guarantees, contingent liabilities, conditional clauses as per agreements and in general from the different transactions a Company undertakes during its existence.
Perhaps it is a remote possibility, but it is a possibility and one that could be minimised if your service provider made sure your Company was compliant with its statutory duties and the Company’s financials were up to date at all times.
5. Increased costs
Whatever the reason for wanting to close down your company, it is usually a matter of urgency and cutting costs. However, if the necessary procedures are not correctly followed, the ‘cheap’ solution may end up costing you more in the long-run; just imagine paying a hefty invoice to close down your Company and leaving yourself exposed to the situations outlined above!
Case Study
‘Client Ltd’ is a Company incorporated in Cyprus for the purpose of holding a portfolio of investments of a large international group of companies. In November 2012, after a successful run, the beneficial owners of the Company decided to close it down by the end of the year.
Their service providers, Best Trust Ltd., assured them that the Company would be closed down by the end of the year, as it was important that the Company did not show in the financials of the Group for 2013. After a “loaded” invoice was paid, the providers confirmed on 27 December 2012 that the Company was no longer in existence. A certificate was to be issued to that effect in the coming days, but ‘it might be delayed a little due to the holiday season’.
A few months later, a notice was received from the Tax authorities for filing the Company tax return for 2012. An employee of Best Trust Ltd threw the notice away, thinking that the Company was no longer liable to report such matters, since it had been dissolved (according to the company’s status on their client system).
In December 2013, a letter was received from the Tax authorities whereby it informed the Directors (former) of the Company that penalties were being imposed for non-submission and non-payment of their tax liabilities. A few days later, the Company was served at the registered office (former) with a court order to settle an outstanding amount of EUR 56,000 due to Alpha Brokers Ltd for commissions and fees, which were invoiced earlier that year, for services offered in 2012.
Why do I keep
getting notices for my company that you closed down for me last year?
The beneficial owners of Client Ltd were rattled, and made an enquiry with Best Trust Ltd., as to how it was possible to receive such notices since the Company was dissolved almost a year ago.
The director of Best Trust Ltd replied to their clients, explaining that there had been a misunderstanding in their communication. He claimed that they never confirmed that the Company was dissolved, but that they had ‘asked for the Company to be dissolved by the end of the year’ by sending a letter to the Registrar of Companies, explaining that the Company had ceased its operations and that it became dormant from that point onwards. The fact was that their application was not processed, as these kind of applications have a waiting period of 2-3 years (again, if you are lucky), meaning that the Registrar will eventually strike-off the Company, but not earlier than 2015.
Moreover, even if there hadn’t been a delay at the Registrar and the strike-off was effective immediately upon request, the Tax Authorities, as well as Alpha Brokers Ltd, would still be able to proceed with their claims by asking for the Company to be reinstated. They could even take it a step further and challenge the strike-off altogether, on the basis of it being unlawful.
In the end, Client Ltd were liable to pay the outstanding taxes (plus penalties and accrued interest), the outstanding invoices of Alpha Brokers Ltd, they were obliged to update their financial statements and undergo audits for 2012 and 2013, make new submissions for 2013 as well as go through the voluntary liquidation procedure after all! Needless to say, the increased costs and delays did not sit well at all with the Group and were far in excess of initial estimations. To add insult to injury, Client Ltd also had to pay for undertaking the procedure from the very start, but this time with a new service provider, as, understandably, they did not want Best Trust Ltd to do the job.
Is there a way to avoid the agony?
Yes - You should follow these steps to close your business safely and legally: Make sure that everything is up to date.
Make sure that the procedure proposed to you is the correct one for your case.
Make sure that you get regular updates from your provider so that you can track that the procedure is going as planned and according to schedule.
Choose your associates wisely – choose associates with experience, integrity and professionalism.
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At Fiducenter we have been providing our clients with international business solutions and professional services since 1980. Founded in Luxembourg and with presence in four of the most attractive financial and business centres in the world, we find solutions for the most complex and demanding of situations. Exceeding our clients’ expectations is the essence of our culture, while also ensuring not to compromise our own values and principles. We are licensed and regulated as applicable; aiming to surpass regulatory requirements, believing that a stronger control environment can streamline our organisation and ensure the highest quality of service is achieved. Our clients are longstanding and loyal, and have grown with us. We hope that we can be of service to you and your business.
With regards to dissolutions specifically, we have a solid experience having closed down more than 100 entities in the last 3 years. Also, we have strong established relationships with officials in the various Government departments that helps make the process smooth and without surprises. Our relations, together with our experience and professionalism, make the absolute combination of assets that you would want your associates to have when engaging them to close down your company with minimum risk.
© Fiducenter April 2014 All rights reserved.
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The information provided in this publication does not constitute legal, tax or investment advice and no responsibility is accepted for any loss occasioned directly or indirectly as a result of persons acting, or refraining from acting, wholly or partially in reliance upon it. All characters/names appearing in this work are fictitious.
