In corporate practice, transactions are typically assessed primarily from a legal perspective, with questions such as “Is the agreement enforceable? Are the representations and warranties in place? Have the necessary corporate approvals been obtained?” being asked.
While these questions are important, experience shows that they are not sufficient on their own, since a transaction can be perfectly valid in law and still be commercially weak, tax-inefficient, or fundamentally misaligned with the company’s wider interests.
The Directors are entrusted by the articles of association of the company to manage the affairs of the latter and, in doing so, are required to act in accordance with the duties imposed on them under Cyprus law and applicable common law principles.
Directors of a Cyprus company are subject to three core categories of duties:
- Fiduciary duties: they must act honestly, in good faith and in the best interests of the company, exercise their powers for proper purposes, avoid conflicts of interest and ensure full disclosure where such conflicts arise.
- Statutory duties: they must comply with the Companies Law, Cap. 113, including obligations relating to proper record-keeping, financial reporting, disclosures, filings and overall transparency in the company’s affairs.
- Duty of care and skill: they are required to act with the level of care, skill and diligence expected from a reasonably diligent person in their position, taking informed and considered decisions in light of the company’s circumstances
Having said the above, a director’s role is not limited to ensuring that documents related to a proposed transaction are technically compliant. Directors are expected to exercise judgment, to act in good faith and in the best interests of the company, and in doing so, the directors need to pause and ask broader, and sometimes uncomfortable, questions such as:
- Does the transaction actually make commercial sense for the company?
- Is it consistent with the company’s normal business activities?
- Have the tax consequences been properly considered and understood?
- Are there regulatory, accounting, or reputational issues to be considered, etc?
By answering such questions, the Directors shall be able to demonstrate that the decision to proceed with the proposed transaction was based on a careful assessment of relevant legal, tax, commercial, regulatory, and reputational considerations. It is therefore essential that the rationale for the transaction is clear, documented, and aligned with the company’s objectives, so if a decision is later questioned by shareholders or regulators, directors will be able to show that they understood the risks involved and exercised informed judgment, rather than simply approving what was placed in front of them.
Too often, tax is treated as something to be dealt with after the commercial deal has been agreed. In reality, tax is an integral part of the commercial outcome. Directors should be in a position to demonstrate that tax issues were examined openly, with appropriate professional input, and that the structure adopted has a genuine commercial rationale. Failing to do so can expose the company, and possibly the directors themselves, to unnecessary risk.
A common example is a corporate reorganisation or asset transfer that appears simple from a legal perspective. If tax implications are not addressed early, the transaction may trigger unexpected liabilities, such as capital gains tax, VAT, or result in the loss of valuable tax benefits. By the time these issues come to light, restructuring options may be limited or costly and directors who approved such a transaction without seeking clarity may struggle to justify their decision as having been taken with due care and for the best interest of the company.
The same applies when setting up or maintaining company structures. Today, it is not enough for a structure to exist only on paper—it must also have real presence and purpose (“substance”). In line with the widely applied “substance over form” principle, tax authorities will look beyond the legal form of an arrangement and assess its actual economic reality. Cyprus tax resident companies therefore need to ensure that their structures genuinely reflect business activity and comply with the conditions set by international tax rules and treaties. If they do not, this can lead to serious consequences, such as losing tax benefits, being taxed more than once, facing withholding taxes on payments, or even penalties. In some cases, profits may also be reassessed or taxed in a different way than originally intended.
Further practical examples can be seen in the recent tax developments introduced in Cyprus, which demonstrate why tax considerations must form part of the decision-making process from the outset. For example, dividend declarations/payments to associated companies in low-tax or non-cooperative jurisdictions may now trigger withholding tax or result in the denial of tax deductions, significantly affecting the expected outcome of a transaction.
Similarly, transfer pricing requirements, highlight that intra-group transactions must be properly supported and reflect arm’s length conditions. The obligation to maintain documentation and report such transactions annually confirms that tax is an integral part of structuring and approving transactions.
Of course, directors are not expected to be tax experts or experts in every commercial field, but they are expected to understand the basic economic logic of what they are approving and what implications may arise, by engaging expert advisers, where needed. Thus, the real question is not whether a transaction can be executed, but whether it should be. This is particularly relevant for fiduciary and nominee directors, who often operate under heightened scrutiny since they are regulated entities.
It is worth noting that the Cyprus legal system does not recognize the concept of a “nominee director” thus any person appointed under such capacity, assumes the same duties and potential liabilities as any other director. On the contrary, such a position requires an even more cautious approach. Reliance on professional advice is appropriate and often necessary, but such advice should extend beyond legal enforceability to include tax exposure and commercial impact. Where information is incomplete or unclear, the correct response is not to proceed regardless, but to seek further clarification as it is an essential part of the fiduciary role.
Ultimately, fiduciary judgment in corporate transactions is about thoughtful, informed decision-making that recognises the interconnected nature of legal, tax, and commercial considerations. Cyprus law expects directors to act in the best interests of the company, and that expectation necessarily requires them to look beyond the contract itself.
In an environment of increasing complexity and scrutiny, directors who approach transactions holistically, by engaging expert advisers early, questioning assumptions, and documenting their reasoning, are not only protecting the company but also fulfilling the true spirit of their fiduciary role.
Article by Elli Ioannou (Head of Corporate & Commercial Wealthmore Services Ltd) in Legal Industry Reviews (Cyprus Edition)