An accusation, not a legal term
“Shell company” appears in no statute. There is no provision defining it and no authority that formally declares one.
That is more than a quibble. Because the term is defined nowhere, the question “is this a shell company?” cannot be answered. Only the two questions behind it can:
- Where is the company tax resident?
- Does it meet the formal requirements of its seat?
Both have answers in real provisions.
The question everything hangs on: who runs it, and from where?
Cyprus income tax law ties a company’s residence to whether management and control are exercised in Cyprus. Not to where it was registered, not to where the post arrives.
The same principle applies in almost every country. Anyone holding a Cyprus limited and taking the decisions from a desk abroad has to reckon with that country treating it as resident there. Then that country’s tax law applies, and the Cyprus rates the company was formed for stop mattering.
How Cyprus determines a company’s residence is in the guide to tax residence.
What Cyprus requires formally
The requirements are modest, but they are real:
- A registered office in the Republic of Cyprus. The companies register states expressly that a PO box will not do.
- A change of address must be reported within 14 days.
- At least one director, at least 18 years old.
- A company secretary. Only with exactly one shareholder and one director may the same person be both.
- There is no minimum share capital.
For registration itself there is no residence requirement for directors or shareholders. The companies register names the minimum age as its only condition. Tax residence is a separate matter, and that is what gets confused.
The full sequence is in the guide to company formation in Cyprus.
The EU rule everyone warns about no longer exists
In 2021 the European Commission proposed a directive against the misuse of shell entities, known as Unshell or ATAD III. It envisaged substance tests: own premises, own bank account, own management, plus reporting duties for companies failing them.
On 18 June 2025 the Economic and Financial Affairs Council formally discontinued work on the proposal. In its 2026 work programme the Commission then announced that it intends to withdraw it. Member States could not agree on the substance tests; the reasons given were administrative burden, overlap with existing rules and legal uncertainty.
That distinction earns its own line here: a proposal the Council has stopped working on, and which the Commission has announced it will withdraw, is not the same thing as a repealed directive. ATAD III never entered into force. For planning purposes both come to the same thing; for accuracy they do not.
The substance thinking is instead to be folded into the reporting duties under DAC6.
What does not fall away: national anti-abuse provisions, in Germany for instance section 42 of the Fiscal Code, and the rules attributing the income of foreign companies. Those existed before ATAD III and they continue to apply.
What substance means in practice
There is no checklist, and anyone selling one is selling their own interpretation.
What can be said: the more of what makes up the company actually happens at its seat, the less exposed it is. Decisions, contracts, accounts, people, premises. The less of that, the more everything depends on whether someone looks closely.
For most of our clients this is not a theoretical question. Anyone already living and working in Cyprus runs the company from there and does not have the problem. Anyone still living elsewhere does have it, regardless of what the company is called.
What we could not verify
- How much substance suffices in an individual case. There is no provision with thresholds, only case law in each country involved.
- The thresholds of the German CFC rules. They have changed repeatedly in recent years, and we did not check the current wording for this article.
- When and how the substance thinking enters DAC6. It has been announced; no adopted text was available to us.
- Whether a Cyprus director moves the management. That depends on the individual case and belongs in advice.
Who judges this for you
Whether a company is exposed is decided under two legal systems at once: the Cyprus one and that of your previous country of residence. One person rarely answers both. Tell us in five questions what your case looks like: Cyprus setup from one place.