Fear of general powers of attorney, issues bearing …

… or is it always good to have a general power of attorney to manage the affairs of an offshore company as an example of Cyprus.

When creating an offshore company will naturally have the desire to fully control its activities and freely represent the interests of the company before third parties. Since, as a rule, to position itself as a company director desire does not arise, the desire to meet the specified uses such legal tool as a general power of attorney. The name “general” is used to show that the principal (in this case, an offshore company) that provides a power of attorney to the authorized person almost every conceivable authority who can afford to provide stakeholders in all possible sectors of the company. In this case, the owner of the offshore companies are often ponders the question: “Is it wise to this behavior and will not be whether such a general power of attorney risks to its owner?”.

Try to answer this question, using the example of an offshore company registered in Cyprus. We can confidently say that if you want to get the general power of attorney from a Cypriot company, the owner of an offshore encounters with active misunderstanding serving his company. And this misunderstanding, which has its own explanation. The explanation is as follows. Tax residency offshore company in Cyprus or, more simply, whether the taxpayer company in Cyprus, is determined by the following criteria: management and control.
Under these concepts will include:

• Important decisions of the company’s life taken in Cyprus;
• majority of the board of directors are residents of Cyprus;
• Board of Directors does not transmit as attorney general broad authority to address issues related to the activities of a company resident of Cyprus;
• accounting operations of the company is in Cyprus;
• Tangible copies of company documents are stored in Cyprus;
• The company has an office in Cyprus;
• bank account is managed from Cyprus.
  

It would seem that for those who use the Cyprus company for operations not related to Ukraine, and is not going to apply the provisions of the Convention on avoidance of double taxation of income between the USSR and the Republic of Cyprus, there is no need to worry about the residence of his company in Cyprus.

Such behavior would be justified if it were not for one major fact presented in the form of tax legislation of Ukraine. Since the Law of Ukraine “On income tax for individuals” establishes that the purpose of tax payer’s income taxes include:
The amount of money or value of the assets, including securities that are owned by the entity, if in accordance with a power of attorney issued by such entity or its founders taxpayer, any active (supplies) operations with money or property shall be made exclusively to address such a taxpayer or his substitution (separate power) – a third party.

Based on the foregoing, it can be argued that if the attorney offshore companies will provide a very broad powers to its owner (General Power of Attorney), then such a person has an increased chance of becoming the object of scrutiny by tax authorities.

Is it possible to reduce these risks? It is quite possible. Recommendations are simple, but, like all other means of reducing risks, require additional costs. Thus, the following recommendations:

• signing of major contracts should be made directly to the nominee director (this would require additional costs for the signature of the Director and the possible harmonization of the treaty text);
• issuance of special warrants to exercise certain powers (the cost of issuing authorization and legalization);
• the Board of Directors resolutions to open a bank account in a particular bank;
• managing a bank account using Internet banking;
• minimal distribute copies of the proxy in the territory of Ukraine.
  

Y. Azarov, 24.10.2010

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