Cypriot Companies Under Scrutiny – Legal Pitfalls for Polish Entrepreneurs in the Era of Enhanced Transparency

Cypriot Companies Under Scrutiny – Legal Pitfalls for Polish Entrepreneurs in the Era of Enhanced Transparency

2025-08-18

 

For years, Cyprus was among the most favored jurisdictions for Polish entrepreneurs seeking advantageous tax solutions and flexible holding structures. Companies established before 2016 operated in a legal reality that today seems almost fairy-tale-like: general powers of attorney from nominee directors, no obligation to report transactions, minimal reporting requirements, and virtually no sanctions for non-compliance. However, the world has changed.

 

The Twilight of the “Paper Company” Era

The implementation of the DAC directive, introduction of the Common Reporting Standard (CRS), intensified international cooperation in tax information exchange, and growing compliance requirements have transformed many of these “convenient” solutions into legal time bombs. Today, owners of Cypriot companies face the consequences of years of negligence, with the most serious being the striking off of companies from the register and loss of control over assets.

 

Anatomy of the Problem – Why Companies Get Struck Off

The era of liberal approach to managing Cypriot companies ended with intensified international pressure for transparency in corporate structures. Company owners who for years benefited from the “convenient” business model suddenly discovered that their structures were threatened with removal from the register due to seemingly trivial oversights.

The most common cause of strike-offs is the lack of a director. According to Article 170 of the Cypriot Companies Law, every company must have at least one director. In practice, companies established before 2016 commonly used nominee director services provided by corporate service firms. Company owners treated these entities instrumentally – paying minimal fees for formal function fulfillment without informing them about business activities, consulting business decisions, or providing financial documentation.

 

This operational model proved fragile. When company owners fell behind on corporate service payments – often due to simple forgetfulness or changing business priorities – the director would resign, leaving the company without management. The Registrar of Companies, upon discovering the lack of a director, sends a notice to remedy the deficiency. If no new director is appointed during this time, the company is automatically struck off the register as “dissolved.”

Equally problematic were neglected annual levy payments. Since 2012, Cypriot companies have been obligated to pay an annual fee of €350. Failure to pay for two consecutive years leads to automatic strike-off from the register. This seemingly simple obligation became a trap for hundreds of Polish companies whose owners were either not properly informed about the new requirement or ignored it as insignificant.

 

The third source of problems involves reporting negligence. Cypriot companies are required to file annual financial statements within seven months of the end of their financial year. Before 2016, practice was very liberal – companies failing to file reports rarely faced consequences. Owners became accustomed to situations where lack of financial statements carried no real sanctions. Today, non-compliance with this obligation for several consecutive years can lead to company strike-off.

Particularly dramatic are conflicts with corporate service providers. A typical scenario unfolds as follows: a company owner, often influenced by changing business circumstances or after receiving unfavorable tax advice, decides to cut costs and stops paying for corporate services. The corporate service firm, which for years received minimal compensation for services, retaliates by resigning the nominee director and ceasing reporting obligations. The company owner, often unaware of the consequences, discovers the problem only after the company has already been struck off the register.

These scenarios demonstrate how dramatically the regulatory landscape has changed. Structures that functioned without problems just a few years ago now become sources of serious legal and financial problems.

 

Legal “Black Hole” – What Happens to Polish Assets?

When a Cypriot company is struck off the register, a legal mechanism is triggered that can lead to absurd consequences. According to Article 328 of the Companies Law of the Republic of Cyprus, upon strike-off from the register, all company assets automatically become property of the Republic of Cyprus as “bona vacantia” (ownerless property). This provision, designed with local assets in mind, creates serious legal problems for international business structures.

Imagine this situation: a Polish holding company owns shares in a Cypriot company, which in turn owns real estate in central Warsaw worth several million zloty. The Cypriot company is struck off for failure to pay the annual levy of €350. Does this mean that luxury real estate in Warsaw automatically becomes property of the Republic of Cyprus?

 

The answer to this question is not obvious, and this is where the legal labyrinth begins. Cypriot law clearly states that assets transfer to the state, but local interpretation of this provision indicates that such “transfer is not perfected.” This enigmatic formula leaves many questions unanswered. What does “imperfected transfer” mean? What are the practical consequences of such legal status? Will Polish authorities recognize the effects of Cypriot expropriation?

The problem becomes even more complicated when we consider the fundamental principle of international private law called “lex rei sitae” – the law of the place where property is located. According to Article 41 of the Polish Private International Law Act, ownership and other property rights are governed by the law of the state where their subject matter is located. This means that real estate located in Poland is subject exclusively to Polish property law, regardless of what provisions apply in the state of the owner’s domicile.

 

This legal collision creates a legal “black hole” where Polish assets find themselves in a state of legal uncertainty. On one hand, Cypriot law claims that assets have transferred to the Cypriot state; on the other hand, Polish law does not recognize the effectiveness of such transfer regarding real estate located in Poland. In practice, this means these assets remain in a kind of legal suspension – they are no longer property of the struck-off company, but simultaneously have not become property of the Republic of Cyprus in a manner effective under Polish legal order.

 

Practical Consequences of Legal Uncertainty

This legal uncertainty has very real practical consequences. The owner of real estate that formally belonged to a struck-off Cypriot company can no longer dispose of it – cannot sell it, lease it, encumber it with a mortgage, or even carry out renovations requiring administrative approval. The land registry still shows the non-existent Cypriot company as owner, but any attempt to make an entry will encounter the problem of lack of legal representation for the non-existent entity.

Equally problematic is the situation of creditors of the struck-off company. If a Cypriot company was a debtor to a Polish entrepreneur, striking off the company from the register makes further debt recovery impossible through normal procedures. One cannot sue a non-existent entity, cannot direct enforcement against its assets, cannot reach a settlement with it. The creditor faces a dilemma: did their claim expire with the company’s strike-off, or are there ways to continue pursuing it?

No less complicated is the situation when a struck-off Cypriot company owned shares in Polish companies. Polish capital companies may have shareholders who are legal entities from other countries, but what happens when such a shareholder ceases to exist? Who can exercise corporate rights from these shares? These questions have no simple answers.

 

Seeking Solutions – Polish Legal Perspective

Faced with this legal uncertainty, Polish jurisprudence and doctrine began seeking solutions that could, at least by analogy, allow for “rescuing” assets remaining after struck-off foreign companies. Resolving a similar issue, the Supreme Court indicated in its resolution of January 29, 2007 (III CZP 143/06, OSNC 2007, No. 11, item 166) that if, after striking off a limited liability company from the register, it turns out that part of its assets remained uncovered by liquidation, it is permissible to appoint a liquidator to complete the liquidation. In the justification of this resolution, the Supreme Court indicated that the situation described in the legal question, bearing features of legal pathology, is not directly regulated by civil law provisions, which undoubtedly justifies seeking its solution through analogy. This resolution, although directly concerning Polish companies, may have fundamental significance for resolving the problem of Polish assets belonging to struck-off Cypriot companies.

 

The Supreme Court rejected the possibility of applying provisions on estate curator, indicating that the scope of such curator’s competence (establishing the circle of heirs and transferring the estate) does not correspond to needs related to liquidating company assets. It also rejected the concept of “reactivating” the company by striking the entry about its strike-off, arguing that striking a company off the register is definitive and cannot be reversed without violating the principle of legal certainty.

Ultimately, the Supreme Court favored a solution involving analogical application of provisions on liquidation of a company in organization. This concept is based on the assumption that if the law permits conducting liquidation proceedings regarding a company that failed to obtain legal personality (company in organization), then all the more possible is initiating such proceedings to complete liquidation of assets of a registered company that was prematurely struck off the register.

 

Asset “Rescue” Mechanism

In practice, applying this concept to assets belonging to struck-off Cypriot companies would require the following approach: a Polish registry court, upon application by an interested entity (creditor, former shareholder, administrative body), could appoint a liquidator for assets remaining after a struck-off Cypriot company located on Polish territory.

Such liquidator would act based on Polish liquidation provisions, but their competence would be limited to assets located in Poland. Their task would be to organize the legal situation of these assets, satisfy potential creditors, and transfer the remaining part of assets to entitled beneficiaries.

This solution has several important advantages. First, it allows restoration of legal certainty – assets receive legal representation in the person of the liquidator, enabling normal legal transactions. Second, it protects creditors’ interests, who can submit their claims in liquidation proceedings. Third, it ultimately ensures transfer of assets to entitled beneficiaries, who in the case of capital companies would be former shareholders.

However, applying this concept also encounters serious practical obstacles. First and foremost, it is unclear which court would have jurisdiction to appoint such liquidator. Equally problematic is the matter of establishing the circle of entitled beneficiaries. In the case of Polish companies, information about shareholders is available in the National Court Register, but how to determine who was a shareholder of a struck-off Cypriot company? Will a Polish court examine Cypriot documents? Will it apply Cypriot law to establish ownership structure?

 

Company Restoration in Cyprus

Probably the most elegant solution to the problem is restoring the struck-off company to the Cypriot register. Cypriot law provides for such possibility in Article 327(7) of the Companies Law, which allows the court to restore a company to the register upon application by an interested party within 20 years of strike-off.

Importantly, the applicant can be not only a former shareholder or director of the company, but also its creditor. In Cypriot jurisprudence, the concept of “creditor” is interpreted very broadly and includes both due and conditional claims that existed at the time of company strike-off.

Company restoration to the register has retrospective character – this means the company is treated as if it had never been struck off. Consequently, all problems related to legal representation of assets and asset ownership are automatically resolved.

 

However, the restoration procedure is neither simple nor cheap. It requires conducting proceedings before a Cypriot court, which means the necessity of representation by a local lawyer and incurring significant procedural costs. Additionally, the court must be convinced of the merits of company restoration, which in the case of companies that for years conducted no real business activity may be difficult to demonstrate.

Particularly interesting is the precedent from the judgment in Eagle Properties Limited v. Copenform Investments Limited (45/20, 08/07/2020), where the Cypriot court stated that it can simultaneously with company restoration appoint a liquidator as manager of its assets. This solution is particularly attractive for companies that have no director and whose former shareholders are not interested in reactivating business – the liquidator can organize company affairs and distribute its assets among entitled entities.

 

Practical and Strategic Dilemmas

Faced with these various legal possibilities, entities affected by the problem of struck-off Cypriot companies face difficult strategic choices. Each available solution has its advantages and disadvantages, different costs, and different probability of success.

Company restoration in Cyprus is theoretically the most complete solution, but requires significant financial outlays and may take many months or even years. Additionally, there is no guarantee of success – the Cypriot court may decide that company restoration is not justified, especially if the company conducted no real business activity.

Applying Polish liquidation provisions by analogy is theoretically possible, but encounters lack of judicial precedents and uncertainty about Polish courts’ position. Additionally, it is unclear how such proceedings would proceed in practice and what their costs would be.

 

In this situation, speed of action and proper assessment of success chances for individual strategies are crucial. Entities that discover the problem in due time will have significantly broader possibilities for action than those that react too late.

Equally important is proper documentation – gathering evidence confirming existence of claims against the struck-off company, establishing ownership structure, securing corporate and financial documents. These materials will be necessary regardless of which legal strategy the interested party ultimately decides to apply.

 

Conclusion

The history of Cypriot companies struck off the register is a warning against too superficial an approach to managing international corporate structures. It also shows how important it is to understand principles of international private law and their practical consequences for business. Above all, however, it proves that in the era of increased transparency and international cooperation in tax matters, the era of “convenient” offshore structures is definitively ending, giving way to an epoch of compliance and professional corporate governance.