Introduction
Currently, the definition of corporate tax residency is based on the management and control test. Therefore, a company is a Cyprus resident and liable to Cyprus taxation when its management and control is exercised in Cyprus irrespective of its place of incorporation.
In December 2021, the Cypriot House of Representatives approved the bills amending the Income Tax Law with respect to the definition of corporate tax residency. As of December 2022, the definition of corporate tax residency is expanded to include the incorporation test. Specifically, a company which is registered in Cyprus, has its management and control exercised outside Cyprus and is not a tax resident in any other jurisdiction, should be considered as a Cyprus tax resident.
This additional test aims to capture Cyprus incorporated entities that are not tax residents in any other jurisdiction. However, attention should be given to the laws of the other country as well, namely the country where the actual management and control is exercised. Probability is, based on the general tax laws, that in case the management and control of a company is exercised in another country, other than Cyprus, then this company shall be considered as a tax resident in this country. Consequently, it is desirable for a Cyprus incorporated company to keep its management and control in Cyprus so that its tax residency is stronger, safer and more evident.
Interpretation of management and control
Common law has established that a company resides where its business is carried out for tax purposes. More specifically in the case of De Beers Consolidated Mines Ltd v Howe [1906] AC 455, 5 TC 198 it was stated that “that a company resides for purposes of income tax where its real business is carried on . . that as the true rule, and the real business is carried on where the central control and management actually abides”. This was interpreted by the Cyprus income tax laws. In conclusion, the tax residency of a company is identified by determining where the management and control is exercised.
The board of directors exercises the central management and control of the business (day to day management). The place of the shareholder is irrelevant in relation to the tax residency of the company. A company whose business is managed and controlled by a board of directors situated in Cyprus, will be tax resident of Cyprus even if the actual trading business of the company is outside Cyprus.
The place where the directors meet for their board meetings, to decide about the company’s policy, finance and related matters, is the location of the central management and control of the company’s business. Consequently the company is tax resident at that location.
Factors identifying the location of the management and control exercise
- Rent/buy an office space in Cyprus intended for business activity (not residential premises);
- Appoint a qualified director, resident of Cyprus who will make independent decisions on the companies’ activities;
- Have a functioning telephone line, domain email address and website;
- Open a bank account with local bank;
- Hire employees in the company and arrange for the payment of the relevant payroll taxes;
- Registration of the company and other employees with social insurance requirements;
- Have effective management and control of the company in Cyprus (make decisions concerning the company in Cyprus);
- Ensure proper physical storage of the company’s documents (agreements, statements, invoices etc.) in the office located in Cyprus;
- Engage professionals practicing in the chosen jurisdictions that will give up to date advice which can be reviewed by the company’s directors before a decision is reached;
- Create some source of income in Cyprus; and
- Avoid giving general powers of attorney to people not residing in Cyprus.
Factors weakening the Cyprus location of management and control
- Appointment of directors residing outside Cyprus;
- Appointment of directors residing in the place where the income of the company is generated;
- Renting offices that are empty;
- Appointing directors who are unqualified for the position and/or appointed in too many other companies;
- Operating company’s bank accounts from a place other than the company’s chosen place of business and by persons who are not located at the company’s chosen place of business;
- Using devices abroad (like telephone numbers); and
- Issuing of general powers of attorney for business decisions that should be made and executed by the company’s directors or employees.
Dual residency – Double tax treaties
Cyprus has been part of a considerable amount of Double Tax Treaties. Dual residency issues might be raised in case where the management and control of the company’s business is exercised by the directors / shareholders / advisors, in various countries. In such a case, if there is a Double Tax Treaty in place, the effective management rule “tie-breaker” article applies and identifies the residency of the company at the place where the “effective management is situated”. If there is not any Double Tax Treaty in place or where the situation is not clear, local laws will apply and give the solution.
Conclusion
Until December 2022, Cyprus or foreign companies anywhere registered, will be considered tax residents of Cyprus if their management and control is exercised in Cyprus. It is significant to follow the steps as stated above in order to establish the management and control in Cyprus.
After December 2022 it remains to be seen as to how the new amendment of the income tax law shall be interpreted. Careful consideration should be given to the place where the management and control is exercised as there is a risk that local laws determine the tax residency irrespective of the incorporation requirement which shall be adopted by Cyprus.
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