New amendments will come into practice in December 2022 as the Cypriot House of Representatives approved bills that amend the Tax Compliance in Cyprus that has been in place meeting the definition of corporate tax residency.
Currently, corporate tax residency in Cyprus is assessed using the management and control test – where a company is of Cyprus tax residency and needs to abide by Cyprus Tax Law, when its management and controls is exercised in Cyprus, irrespective of initial incorporation. With the new law, the existing tax residency test will continue to apply, but will add a provision so that an entity incorporated in Cyprus will still be considered a Cyprus tax resident even in the cases when management and control is exercised outside of Cyprus, provided that it is not a tax resident in another authority. It is suggested and beneficial for Cyprus companies to keep their management and control within the Republic of Cyprus, to benefit from safer, stronger and sound tax residency.
Management and Control specifications
There is no definition in the Cypriot tax legislation of what are the management and control requirements and no detailed guidelines have been issued by the Cypriot tax authorities. It is generally accepted and in line with international tax practices, that the following conditions should be considered in order to determine if a company qualifies as a resident for tax purposes of Cyprus:
All strategic (and preferably also day-to-day) management decisions are taken in Cyprus by the directors exercising their duties from Cyprus. This is usually achieved by having the meetings of the Board of Directors take place in Cyprus and the signing written resolutions, contracts, agreements and other relevant company documents relating to the management, control and administrative functions of the company in Cyprus
The majority of the directors of the company are tax resident in Cyprus and they exercise their office from Cyprus
Hard copies of commercial documentation (agreements, invoices, etc) are stored in the office facilities of the company
Accounting records of the company are maintained and kept in Cyprus
Bank accounts of the company are operated from Cyprus, even if the banks are maintained with banks established outside of Cyprus
Factors that help identify the location where management and control is exercised, include the following (non-exhaustive list):
Rental/Purchase of office space indented for business activity
Appointment of a qualified, skilled, resident of Cyprus, director, who will independently decide on the company’s daily activities
Establishment of a functioning telephone line, email address, and website
Bank account opening with local bank
Recruitment of employees, and arrangement for payroll taxes, and registration of the company and the employees of social insurance requirements
Decision making and control is exercised at the location
Physical storage of documents
Income generation in that country
Factors that prevent the identification of establishing the management and control location:
Appointing directors residing outside of the country, and outside of the country that income is generated
Rental of empty office spaces (just for registered office purposes)
Appointing unqualified and inexperienced directors for management positions, especially if these directors act as directors in a number of companies
Operating company bank accounts from a place outside the country where the Company engages in central management and decision-making
Appointing non-business related powers of attorney for business decisions that should be determined by the company's directors or employees.
Dual Tax Residency – Double Tax Treaties
Dual tax residency issues could be raised when management and control of a company’s business is exercised by either management, shareholders, or advisors operating in different countries (i.e. a company may be considered a tax resident in more than one country). In such cases, a “tie-breaker” test applies and identifies the tax residency of the company at the place where “effective management is situated”. The place of effective management usually has stingier rules than management and control and there can be only one place of effective management for a company.
Cyprus registered companies may be considered as Cyprus tax residents even if their management and control is not exercised in Cyprus, provided that they are not tax resident in other countries. For this to be possible, management and control would have to be exercised from countries that do not use the management and control criterion for determining tax residency.