Cyprus Tax Residency
Place of taxation, place of business, tax residency – where will profits be taxed? Get in-depth advice.
Cyprus Tax Residency and Place of Business (“Substance”)
Cyprus Tax Residency: Where will my Cyprus Company get taxed?
The definition of tax residency of companies varies from country to country.
As a general rule, companies are liable to pay tax on their taxable profit in the country where they conduct business and/or where management decisions are taken. Below you will find important points related to Cyprus Tax Residency.
Some countries, for example Cyprus, Malta and others, are focusing on the place of management in order to determine the tax residency of a company. In those countries, the place of management is generally defined by the place of residence of the majority of a company’s directors. Cyprus tax residency is established as per the laws of Cyprus when a single director of the company resides in Cyprus, or, in case of more than one director, the majority of directors resides in Cyprus. If the company has one resident and one non-resident director, the non-resident director needs to carry out a part of his work in Cyprus, to establish the company’s Cyprus tax residency, as per the laws of Cyprus.
Other countries, for example France, Russia, Germany, Italy and others, are rather evaluating where the company actually conducts its business effectively, in order to determine the taxability of a foreign company’s profits. In such countries, the following general rule applies:
If a company registered in country A, for example a Cyprus Company, effectively conducts active business in country B, for example Russia, then the profit of the company in country A (e.g. the Cyprus Company) might become taxable in country B (e.g. Russia). Therefore, establishing Cyprus tax residency is important.
There might be several reasons where a company effectively conducts active business in another country, for example:
- The company in country A (e.g. the Cyprus Company) opens an office in country B (e.g. Russia) and carries out business in country B;
- The shareholder(s) or beneficial owner(s) of the company in country A (e.g. of the Cyprus Company) are effectively conducting business in their own country B (e.g. Russia).
The above scenario 2. is often the case when, for example, the Russian owner of a Cyprus Company acts in Russia on behalf of the Cyprus Company, by visiting customers of the Cyprus Company, and by negotiating and signing contracts in Russia, on behalf of the Cyprus Company. This scenario will lead to tax liability of the Cyprus Company in Russia.
Result: The place of tax residency can be different from the place of tax liability. This is actually not new, but implemented in Article 5 of the OECD standard double taxation agreement proposal since long years. But it is relatively new that countries are focusing on the place where business is effectively carried out, in order to determine the taxability of a foreign company’s profits.
New is as well the BEPS approach. BEPS means “Base Eroding and Profit Shifting” and is the approach to tax profits where they actually and effectively accrued.
The Place of Business in Cyprus
It is important that a company, for example in Cyprus or in Malta, has a place of business in Cyprus or Malta, a so-called permanent establishment, to have “operating substance”. Having “substance distinguishes a (tax-resident) onshore company from a non-tax-resident offshore company. Cyprus tax residency is essential for Cyprus companies, as it is for Maltese companies in Malta.
Until a few years ago it was sufficient when the beneficial owner of a company in another country could proof to the tax authorities of his or her own country that the company in the other country indeed had substance, which means that it indeed had a place of business in the other country, of course provided that the beneficial owner did not act in his or her on behalf of his or her foreign company.
However, things have changed and tax authorities are now evaluating where the business of a foreign company is actually conducted effectively. Renting an office in the country where the foreign company is registered is not enough anymore. The place of business of the foreign company, for example a Cyprus Company, must actually be operative and conduct business itself.
Conclusion: The place of tax residency and the place of taxability can well be different places. Country-related tax legislation may result in different evaluations regarding the place of taxability, and discrepancies in applicable tax law may occur.
Shanda Consult is experienced in cross-border tax implications, from the perspective of Cyprus, Malta or other countries and may assist you accordingly. Please do not hesitate to contact us, to make sure that Cyprus tax residency or Malta tax residency is well in place.
Tax Residency and Place of Business (“Substance”) – Our Recommendations:
Get Consultancy in Your Country
We recommend to you to consult an tax advisor in your country, who is acknowledged in international taxation and cross-border tax implications.
Shanda Consult provides consulting services from the perspective of Cyprus, Malta and other countries.
Operative Place of Business in Cyprus
Please keep in mind that your foreign company, for example a Cyprus Company or a Malta Company, needs an operative place of business in order to comply with recent international taxation rules.
The shape and scope of the place of business depends on the type and scope of business of the company. Typically, an operative place of business consists of a verifiable physical office infrastructure and of verifiable business activities. As per the laws of the beneficial owner’s country, resilient Cyprus tax residency (or tax residency in Malta for Maltese companies) is of highest importance.
Verifiable Physical Infrastructure
The verifiable physical place of business should comply at least with the legal minimum requirements of the beneficial owner’s country. The following criteria must generally be met as a minimum:
- Office or office space, to be verified by a rental contract.
- Company must be reachable by phone, with its own phone number. The phone bill in the name of the company may be needed as proof of address as well.
- The office must have furniture. Furniture may be rented or purchased and part of the company’s assets.
- The company should have its own website, preferably with a domain extension of the country where it is registered.
- The company needs to have at least one employee, to be verified by the monthly payment confirmation of social contribution.
Depending on the kind and scope of business, the company may need more than one employee.
Verifiable Business Activities
The place of business shall not be only an “empty shell”, but an operating place of business. Respective criteria might be:
- The company should be able to proof communication with its suppliers and customers (emails, letters, call notes).
- Signing of contracts with suppliers and customers by the director of the company.
- Traceability of the director’s discretion in his or her decisions.
- The director of the company should be signatory of the company’s bank accounts.
It is of course up to your discretion where and how to establish a place of business for your Cyprus Company or Malta Company.
Beneficial owners should avoid business activities on behalf of their foreign company, in their own country
If the shareholder or beneficial owner conducts business in his or her own country on behalf of his or her foreign company, the foreign company might become liable for taxes to be paid in the country of the shareholder or beneficial owner. Cyprus tax residency (or Maltese tax residency) requires that the Cyprus (or Maltese) company is apparently managed from Cyprus (or Malta), Please consult Shanda Consult or your tax consultant in your country for more details.
Attend your duties as your company’s shareholder!
It is common that shareholders personally follow up the business of their companies and their directors, and that they attend shareholder meetings. You should not neglect your shareholder responsibilities. The tax authorities of any country would become suspicious if a shareholder does not travel to the country where his or her company is active to control its business.