Cyprus Tax Residency
Place of taxation, place of business, tax residency – where will profits be taxed?
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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 generate profit, 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. As per the laws of Cyprus, a company’s tax residency is established when the director of a 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 or her work in Cyprus, achieving the majority of company and business management carried out from Cyprus.
Other countries, for example France, Russia, Germany, Italy and others, are rather evaluating where the company actually conducts its business effectively and where it generates its profits, 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 company in Cyprus, effectively conducts active business in country B, for example Russia, then the profit of the company in country A (e.g. in Cyprus) might become taxable in country B (e.g. in Russia). Therefore, establishing effective Cyprus tax residency from the perspective of country B is important.
There might be several cases where a company effectively conducts active business in another country, for example:
- The company in country A (e.g. in Cyprus) opens an office in country B (e.g. in Russia) and carries out business in country B;
- The shareholder(s) or beneficial owner(s) of the company in country A (e.g. in Cyprus) are effectively conducting business and generating profit in their own country B (e.g. in Russia).
The above scenario 2. is often the case when, for example, the Russian shareholder of a Cyprus Company acts in Russia on behalf of the Cyprus Company, by visiting customers of the Cyprus Company that are resident of Russia, 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, for the
Result: The place of tax residency as per the one country can be different from the place of tax liability of a company as per the other country. This is actually not new, but implemented in Article 5 of the OECD standard double taxation agreement proposal since some years. However, it is relatively new that countries are focusing on the place where business is effectively carried out and profits generated, 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, has a place of business in with operational substance in the country of registration, a so-called permanent establishment. Maintaining operative substance distinguishes a tax-resident onshore company from a non-tax-resident offshore company. Cyprus tax residency is essential for Cyprus companies, meeting applicable substance requirements.
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 was indeed maintaining a permanent establishment in that other country, which means that it indeed did maintain 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 other company.
However, things have changed and tax authorities are now evaluating where the business of a foreign company is actually conducted effectively and where profits are generated. 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 tax liability 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.
Tax Residency and Place of Business (“Substance”) – Recommendations:
Get Professional Consultancy in Your Country
We recommend to consult a tax advisor in your country, who is experienced in international taxation and cross-border tax implications.
Operative Place of Business in Cyprus
Please keep in mind that your foreign company, for example a Cyprus 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 legislation of the beneficial owner’s country, documented and resilient tax residency based on operative substance in the country of a company’s registration 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:
- Fully-fledged 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 company should have its own website, preferably with a domain extension of the country where it is registered;
- The director of a company shall be employed with an adequate salary and be managing the company within the guidelines provided by the Memorandum & Articles of Association and additional shareholder resolutions, if applicable.
Depending on the kind and scope of business, the company may need more than one employee.
Verifiable Business Activities
The place of business is not only an “empty shell”, but an operating place of business. Respective criteria might be:
- The company shall 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, within the guidelines provided by the Memorandum & Articles of Association and additional shareholder resolutions, if applicable;
- The director of the company shall 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, keeping in mind possible consequences.
Beneficial owners must 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 requires that the Cyprus company is apparently managed from Cyprus.
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 (perhaps rightfully) become suspicious if a shareholder does not travel to the country where his or her company is active to control its business.