As a result of the Covid-19 pandemic, special measures have been taken at a global level, including restrictions on travelling, compulsory self-isolation, working from home and the suspension of employment. Such measures restrict the physical presence of individuals at their place of work.
It is within this context that the Cypriot Tax Department ("TD") issued on 27th of October 2020, Circular 4/2020 ("Circular") which relates to the implementation of the provisions on tax residency and permanent establishment in accordance with article 2 of the Income Tax Law, aiming to provide guidance to taxpayers with regards to the potential impact of such special measures on the tax residency status of individuals and companies as well as on the permanent establishment status of businesses.
It is noted that the Organisation of Economic Cooperation and Development ("OECD") has recently issued general guidance on tax matters triggered as a result of such measures.
The TD has indicated that although such guidance is not binding, the intention of the TD is to follow such guidance as deemed appropriate. It has further been noted that the provisions of the Circular will be applied on the condition that the taxpayer elects to do so, otherwise the provisions of the relevant tax law will apply. It has been further clarified that the circular does not take into consideration the possible different tax treatment of the matters raised by other jurisdictions and focuses exclusively on Cypriot tax related considerations.
The Circular defines the period 21 March 2020 to 9 June 2020 as one during which there were objective restrictions in movement as a result of Covid-19, and as such should not be taken into consideration for the application of the referred to legislative provisions (see below analysis). In case the period is to be extended before 21 March 2020 or after 9 June 2020, depending on the case at hand, the taxpayer is obliged to provide relevant supporting evidence which proves the objective restriction to travel by reason of Covid-19 pandemic.
- Permanent Establishment ("PE" ) related considerations
The continuous presence of individuals in a country other than the one where they normally work or the provision of distance employment services during the Covid-19 pandemic may trigger PE risks and consequently, tax obligations.
In this respect it has been clarified that the Covid-19 pandemic will not result in any changes in the way a PE is determined. More specifically, the activities exercised in Cyprus by persons who are physically present in the Republic exclusively by reason of the special circumstances associated with the Covid-19 pandemic, will not be deemed as activities that create a PE in Cyprus. Instead, such activities are temporary in nature and are the result of undesired factors.
Furthermore the Circular makes it clear that the physical presence of individuals in the Republic, due to employment restrictions which result from state guidelines and which have been set in the context of fighting the Covid-19 pandemic, given their temporary nature, should not create new PEs for their employer. Similarly, when employees conclude contracts in the name of a business in a state different from that of their ordinary employment by reason of the Covid-19 pandemic, they do not contribute to the creation of a PE for the business in that state. The same considerations apply for representatives.
The Circular also refers to instances where individuals stayed abroad by reason of Covid-19 pandemic restrictions, whereas under any other circumstances they would have been physically present in Cyprus for the provision of their services or for the exercise of their duties. In these instances, the days spent abroad will not be taken into consideration for the purpose of determining a PE in Cyprus. In substance, it will be deemed that such persons exercised their activities from within Cyprus.
The actual circumstances of each case should also be considered in assessing the degree of permanency of the relevant activities of employees and/or of the representatives in Cyprus, possibly in comparison to the corresponding circumstances before and/or after the pandemic crisis.
- Corporate tax residency considerations
A company which is not tax resident in Cyprus, will not be deemed as establishing tax residency in the Republic by reason of the presence/ stay in its territory of staff, directors, representatives or employees under a contract of service, when the reasons of their stay in the Republic are Covid-19 pandemic related.
Furthermore, the Circular clarifies that the tax residency status of a Company in the Republic will not be affected by reason of a director not being able to travel to the Republic and attend a meeting of the Board of Directors, when the reasons are exclusively Covid-19 pandemic related.
The circular notes that the actual circumstances of each case should also be considered prior to reaching a final decision. All necessary evidence should be kept supporting the case at hand.
- Individuals' tax residency considerations (183 days rule and 60 days rule)
Where an individual is already in Cyprus and his presence as well as his stay are due exclusively to Covid-19 pandemic reasons and of the relevant travel restrictions, the period from 21 March 2020 to 9 June 2020 will not be taken into consideration for the purpose of determining the tax residency of such an individual and taxing his income.
It has been clarified in the circular that in order to prevent abuse of the provisions therein, an individual staying in the Republic for a period exceeding 183 days and wishing to call upon the provisions of this Circular, should furnish relevant evidence to support his claim (e.g. a tax residency certificate issued by a foreign tax authority).
In addition, in the case where an individual stays abroad for reasons relating to the Covid-19 pandemic and other travel restrictions, and who under other circumstances would have been in the Republic, then for the purpose of determining his tax residency and tax obligations, such an individual will be deemed to have been present in the Republic. That is, the days that the individual has spent abroad during the period from 21 March 2020 to 9 June 2020 will be ignored/ not taken into consideration (such period can be extended depending on the case at hand).
The circular indicates that the above principles apply in the case of individuals who are tax resident on the basis of the 60 days rules and on the proviso that they are not tax resident in any other state. The overseas presence of individuals during the period 21 March 2020 to 9 June 2020 will be ignored, and for the purpose of imposing taxation such individuals will be deemed to have been physically present in the Republic on the presumption that the rest of the conditions set in Section 2 of the Income Tax Law are met, i.e.,
- The individual maintains permanent residence in Cyprus
- Exercises a business or employed or holds an office in the Republic
- Did not spent more than 183 days in any other country (taking into consideration the above provisions)
The circular notes that each case will be deemed distinct and will be assessed without reference being made to any other, having regard to its own fact pattern.
- Application of Sections 8(23) and 36(5) of the Income Tax Law
For the purpose of applying the provisions of Section 8(23) of the Income Tax Law, the Circular clarifies that the relevant deduction will be provided in the case the individual suffers a reduction in his employment income (i.e. emoluments being less than Euro 100.000 per annum taking into account any special allowances) as a result of the special Covid-19 pandemic measures taken by the Government and/or the employers. The individual will be deemed to have had income from employment in excess of Euro 100.000 per annum for the purpose of applying this Section, on the condition that there is supporting evidence (e.g. certificate of emoluments, monthly payslips, decision of the employer for a holistic or selective reduction in salaries).
For the purpose of applying the provisions of Section 36(5) of the Income Tax Law, the Circular clarifies that, if an individual was unable to travel overseas for the performance of his duties (in accordance with his employment contract or having regard to the ordinary practice of the business) during the crisis period due to the prevailing circumstances, and after taking into consideration the real circumstances as well as the practice in prior years, the individual's tax position should not be affected in any way. All relevant evidence should be maintained for this purpose.
The Circular includes 3 examples to demonstrate the above principles.
The first example refers to an individual who during 2020 spent 220 days in the Republic, out of which 60 days related to the period of travel restrictions. Given that the ordinary residency of the individual is not in Cyprus, and if the individual elects so, those 60 days should not be taken into consideration for assessing his tax residency in the Republic under the 183 days rule, irrespective of whether tax residency is established in another country.
The second example refers to an individual staying in the Republic for 325 days, out of which 60 days were by reason of the pandemic and travel restrictions. Given that the individual has already spent 40 days outside of the republic (Section 36(5)), then the 60 days should be considered together with the 40 days. As such the individual would have spent 100 days outside of Cyprus for the purpose of applying the provisions of Section 36(5) – on the assumption that the conditions set above in the Circular are met.
The third example refers to an individual who spent only 30 days in the Republic. If the whole period of the restrictive measures had been spent abroad then this period could be considered together with the 30 days already spent in Cyprus for the purpose of establishing tax residency in the Republic on the basis of the 60 days rule. This is assuming that the conditions for establishing tax residency based on the 60 days rule are met.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.