I. INTRODUCTION

In this publication, we shall examine the notion of "management and control" οf companies as this is applicable in Cyprus and how it affects the taxation of Cyprus and Overseas companies.

II. THE LAW

Basis of Taxation

A company or an individual are taxed in Cyprus, if they are residents of Cyprus, subject to specific exceptions1.

The residency requirement as the basis of taxation, is provided in article 5(1) of the Income Tax Law, No. 118(I) of 2002 as amended, hereinafter referred to as the "Income Tax Law".

Article 5(1) of the Income Tax Law provides the following:

"Subject to the provisions of this law, in the case of a person who is resident in the Republic, tax shall be charged at the rate or rates specified hereinafter for each year of an assessment upon the income accruing or arising from sources both within and outside the Republic, in respect of: ..."

Meaning of Resident in the Republic

The meaning of "Resident in the Republic" is defined in the Income Tax Law article 2 which provides the following:

"Resident in the Republic, when applied to an individual, means an individual who stays in the Republic for a period or periods exceeding in aggregate 183 days in the year of assessment and when applied to a company, means a company whose management and control is exercised in the Republic and "non-resident or resident outside the Republic" shall be construed accordingly and non-resident or resident outside the Republic shall be interpreted accordingly".

Pursuant to this provision, a company is considered to be resident of Cyprus, and in effect subject to Cyprus taxation, when its "management and control" is exercised in Cyprus.

In addition to the above meaning of Resident in the Republic as to companies, as from 31.12.2022, a company, which is established or registered pursuant to any law in force in Cyprus, will by default be considered as Resident in the Republic, provided it is not tax resident in any other country.

In article 2 of the Income Tax Law, the proviso of the definition of the meaning of "Resident in the Republic", provides the following:

"It is provided that, a company which has been established or registered pursuant to any law in force in the Republic, of which its management and control is exercised outside the Republic, it is considered that it is resident in the Republic, unless the said company is tax resident in any other country".

This provision is applicable as from 31.12.2022, identified as the incorporation rule for taxation purposes.

Meaning of Company

The Income Tax Law, in article 2, identifies the notion of company to be "any legal body registered either in Cyprus or abroad".

Taxation of Companies

All companies, anywhere registered, being residents of Cyprus are taxed on their worldwide income, accrued or arising from sources in Cyprus and/or abroad.

As per the above provisions of the Income Tax Law, a company:

  1. If it is incorporated in Cyprus, it is resident of Cyprus, the incorporation rule applies and it is subject to Cyprus taxation;
  2. If it is incorporated in Cyprus with management and control outside Cyprus, as from 3.12.2022, it is resident of Cyprus, unless it is tax resident in any other country2;
  3. If it is incorporated outside Cyprus but its management and control is in Cyprus, then it is resident of Cyprus, subject to Cyprus taxation.

A Cyprus resident Company, is liable to taxation on its worldwide income.

Note: A special case may arise when a company has dual residency. This happens when there is fragmentation of the management and control in various countries. In such a case, if a Double Tax Treaty (DTT) is in force between the relevant countries, the company will be tax resident in the country where its effective management is exercised. In case there is no Double Tax Treaty in force between the relevant countries, the company will be tax resident as per the applicable laws of each country where the management and control is exercised. If the laws of the various countries have conflicting rules as to this issue, then there might be a state dispute as to where the company is tax resident.

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Footnotes

1 See further below under the heading," Taxation of Companies" at page 5, what is provided as to the taxation of non-resident companies of Cyprus.

2 "Common Law" is the body of legal rules, based upon court decisions and not on statutory law made by a parliament, embodied in reports of decided cases, that has been administered by the common-law courts of England since the Middle Ages. Common laws vary depending on the jurisdiction, but in general, the ruling of a judge is often used as a basis for deciding future similar cases.

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.