A company is considered to be a resident in the country in which management and control is located and implemented. Even though an entity can have more than one place of management, an entity can only have one place of effective management at any given time. See table
|Company incorporated in Cyprus||Management and Control in Cyprus||Cyprus tax resident company|
|Yes||No||No – Up to 31/12/2022 Yes – As of 01/01/2023*|
*As of 01/01/2023, all companies that are incorporated in the Republic of Cyprus, with management and control outside the republic, are considered a Cyprus tax resident company, assuming that the company is not a tax resident in another state.
When it comes to determining management and control, there is no clear definition. However there are factors that are taken into consideration and criteria according to OECD.
See full list of conditions and criteria that are considered when assessing if management and control is located in Cyprus:
- Directors: Are the majority of the directors Cyprus tax resident individuals? If yes, then the company will need to prove that these directors carry out their duties in Cyprus. It is important to note that directors must be properly qualified, with experience and expertise. In addition to this, directors must be employed by the company and receive an appropriate level of compensation that matches their qualifications. This is important, since if it can be challenged that the director does not have sufficient expertise, and then this may demonstrate that the director is not the actual decision-maker and may raise red flags. Appointing nominee directors or directors outside Cyprus are considered negative factors and ideally should be avoided.
- Management decisions: Are the key strategic and management decisions made in Cyprus by the directors of the company? This is confirmed with minutes of meetings conducted in Cyprus along with ensuring that resolutions, agreements, strategic decisions, contracts and other important documents are signed in Cyprus.
- Office: Does the company hold a fully-fledged office in Cyprus? The office should have its own business line, email account and all furniture and equipment necessary to operate. In addition to this, the office must have sufficient personnel necessary to manage company's matters. Also any hard copies of important agreements, invoices etc. that are executed in Cyprus must be stored in the office. Accounting records, share register, company seal and other administrative documents must also be kept in the company's offices. Company must also hold a lease agreement if the office is being rented.
- Bank: The Company's bank accounts must be managed and controlled by Cyprus residents, even if the accounts are held in overseas banks.
Cyprus Tax Residency Certificate:
Even though there is no clear definition of management and control in Cyprus law and regulations, by examining the tax residency certificate request and questionnaire for legal entities who aim to obtain a Cyprus tax residency certificate, there is a pattern of questions asked. These questions assist companies in understanding what is taken into consideration by the authorities when assessing the application for tax residency. A few of the key questions included in the application request are listed below:
- Are the majority of board of directors meetings held in Cyprus?
- Are board of directors minutes prepared and kept in Cyprus?
- Are the majority of board of directors Cyprus tax residents?
- Has the company issued any General Powers of Attorney?
In order for a Cyprus tax company to enjoy the benefits of double tax treaties and be taxed under Cyprus corporation tax on their worldwide income, the issuance of a tax residency certificate issued by the Cyprus tax authorities is required.
When it comes to determining where foreign company profits will be taxed, countries such as Russia, Germany, Italy, France and others, assess where the company manages its business effectively and where it generates its profits. For example, if a company is incorporated in Cyprus but it is effectively active in Russia, then profits in Cyprus may be challenged to be taxed in Russia. Holding a Cyprus tax resident certificate in place can assist in such situation.
Exchange of information:
There are circumstances under which foreign jurisdictions request from the Cyprus tax authorities to exchange information on transactions in order for them to assess whether the company can be classified as a Cyprus tax resident or not. Examples of questions asked from a foreign jurisdiction are:
- Does the company hold office facilities and are the facilities in line with the size and operations of the business?
- Where are important management decisions taking place?
- Does the company have qualified staff and are they compensated appropriately?
- Information regarding board of directors and other officials;
If the answers to the above questions are not satisfactory in the eyes of the foreign jurisdiction then they may not grant double tax treaty benefits, even though the company may hold a Cyprus tax resident certificate. Proper substance is crucial in order for a company to operate in Cyprus and claim double tax treaty advantages and have rights to the EU Directives.
Therefore it is important to ensure that a Cyprus Tax Company is properly structured, managed and has sufficient substance in order to act as a shield against any foreign tax authorities attempting to challenge the company's tax residency and force tax under their own laws.
Each company is different and there is no standard approach to follow. Each company must be viewed on a case-by-case basis. Oxford Tax Solutions can provide guidance and assist every step of the way.
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.