Updated: Sep 20
Recent developments and pressure from the EU and the OECD have led many international business centres to change their regulations and legislation to adopt actual substance requirements.
Recent developments and pressure from the EU and the OECD have led many international business centres to change their regulations and legislation to adopt actual substance requirements. This is not a new trend but it is the outcome of a decade-long global enforcement to tackle and eliminate tax evasion.
These international business centres (including but not limited to Bahamas, Bermuda, Belize, British Virgin Islands, Cayman Islands, Guernsey, Jersey, Isle of Man, Mauritius, and Seychelles) are forced to follow the newly set requirements or will face the high probability of being added in the EU tax haven list.
Cyprus as a business-oriented jurisdiction has and will continue to be affected by global changes in the subject of taxation, but with some premeditated maneuvers a corporation can avoid many hindrances in its activities whilst being in line with local and international tax regulations.
Generalizing the core requirements for these international business centres include as a minimum the employment of (1) qualified directors and actual physical presence in meetings at the jurisdiction of incorporation, (2) employment of qualified staff in line with company’s activities, (3) properly equipped offices in the jurisdiction in line with company’s activities and (4) actual economic presence in the jurisdiction.
It can be argued that many of these international business centres will become unfavourable due to the difficulty in implementing the aforementioned.
In contrast with international business centres, as mentioned above, Cyprus is an EU member with a strategic location in the Mediterranean, with one of the most favourable tax systems and with the infrastructure, workforce and pro-business mind-set to implement the stricter requirements of the law with greater ease and cost efficiency.
Residence is a word that has a different meaning depending on the context which is used in. It has a specific meaning for legal purposes and a different significance for tax purposes.
A corporation’s or an individual’s tax residence basically is the jurisdiction to which tax liability arises. The conditions for establishing tax residency in a particular jurisdiction depends on the rules applicable in the given country and these differ substantially from jurisdiction to jurisdiction. Each jurisdiction has different tests which are implemented to identify whether an individual or a legal entity is a tax resident.
The main test for tax residency in regards to individuals is usually physical presence but several other factors might be taken into account.
In respect to companies, tax residency is customarily based on the place of incorporation or the place of management and control of the company, but most jurisdictions take other factors into account. Management and control commonly mean the place of effective management and as a minimum management and control is thought to be exercised at the place where the Board of Director meets and takes decisions.
The question of how someone can define his tax residency is a question of fact and the answer depends on all the relevant circumstances of each individual or corporation.
Tax Residence in Cyprus-General Information
It is vital for a corporation and an individual to determine whether they can be considered as Cypriot Tax Residents or Non-Residents. Each group has different tax liabilities and obligations. Non-Residents are not taxed on their worldwide income and their tax liabilities derive from the income that is either brought in or originates within Cyprus.
In contrast Cypriot Tax Residents are taxed based on their worldwide income irrespective of its source.
Different characteristics and factors exist in determining the tax residency of an individual and the tax residency of a legal entity. For individuals local law suggests that they are Cypriot Tax Residents if they stay in the Republic of Cyprus for a period or periods that exceed the aggregate of 183 days in the tax year or when the following conditions are met within the tax year:
i. The individual is not a tax resident of any other jurisdiction
ii. The individuals had not spent 183 days or more to any other jurisdiction
iii. The individual enjoys a permanent residential home in Cyprus that is either rented or owned.
iv. The individuals is employed or carries on a business in Cyprus or holds an office in a Cypriot Tax Resident corporation.
In contrast with other international jurisdictions, Cyprus does not follow the incorporation principle. This means that a company cannot be considered as tax resident merely on the fact that it has been incorporated in Cyprus. The corporation must show primarily that the management and control is effectively in Cyprus. Therefore, Cyprus enjoys a residence-based system to determine residency for legal entities.
Management and Control
Although management and control is the main factor in determining the tax residency of a legal entity, local law does not explicitly define this phrase. Cyprus Tax Authorities therefore take into consideration various factors to reach a conclusion on the question of residency.
The following factors are the most important:
a. The constitution of the Board of Directors of the entity (whether it includes local officers)
b. The place where the Board of Directors make their decision making and if this decision-making process applies thoroughly the corporate rules and the place where the Board of Directors approve the financial statements of the company.
c. The place where the seal of the company is kept
d. The control over the bank account of the company and whether the bank account is within the Republic.
Other factors that show that effective management occurs in Cyprus:
a. Memorandum and Articles of Association have the necessary provisions that minimize taxable presence in other jurisdictions.
b. Record keeping should be made in the Cyprus offices
c. Accounting function should be made in Cyprus along with other transactions and financial activities (issue of invoices/receipts etc.)
d. The company should have personnel and office space situated in Cyprus.
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