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 by country.
Generally, 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.
The following are important points related to Cyprus Tax Residency:
Some countries (Cyprus, Malta, and others) are focusing on the place of management in order to determine the tax residency of a company. In said countries, the place of management is generally defined by the residence of the majority of a company’s directors. A company’s tax residency is established when the director of a company resides in Cyprus or (in the case of more than one director) the majority of directors reside in Cyprus. If the company has one resident and one non-resident director, the non-resident director needs to carry out some of their work in Cyprus, achieving the majority of company and business management carried out in Cyprus.
Other countries (France, Russia, Germany, Italy, etc.) are evaluating where the company actually conducts its business effectively and generates its profits in order to determine the taxability of a foreign company’s profits. The following general rules apply in said countries:
If a company registered in country A conducts active business in country B then the profit of the company in country A might become taxable in country B. Therefore, establishing effective 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:
1. The company in country A opens an office in country B and carries out business there;
2. The shareholder(s) or beneficial owner(s) of the company in country A are effectively conducting business and generating profit in their own country B.
Result: The place of tax residency in the initial country can be different from the place of tax liability of a company in the other country. This is implemented in Article 5 of the OECD standard double taxation agreement proposal. Recently, countries have been 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.
The BEPS approach (Base Eroding and Profit Shifting) has also been recently implemented.
The Place of Business in Cyprus
It is important that a company has a permanent establishment (operative substance). This distinguishes a tax-resident onshore company from a non-tax-resident offshore company.
Tax authorities are now evaluating where the business of a foreign company is conducted effectively and where profits are generated. Renting an office in the country where the foreign company is registered is not enough. The place of business of the foreign company must be operative and conduct business itself.
The place of tax residency and the place of tax liability can be different. Country-related tax legislation may result in different evaluations regarding the country of taxability.
Tax Residency and Place of Business (Substance) Recommendations:
Get Professional Consultancy in Your Country
We recommend consulting 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 needs an operative place of business in order to comply with recent international taxation rules.
The shape and scope of the place of business depend on the type of company. An operative place of business usually consists of a physical office and verifiable business activities. As per the legislation of the beneficial owner’s country, documented and resilient tax residency based on the operative substance in the country of a company’s registration is of utmost importance.
Verifiable Physical Infrastructure
The verifiable physical place of business should comply with the legal minimum requirements of the beneficial owner’s country. The following minimum criteria must be met:
1. Physical office, verified by a rental contract;
2. The company must be reachable by phone, with its own phone number.
3. The company should have its own website
4. The director of a company shall be employed with an adequate salary and manage the company within the guidelines provided by the Memorandum & Articles of Association
The company may need more than one employee depending on the size and scope.
Verifiable Business Activities
1. The company shall be able to prove communication with its suppliers and customers (emails, letters, call notes, etc.);
2. Signing of contracts with suppliers and customers by the director of the company;
3. Traceability of the director’s discretion in his or her decisions;
4. The director of the company shall be the signatory of its bank accounts.
Beneficial owners must avoid business activities on behalf of their foreign company in their own country
If the shareholder or beneficial owner does business in their own country on behalf of their foreign company, the foreign company might become liable for taxes to be paid in the country of the shareholder or beneficial owner.
Attend your duties as your company’s shareholder
It is common that shareholders personally follow up on the business of their companies and directors, attending shareholder meetings. Do not neglect your shareholder responsibilities. The tax authorities of any country would become suspicious if a shareholder does not travel to the country where his or her company is active to control its business.
Simply contact Efstathios C. Efstathiou LLC to consult and assist you with the set-up of your Cyprus Company’s operative place of business.