Determining the tax residency of a company is based on the location and implementation of its management and control. While an entity can have multiple places of management, it can only have one place of effective management at any given time. The following table provides an overview:
| Company incorporated in Cyprus | Management and Control in Cyprus | Cyprus tax resident company |
| Yes | Yes | Yes |
| No | Yes | Yes |
| Yes | No | No – Up to 31/12/2022 Yes – As of 01/01/2023* |
*Starting from 01/01/2023, all companies incorporated in Cyprus with management and control outside of the country are considered Cyprus tax resident companies, provided they are not tax residents in another state.
When determining management and control, there is no clear-cut definition, but certain factors are taken into consideration based on OECD criteria. Here are the conditions and criteria considered for assessing the location of management and control in Cyprus:
A. Directors: Are the majority of directors tax residents of Cyprus? If yes, the company must demonstrate that these directors carry out their duties in Cyprus. It is important for directors to be qualified, experienced, and properly compensated. Appointing nominee directors or directors outside of Cyprus is discouraged.
B. Management decisions: Are key strategic and management decisions made in Cyprus by the directors? This is confirmed through minutes of meetings held in Cyprus, as well as the signing of resolutions, agreements, contracts, and other important documents in Cyprus.
C. Office: Does the company maintain a fully-fledged office in Cyprus with its own business line, email account, and necessary furniture and equipment? The office should have sufficient personnel to handle company matters, and hard copies of important documents executed in Cyprus must be stored there. Accounting records, share register, company seal, and administrative documents should also be kept in the office. If the office is rented, a lease agreement is required.
D. Bank: The company’s bank accounts, even if held in overseas banks, must be managed and controlled by Cyprus residents.
Cyprus Tax Residency Certificate:
Although there is no precise definition of management and control in Cyprus law and regulations, the tax residency certificate request and questionnaire for legal entities seeking a Cyprus tax residency certificate provide insight into the factors considered by the authorities when evaluating the application. The application includes several key questions, which help companies understand the criteria used in assessing tax residency. Here are some examples of the questions included in the application:
- Are the majority of board of directors meetings held in Cyprus?
- Are board of directors minutes prepared and retained in Cyprus?
- Are the majority of board of directors Cyprus tax residents?
- Has the company issued any General Powers of Attorney?
To benefit from double tax treaties and be subject to Cyprus corporation tax on worldwide income, a Cyprus tax company must obtain a tax residency certificate from the Cyprus tax authorities.
Other countries: When it comes to determining the jurisdiction where foreign company profits will be taxed, countries like Russia, Germany, Italy, France, and others consider where the company effectively manages its business and generates its profits. For instance, if a company is incorporated in Cyprus but conducts its main activities in Russia, there may be a challenge to tax the profits in Russia rather than Cyprus. Holding a Cyprus tax resident certificate can help in such situations.
Exchange of information: In certain cases, foreign jurisdictions may request information from Cyprus tax authorities to assess whether a company can be classified as a Cyprus tax resident. Foreign jurisdictions may inquire about the company’s office facilities, their suitability for the business’s size and operations, the location of important management decisions, the qualifications and appropriate compensation of staff, and details regarding the board of directors and officials. If the answers to these questions are deemed unsatisfactory by the foreign jurisdiction, they may not grant double tax treaty benefits, even if the company holds a Cyprus tax resident certificate. Having proper substance is essential for a company to operate in Cyprus, claim double tax treaty advantages, and have rights under EU Directives.
Therefore, it is crucial to ensure that a Cyprus Tax Company is well-structured, effectively managed, and possesses sufficient substance to serve as a safeguard against any attempts by foreign tax authorities to challenge the company’s tax residency and impose tax under their own laws. Each company is unique, and a case-by-case approach is necessary.