Tax resident status in Cyprus

At the end of February 2009, the tax authorities in Cyprus refused to confirm the tax residence – and rejected the related request for a Certificate of Tax Residence – for one of our companies in which the directors were not resident in Cyprus for tax.

We can conclude from this that this is likely to be the standard practice in the future, with rejected applications for all those companies in which the company management can not be seen to be carried out by directors resident in Cyprus. And without such a certificate, the company can not benefit from the advantageous conditions offered by the agreements signed by Cyprus for the avoidance of double taxation.

Unlike the majority of European Union members, who base the tax residence of a company on the place of registration, Cyprus employs the “management and control” system, focusing on the actual place of management. In this way, a company registered in Cyprus is only actually resident for tax purposes, if the company is also managed from Cyprus. The tax authorities do not have a fixed method of deciding on tax residency, but in the management and residency test to decide whether or not the company was managed from Cyprus, the following factors are generally taken into consideration:

- the tax residency of the majority of the directors

- the place where the major decisions regarding the operation of the company are taken and where minutes recording such decisions are signed

- the place of signature of trading contracts

- the place where invoices in the company name are issued and by whom

- the location of the company’s bank account

- the persons authorised to manage the bank account

- whether or not the company has issued a general power of attorney, allowing somebody outside Cyprus to act on behalf of the company

- whether the company directors have issued any specific powers of attorney, and with what rights

- the place where the company’s original corporate documents and stamp are held

- whether or not the company has telephone and fax numbers and an email address in Cyprus

- whether or not the original documents relating to the administration of the company can be found in Cyprus

This list of conditions is particularly complex, and accordingly numerous factors should be considered before an accurate decision can be reached. In our experience, however, the tax office are not keen to go into too much detail in the decision-making process, and generally choose the simple route: if the majority of the directors are private individuals resident in Cyprus for tax purposes, then the company is also usually considered to be tax resident in Cyprus.

As taking advantage of the agreement for the avoidance of double taxation is, after the “prestige of being registered within the European Union”, one of the major reasons for the registration of companies in Cyprus, from now on LAVECO Ltd. only recommends to its clients the formation of companies in which the majority of directors are resident in Cyprus.

For existing companies, and in particular those which have obtained an EU VAT number, we recommend that, if this is not already the case, changes be made in the board of directors, appointing a majority of Cyprus residents, in order to satisfy the requirements listed above. Another potential problem is that companies which have obtained an EU VAT number could have this number revoked by the VAT office, if the company is not being managed from Cyprus; if a company is not resident for tax purposes, then it does not have the right to have an EU VAT number.

If you would like to receive more information on the procedure for making changes in the board of directors, please contact one of our customer service representatives in the offices of LAVECO Ltd.

Despite this, in a recent survey by the international firm of consultants, KPMG, of the opinions of 400 European financial specialists, Cyprus came out in first place in the list of European countries based on the total tax environment.