Corporate tax residency is determined with the management and control test. This means a company is considered to reside in Cyprus, and is therefore subject to Cyprus taxation, when it is controlled and managed within the territory of Cyprus, regardless of where the company is incorporated.

During December 2021, The Cypriot House of Representatives approved bills that amend the Income Tax Law in regards to corporate tax residency. The definition of corporate tax residency will be expanded in December 2022 to include the incorporation test, in addition to the management and control test. This means that companies that are incorporated in Cyprus and are not tax residents in other jurisdictions, regardless of their management and control location, will be considered a Cyprus tax resident.

The purpose of this amendment is intended to ensure that entities incorporated in Cyprus and are not tax residents in other jurisdictions are included in Cyprus’s tax collections. However, it is likely that entities will be taxed in other jurisdictions based on their management and control. This means that in order to benefit from Cyprus’s tax policies, companies would also want to maintain their management and control in Cyprus. This would ensure that their tax residency is clear and safe.

Interpreting Management and Control

Common law establishes the tax residency of a company as the location where its business is conducted. Specifically, The case of De Beers Consolidated Mines Ltd v Howe [1906] AC 455, 5 TC 198 states that “a company resides for purposes of income tax where its real business is carried on  that as the true rule, and the real business is carried on where the central control and management actually abides.” This guided the formation of Cyprus’s income tax law. This is the management and control test that determines residency for tax purposes.

The management and control of a company is exercised by its board of directors in its day to day operations. Shareholder residency is irrelevant when determining tax residency of a company. If a company’s board of directors is controlling and managing the company’s activities from Cyprus, holding their meetings and making policy and finance decisions, the company will be considered a tax resident of Cyprus, regardless of where those business activities are actually conducted.

Identifying the Location of Management and Control

The tax residency status of a company can be determined by assessing the following factors:

• Renting or buying office space in Cyprus for business purposes
• Appointing a Cyprus resident as a director who has the authority to make independent business decisions
• Having a functional telephone line, website and email domain in Cyprus
• Having a business account with a Cyprus bank
• Hiring employees and arranging payment of payroll taxes
• Registering the company with social insurance requirements
• Making major company decisions in Cyprus
• Storing physical documents (financial statements, legal agreements, etc.) in the Cyprus office
• Working with professionals based in Cyprus who provide advice to company directors
• Creating an income stream based in Cyprus
• Keeping power of attorney limited to those residing in Cyprus

The following factors weaken the standing of a company as a tax resident:

• Appointing directors that reside outside of Cyprus
• Appointing directors that reside in the location that generates the company’s income
• Renting offices but keeping them empty
• Appointing unqualified directors or directors that are appointed in many other companies
• Using bank accounts that are located outside the place of business or used by persons that are not located in that place of business
• Using telephone numbers and websites registered abroad
• Issuing power of attorney to allow others abroad to make business decisions that should be handled by the board of directors or other employees

Dual Residency and Double Tax Treaties

Cyprus has belonged to a significant number of Double Tax Treaties. Dual residency issues can arise when the management and control of a company is performed by directors, shareholders, or advisors that are located in various countries. In these cases, if there is a Double Tax Treaty in place, a management “tie-breaker” rule is used to identify the residency of the company as the location where “effective management is situated.” If there is no Double Tax Treaty in place, or the situation is otherwise unclear, local laws should apply to resolve the tax situation.

Conclusion

Currently and until December 2022, companies either based in Cyprus or other countries are considered Cyprus tax residents if their management and control is exercised in the country. The guidelines mentioned above should be used to establish tax residency in Cyprus.

It is not entirely clear how the new amendment to the income tax law will be interpreted once it takes affect in December 2022. The location of a company’s management and control should be considered carefully, as there is a risk that local laws will have to determine tax