New Cypriot tax residency rules

Recently the Cypriot parliament approved a law which introduced new tax residency rules for individuals. The new law, which is effective retrospectively from 1st January 2017, amends the provision of the ITL (Income Tax Law), and now means that, in certain circumstances, an individual can be deemed tax residence in Cyprus, even if they spend less than 183 days in the Republic in a tax year.

Formerly, the rules stated, that in order to be deemed tax resident in Cyprus, an individual needed to spend an aggregate of 183 days or more in any tax year in the Republic. The day of arrival counts as one day spent in the Republic, the day of departure as a day spent outside. If you departed and came back to the country on the same day, then that was counted as a day spent in Cyprus, whereas arriving and departing the Republic on the same day was regarded as day outside.

The amendment to the law now states that somebody can be deemed to be tax resident in Cyprus if they meet a number of following cumulative conditions.

If the individual does not stay in any other state for one or more periods, exceeding, in aggregate, 183 days in the same year of tax assessment, and who is not regarded as tax resident in any other state in the same year of assessment then they can claim tax residency in Cyprus provided that:

  • They stay in the Republic for at least sixty 960) days in the year of assessment; and
  • They exercise any business in the Republic and/or are employed in the Republic and.or holds an office for a person tax resident in the Republic at any time during the year of assessment; and
  • They maintain a permanent residence in Cyprus which is owned or rented by them.

One proviso is that, even if an individual meets these cumulative stipulations, they will not be considered tax resident in Cyprus, if the business, employment or office they hold is terminated or comes to an end.

The new provisions are designed to offer an incentive for individuals to transfer their tax residency to Cyprus, and to be taxed only on income from activities that the individual carries out in the Republic.

This new law makes it attractive for an individual with earnings in excess of €100,000 to be regarded as tax resident but non-domiciled in Cyprus (non-dom). This is because they are granted an exemption from Income Tax and Defence Tax on dividends received either in Cyprus or aboard. They are also allowed an exemption from tax of 50% of their salaries for up to 10 years, which can substantially reduced their income tax liability.



Permanent Establishment – Are new rules on the cards?

Permanent Establishment is a concept anchoring much current tax legislation. Any activity which is carried out by a business in a country that results in the generation of revenue in that country is likely to be regarded as a Permanent Establishment (PE); on that basis, local authorities will assess corporation tax on deemed in-country revenue. To be formally recognised as a PE, the revenue-generating PE will normally need to be registered as some form of corporate entity in the host country – either as a branch, a subsidiary, or representative office.

There is no universal definition of PE – it is usually determined on a country by country basis, by reference to local law and applicable double tax treaties. However, there are a number of commonly used indicators to determine whether the activities of a foreign organisation give rise to a PE in a particular country. These include:

  • If an organisation operates out of a fixed place of business in the host country (this can either be a fixed office or even an office in an employee’s house);
  • If an organisation’s employees in the host country receive some form of sales-based compensation, such as commission or bonuses;
  • If the job-title of an employee includes some reference to sales or revenue generation, and that employee has been contracted in the host country for a prolonged period of time; and
  • Sales made to customers in the host country which have been negotiated by locally-based staff or agents.

When an activity is deemed, however, to be preparatory or auxillary in nature – in other words it is not an essential part of business as a whole – then PE is generally not regarding as existing; although, in practice, it may be the responsibility of the tax payer to demonstrate that it does not exist, rather than that of tax authorities to prove that it does.

Essentially, this tax residency approach has been the fundamental behind the concept of PE for more than a century, which makes a recent proposal, leaked and published by Reuters, all the more radical. At a meeting held in Tallinn last weekend with EU Finance Ministers, a proposal was put forward by Estonia, which currently holds the presidency of the European Union, to amend and change the definition of PE.

Under their proposal,rather than using tax residency as the basis for determining Permanent Establishment, value creation should be used instead. In other words, a multi-national would be taxed according to the value it created in a host country; that virtual PE would be considered enough to substantiate a taxable presence in a country and, therefore, make it liable to corporate income tax.

This would have potentially large-scale implications for international taxation and the application of double-tax treaties, and comes hard on the heel of news that the OECD, in the light of the BEPS initiative and consideration of the tax treatment of technology groups, has indicated that the definition of PE is up for wider debate.

It is acknowledged that theseproposals are radical, and that a consensus needs to be built before there is wider acceptance of the need to change the definition of Permanent Establishment. Nevertheless, this could mean yet another shake-up to the taxation of foreign subsidiaries, and another level of complexity added for accountants, tax experts and managers of multi-national organisations.