Cyprus Registered Companies and Cyprus Branches that may not be taxed elsewhere but instead only in Cyprus
Many individuals and corporate groups have set up companies in other jurisdictions to ring-fence their risks, to create flexibility when a particular business is going to be disposed of, for asset protection, for better control and management of departmental activities, to manage and control effectively regional activities, to split risks amongst regions and continents as well as for many other reasons. However, many tax authorities around the world may see them as tax avoidance vehicles especially if they record high income.
But what can be the real situation under such circumstances and when a Cyprus Registered Company or a Cyprus Branch may not be taxed elsewhere but instead only in Cyprus?
If a Cyprus registered company or a Cyprus branch is considered a tax resident of Cyprus and not a tax resident of another jurisdiction the Cyprus Company or the Cyprus Branch is taxed only in Cyprus
In regards to the taxation of a company’s or branch’s profits, the place of tax residence of a company or a branch is of the utmost importance. Then how tax residence is determined?
- Tax residence in Cyprus is determined by Cyprus legislation which in turn takes into account EU directives applicable in Europe, the double taxation treaties concluded between Cyprus and other countries, the Organization for Economic Cooperation and Development – OECD guidelines, and other relevant bodies.
- Tax residence in other EU countries is mostly determined by the EU Directives, the Organization for Economic Cooperation and Development – OECD guidelines, and the relevant double tax treaties concluded between two relevant jurisdictions and
- Tax residence in regards to the rest of the world countries is mostly determined by the Organization for Economic Cooperation and Development – OECD guidelines and the relevant double tax treaties concluded between two relevant jurisdictions.
It is therefore important to demonstrate that a Cyprus registered company or a Cyprus branch is a Cyprus tax resident Company or a Cyprus tax resident branch.
Then how tax residency can be defined and determined? A tax residency can be determined from the company’s place of effective management and or from the company’s or branch’s permanent establishment. Then how the place of effective management can be determined?
A) When key management and decision-makers meet in Cyprus and therefore decisions are taken in Cyprus
1) Overall – when key management and decision-makers meet in Cyprus and therefore decisions are taken in Cyprus
Cyprus registered companies and Cyprus branches need to demonstrate that key management and decisions are taken in Cyprus. Even though there is no specific definition in the Cyprus income tax law or in any other Cyprus law, as to what constitutes a place of effective management, the definition of the OECD Model Convention in relation to the “effective management site” is the definition most likely to be followed by the Cypriot tax authorities. It is understood by Cyprus tax authorities that effective management/management and control is where the Board of directors meets and/or where key management decisions are taken.
Generally, globally the place of effective management is the place where the key management and commercial decisions that are essential to conducting the work of the entity or a branch are essentially made. The key element in the control and direction of a company’s operations is the making of decisions that set the company’s or branch general policies and determine the direction of its operations and the type of transactions it will enter. It is different from the day-to-day conduct and management of its activities and operations, which is not ordinarily regarded as an act of central management and control. However, for small companies or branches, their day-to-day conduct and management of a company’s or branch operations may still be an exercise of management and control.
2) The type of decisions taken – Investment policies, buying and selling of shares or significant assets, appointing officers, concluding commercial contracts eta.
Exercising management and control of a company or a branch can involve setting investment and operational policy including buying and selling of goods stocks or significant assets, appointing company officers, concluding commercial contracts, including determining how profits are used, and the declaration of dividends. Matters of the company’s day-to-day administration, may not necessarily acts of management and control.
3) Director’s and management knowledge
The directors’ and management knowledge is also relevant. A lack of knowledge sufficient to enable the key management to make decisions, suggests they are not the real decision-makers of the entity (Registered company or a branch).
4) If an outsider dictates or controls the decisions made by the directors or managers
If an outsider actually dictates or controls the decisions made by the directors or managers, the outsider will exercise management and control of the company. It is therefore important that the company’s directors and key – managers must not be directed by outsiders or company shareholders, but rather should act independently in the interests of the company.
5) Management and control is not determined by where the directors or managers live but where they actually control and direct
A company’s management and control are not determined by where the directors, or other persons, who control and manage it, are resident or live. What is important is where they actually perform the activities to control and direct the company.
It is therefore important that in order for a Cyprus registered company or a branch not to be taxed elsewhere but instead only be taxed in Cyprus, key management decisions should take place in Cyprus by real fit and proper persons.
B) When the place of effective management is in Cyprus.
1) Place of effective management
A company will be controlled and directed where the high-level decision-makers make it actually happen. It is not where is registered and formalized, or where the company’s articles of association or statutes require it to be controlled and directed.
2) Multiple places of effective management
The control and direction of a company may be undertaken by those controlling a company in multiple places. However, a company’s central management and control may be divided between more than one place. For the purpose of the management and control test a company’s management and control will only be exercised elsewhere or other than the place of central management and control, if it is exercised elsewhere to a substantial degree, sufficient to conclude the company, is really managed and controlled elsewhere.
3) Management and control is not determined by where the directors or high level of management live
It is worth emphasizing again that where a company’s central management and control is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. What is really important is where the directors and key management actually perform the activities to control and direct the company.
It is therefore important that in order for a Cyprus registered company or a Cyprus Branch to be taxed in Cyprus and not elsewhere, the Cyprus Registered Company or a branch must demonstrate that it is controlled and directed in Cyprus regardless of whether the directors, key management or shareholders of the Cyprus Registered Company live in Cyprus or elsewhere.
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