The “Tax residence” of a company/entity basically indicates the jurisdiction/country in which that company’s worldwide income is liable to tax.
There used to be a time when preservation of a “tax residents certificate” was consider as prima facie evidence of a company’s tax residence.
According to Cyprus income law a company is tax resident in Cyprus if its management and control are exercised in Cyprus. A tax residence certificate can be obtained by filing a “tax residency certificate request and questioner for legal entities” which inter alia includes a declaration by the director that management and control is exercised in Cyprus.
The “tax residency certificate request and questioner for legal entities” examines if the Cyprus Tax Authority’s minimum requirements for tax residencies are met.
Even though the Cyprus Tax authority is not expected to challenge the tax residence of a Cyprus registered company, foreign tax authorities/jurisdictions might.
Therefore, following the above, a successful challenge of the Cyprus tax residency of a company might result in:
A) The loss of the benefits derived from Cyprus’s extensive Double Tax Treaty Network and benefits derived from the EU Parent Subsidiary directive.
B) Income being liable to tax in another jurisdiction.
Creating sufficient substance in Cyprus is the key for limiting the chances of such a successful challenge.
Substance is the creation of supporting evidence for the effective ‘management & control’ principle. Substance evidence includes, but it’s not limited to:
o Local office rent;
o Hiring of local employees;
o Using local professionals;
o Keeping all company records locally;
o Cyprus resident bank signatory;
o Use of Cyprus utilities (water/electricity/telephone);
o Use of company webpage.
Following most of the Tax Jurisdictions, the Central Bank of Cyprus through its circular “Shell companies/entities” also examines whether a Cyprus resident company claiming tax/DTT/EU Directive benefits, has substance or is just a “Shell Company”.
Banking in Cyprus is not permissible for “Shell Companies”
Banking in Cyprus is permissible for companies that:
o Have substance and Physical Presence in Cyprus or
o Have operations in Cyprus or
o Have established economic activities:
1. Hold shares;
2. Hold assets;
3. Act as group treasurer;
4. Facilitate currency trades;
5. Any other legitimate business with identifiable UBOs.
Banking in Cyprus is permissible for the above companies, subject to the bank’s Risk-Based approach.
In conclusion, current “international taxation and banking practice developments” necessitate the abolishment of differences between the legal form and the substance of company operations, Incorporation certificates should be backed up with real existence.
L. Gnaftis & Co is an Audit, Accounting, Tax and Business Consulting firm based in Limassol, Cyprus.
L. Gnaftis & Co can assist by reviewing your current structure, recommend changes and contribute in achieving the implementation of such changes
Tel: +357 25817577
Fax: +357 25817522
Address: Anexartisias & Athinwn, Nora Court, 2nd Floor
We help you achieve the financial future you deserve.