Income tax in Cyprus is based on the principle of tax residence. A company is resident in Cyprus for tax purposes if its management and control are exercised in Cyprus. An individual is resident in Cyprus for tax purposes, if he/she resides therein for a period or more which in aggregate exceed 183 days in the same tax year.
Cyprus tax residents are liable to tax in respect of worldwide income. Non Cyprus tax residents are liable to tax in respect of Cyprus source income only. Non Cyprus tax residents having a permanent establishment in Cyprus may opt, if it is to their benefit, to be taxed as Cyprus tax residents.Under Article 2 of the Income Tax Law of 2002, in order for a person to be considered ‘tax resident in Cyprus’, he/she should reside in Cyprus for more than 183 cumulative days in Cyprus during the tax year (1st January to 31st December).
For the purpose of calculating these days:
- The day of departure from the Republic is considered to be outside Cyprus
- The day of arrival in the Republic is considered to be a day in the Republic
- In case someone arrives and departs from the Republic the same day, then this is considered to be one day of residence in Cyprus.
- The departure and the return to the Republic on the same day is considered to be a day outside Cyprus.
Cyprus takes a split-year approach:
If you arrive in Cyprus later in the year and spend less than 183 days in Cyprus during that year, you will be tax resident from 1st January of the following year, assuming that you intend to (and do) stay for more than 183 days in that year. If you arrive on say 30th April and you are in Cyprus for more than 183 days that year, then you will be considered as tax resident from 30th April.
Under the same Article of the Income Tax Law of 2002, a company is considered to be tax resident in Cyprus, if its management and control is in Cyprus.
Practice indicates that the management and control signifies the ultimate level of policy decision-making (i.e. board of directors). As a result, it is always recommended that the Board of directors of a Cyprus company consists of majority Cyprus tax resident directors and for all board-meetings, in which issues pertaining to the strategic and operational management of the company are resolved in Cyprus.
It is therefore recommended that no general powers of attorney are granted to non-tax resident individuals as such practice could jeopardize the decision making powers and involvement of the company’s directors.
Thus substance, business purpose & proper Company operations/administration issues should be considered. Various levels of substance should be applied to different types of activities i.e. holding, financing, trading, etc and should depend on the extent of the activity, the business sector and the risk assumed.
It is therefore necessary to ensure that a Company satisfies the residence test for taxation purposes and at the same time enjoys the offered benefits under Cyprus tax laws. If the company does not satisfy the management & control test, there is no residence.
Examples of measures which can be taken in order to satisfy the management & control test of a company are:
- Important decisions are taken in Cyprus
- The majority of directors (board members) are Cypriot tax residents
- Accounting & Bookkeeping are carried out in Cyprus
- There is no broad transfer of powers to non-Cypriot resident persons
- Hard copies of documentation are kept in Cyprus
- An office is maintained in Cyprus
- Bank accounts are operated from Cyprus