Management and Control of a Cyprus Company
A company registered in Cyprus is generally considered to be a tax resident there if its management and control resides in Cyprus.
Whilst Cyprus income tax legislation does not statutorily define what constitutes management and control, there are certain measures that a company can exercise in order to comply with what the Cyprus tax authorities consider to be the place of effective management.
These measures, while not extensive, do influence how the affairs of a company should be carried out, how they are managed, in Cyprus.
It is therefore imperative that the following factors are taken into consideration in order to pass the “test” of where management and control lies:
- Where a company has adopted standard Articles of Association through which the board of directors of that company manage its affairs, the test for tax residency is normally satisfied if:
- The majority of that board are Cyprus tax residents themselves.
- All board meetings are held in Cyprus.
- Board of Directors decisions are taken in Cyprus.
- If the Articles of Association of a company registered in Cyprus allows for its management and control to be transferred to any other body such as shareholders or any other committee, then the tax residency of that company will be considered to be where that body is resident.
In addition to the above, with the extensive changes that many countries are making to their legislation to combat tax fraud and tax evasion and also for the prevention of treaty abuse, intense scrutiny by foreign jurisdictions as to the actual substance of a company has become very prevalent when determining tax residency.
What defines substance, especially economic substance, is open to interpretation but for the most part, the factors that are normally examined are whether a company has:
- Its own office space.
- An email address and/or website.
- A telephone and fax line.
- Employee/s (in other words, whether the company is registered as an Employer with the Department of Social Insurance) to carry out the day to day management and other administrative activities of the company in Cyprus. This is taken further by examining:
- Where the employees are based.
- How suitably qualified the employees are.
- Accounting records maintained in Cyprus and that all legal corporate and fiscal obligations are filed timeously.
- Opening local bank accounts to settle expenses.
A concern often raised nowadays regarding the implementation of the aforesaid measures is that cost for setting up a Cyprus company will increase significantly. However, one needs to keep in mind that these costs can be minimised in various ways such as the recruitment of part-time rather than full-time employees or utilising shared serviced offices.
It is important to note that whilst it is unlikely that the tax residency of a Cyprus company will be challenged by the Cyprus tax authorities, a foreign tax jurisdiction could on its own initiative argue the legitimacy of that company being tax resident in Cyprus. In such a case, the onus will be on the Cyprus company to demonstrate to the foreign jurisdiction that it is tax resident in Cyprus, always taking into consideration the applicable provisions of the double tax treaty that exists between the two jurisdictions.