Cyprus Tax Residence

Налоговое резиденство Кипра
7 January 2022 Vlad Yazykov
3551

Features of tax residency in Cyprus

Many countries pay special attention to the place of management to determine the tax residency of a company.

As a rule, it is determined by the place of residence of the majority of directors of the company. If the company has one resident director and one non-resident director, the second one must carry out part of his work in Cyprus, providing most of the management of the company and business carried out from Cyprus.

Other countries, such as France, Russia, Germany, Italy, are more likely to assess where a company effectively conducts its business and where it generates its profits in order to determine the taxability of a foreign company's profits. In such countries, the following general rule applies:

If a company incorporated in country A (Cyprus) is effectively active in country B (Russia), then the profits of the company in country A (Cyprus) may become taxable in country B (Russia). Therefore, establishing an effective tax residency in Cyprus from the point of view of Country B is essential.

There may be several cases where a company is effectively active in another country:

1. A company in country A (Cyprus) opens an office in country B (Russia) and has business in country B.

2. The shareholder(s) or beneficial owner(s) of a company in country A (Cyprus) have business and make a profit in their native country B (Russia).

The second scenario often occurs when a Russian shareholder of a Cypriot company is acting in Russia on behalf of the Cypriot company, visiting Russian resident clients of the Cypriot company. It also conducts negotiations and signs contracts in Russia on behalf of the Cypriot company. In this case, the Cypriot company has tax liability in Russia.

Relatively new here is that countries are focusing on where business is effectively carried out and profits are generated in order to determine the taxability of foreign company profits.

The BEPS approach is also new. BEPS stands for Base Erosion and Profit Shifting and is an approach to taxing profits where they actually and effectively accrue.

Place of business in Cyprus

It is important that a company, for example in Cyprus, has real business in the country. Maintaining an operational entity distinguishes a tax resident offshore company from a non-tax resident offshore company. Cyprus tax residency is essential for Cypriot companies that meet the applicable content requirements.

Until a few years ago, it was enough for the beneficial owner of a company in another country to be able to prove to the tax authorities of their country that the company in another country actually had a permanent establishment in that other country, which means that it did have a place of business in another country, of course, provided that the beneficial owner was not acting on their own behalf, on behalf of their other company.

However, the situation has changed. Currently, the tax authorities are assessing where a foreign company's business is actually effectively conducted and where profits are generated. Renting an office in the country where a foreign company is registered is no longer enough. The place of business of a foreign company, such as a Cypriot company, must actually operate and conduct business here.

To summarize, the place of tax residence and the place of tax liability may well be different places. The tax laws of a country may lead to different assessments as to the place of taxation, and there may be discrepancies in the applicable tax laws.

Place of business in Cyprus

Please be aware that your foreign company, such as a Cypriot company, needs a workplace in order to conduct business in accordance with the latest international tax rules.

The form and scale of a commercial enterprise depends on the type and scope of the company. Typically, an enterprise workplace consists of verifiable physical office infrastructure and verifiable business activity. In accordance with the laws of the country of the beneficial owner, documented and stable tax residence based on the operating entity in the country of incorporation of the company is of paramount importance.

Verifiable Physical Infrastructure

A verifiable physical business enterprise must meet at least the minimum legal requirements of the country of the beneficial owner. As a rule, at a minimum, the following criteria must be met:

  1. A full-fledged office or office space, which must be confirmed by a lease agreement.
  2. The company must be contacted by phone with its own phone number. A phone bill in the name of the company may also be required as proof of address.
  3. The company must have its own website, preferably with the extension of the country in which it is registered.
  4. The director of the company must work with an adequate salary and manage the company in accordance with the guidelines provided for in the Memorandum and Articles of Association and additional resolutions of the shareholders, if applicable.
  5. Depending on the type and scope of the company, more than one employee may be required.

Audited business activity

A business enterprise is not only an "empty shell" but also an operating business enterprise. Relevant criteria could be:

  1. The company must be able to confirm communication with its suppliers and customers (emails, letters, call notes).
  2. Signing contracts with suppliers and customers by the director of the company.
  3. The traceability of the director's discretion in his or her decisions in accordance with the guidelines provided for in the Memorandum and Articles of Association and additional shareholder resolutions, if applicable.
  4. The director of the company must sign the bank accounts of the company.
  5. Of course, it depends on your discretion where and how to open a business for your Cyprus company, taking into account the possible consequences.
  6. Beneficial owners should avoid doing business on behalf of their foreign company in their own country

If a shareholder or beneficial owner conducts business in their home country on behalf of their foreign company, the foreign company may be liable to pay taxes in the country of the shareholder or beneficial owner. Cyprus tax residency requires a Cypriot company to be managed from Cyprus.

Benefits of Cyprus tax residency

The main positive aspects of Cyprus tax residency:

  1. Cyprus has one of the lowest taxes in Europe, many benefits and tax optimization opportunities. The country has signed a double tax treaty with 65 countries, allowing you to obtain tax residency in just 60 days of residence in Cyprus in a calendar year.
  2. There is no tax on profits from the sale of securities, including stocks, bonds, debentures.
  3. There is no tax on dividends and interest on loan and royalty agreements.
  4. No tax on property, luxury and gifts.
  5. Since 2017, the property tax has been abolished - now the owners pay only the municipal tax, which is 0.1-0.2% of the market value of the property.
  6. No inheritance tax.
  7. No tax on pension payments.
  8. You can choose a special tax regime for foreign pension payments - the first € 3,420 is not taxed, the rest of pension income is 5%.

For those who are employed in Cyprus:

  1. Low rates of payments for social insurance from the salary.
  2. 50% income tax relief if income is over €100,000. The benefit is given for 10 years. The key condition is that a person should not be a tax resident of Cyprus before starting employment.

For those who work outside of Cyprus for more than 90 days a year:

  1. There is no need to pay Cypriot income tax on wages from this employment.

Income that is not exempt from taxes

Non-domiciles pay taxes at a progressive rate (from 0 to 35% depending on the amount of income) on income:

  1. from renting property in Cyprus and beyond
  2. from employment in Cyprus
  3. from the sale of Cypriot real estate and shares of companies owning Cypriot real estate
  4. from commercial activities, for example, as a sole trader
  5. the first €19.5 thousand of income is not taxed.

How to get tax residency in Cyprus

There are two main ways. A person is considered to be tax resident in Cyprus if they comply with the 183 days or 60 days rule in a calendar year.

183 day rule

Everything is simple here - if you live more than 183 days a year in Cyprus, you are its tax resident.

60 day rule

Appeared in 2017. Also simple, but with nuances. First, you cannot have a different tax residency. You must:

  1. stay in Cyprus for at least 60 days in a calendar year and not live more than 183 days in another country
  2. officially work or have a business in Cyprus - be the founder or director of a Cypriot company
  3. buy or rent a property to live in Cyprus during the tax period

All these requirements are mandatory, for violation of the status of a tax resident is canceled.

How to count the days

You are in Cyprus on:

  1. day of arrival in Cyprus
  2. day of arrival in Cyprus, even if you left on the same day.

You are outside on:

  1. day of departure from the island
  2. the day of departure, even if you returned to Cyprus on the same day.

How to confirm:

a certified copy of the passport with entry stamps, boarding passes, electronic tickets.

How to avoid double taxation

Submit a Cyprus tax residency certificate to the tax country of citizenship. Suitable for countries with which Cyprus has signed an agreement for the avoidance of double taxation, including Russia. A tax residency certificate can be requested for the previous and current calendar year. To obtain a certificate, you need to pay a fee of €80.

How to get a certificate under the 183 day rule:

  1. Register with the Cyprus tax authorities and obtain a TIC tax identification number.
  2. Complete and file Form TD2001 with the tax authority.
  3. Sign a statement stating that you intend to stay in Cyprus for more than 183 days in the current tax period. If you fail to meet this requirement, you will need to write an application for the annulment of the tax residency certificate.
  4. Provide proof of receipt of foreign dividends or interest.
  5. Provide evidence of your intention to stay in Cyprus for more than 183 days - a contract of employment, a lease agreement, ownership of housing.
  6. Previous tax returns must be filed.
  7. All tax payments must be made.
  8. Specify for which country you are requesting a certificate.

How to get a certificate under the 60 day rule:

  1. Register with the Cyprus tax authorities and obtain a TIC tax identification number.
  2. Complete and file Form TD2001 with the tax authority.
  3. Sign a statement stating that you intend to stay in Cyprus for more than 60 days in the current tax period. If you fail to meet this requirement, you will need to write an application for the annulment of the tax residency certificate.
  4. Provide proof of receipt of foreign dividends or interest.
  5. Provide a copy of your passport with entry and exit stamps.
  6. Provide a copy of the employment contract or a document confirming the legal status of the owner of the company.
  7. Provide proof of ownership of the property or a rental agreement.
  8. Previous tax returns must be filed.
  9. All tax payments must be made.
  10. Specify for which country you are requesting a certificate.

Tax return

Each country interprets international rules on tax residency and the need to report on controlled foreign companies (CFCs) differently.

Interested in housing in Cyprus? Visit DOM. The website has the largest database of real estate in the country - from residential to commercial. Choose and contact professionals who will help you make the right choice!

Read more:

  1. Buy and Sell Real Estate With Cryptocurrency In Cyprus
  2. Living Room Storage: 7 Inspirational Ideas For Cyprus Property Owners
  3. The most popular areas of Limassol to live
  4. First acquaintance with Larnaca
  5. Permanent residence permit in Cyprus
Source: DOM
Photos: pixabay.com
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