Companies whose employees, due to extraordinary circumstances, are forced to temporarily fulfill their labor obligations remotely in Cyprus, are concerned about the question whether such activities will lead to the formation of a permanent establishment in this jurisdiction and, as a result, to the need to pay taxes in a foreign state at the place of residence of such workers.
Recently, the Cyprus Tax Department, in compliance with the OECD recommendations, issued Executive Directive 04/2020 on the application of the provisions on tax residency and permanent establishment during the period from March 21 to June 9, 2020.
According to the document:
- A non-resident who is not a permanent tax resident will not be considered acquiring tax residency in Cyprus if the management or employees of the company must remain on the island solely due to travel restrictions due to COVID-19.
- If the director of a company is unable to fly to Cyprus to attend a meeting of the board of directors due to travel restrictions, this will not affect tax residency in Cyprus.
- When determining the 183-day period for tax residency of individuals, the period from March 21 to June 9, 2020 will not be taken into account if the non-resident's stay in Cyprus is solely due to restrictions caused by the coronavirus pandemic. Likewise, the restriction period will not count for persons normally residing in Cyprus who have stayed abroad due to COVID-19.
For a permanent establishment, a similar approach will be applied:
- Activities carried out in Cyprus by persons remaining in Cyprus solely due to restrictions imposed by COVID-19 will not be considered activities that create a permanent establishment on the island.
- The activities of persons who remain abroad due to the coronavirus pandemic, but have a permanent establishment in Cyprus, will be deemed to have been carried out in Cyprus during their stay in another country.