Additional Corporate Tax Residency Test – our remarks

On 21.12.2021, amendment 193(I)/2021 to the Income Tax Law has been published in the Official Gazette of the Republic of Cyprus by adopting an additional test for determination of corporate tax residency based on the incorporation principle.

The new amendments will come into force on 31 December 2022.

It provides that any company having its registered seat in Cyprus, even if the management and control are executed outside of the Republic of Cyprus will, nonetheless, be considered a tax resident. Prior to that, the company could be considered as a tax resident if it had its management and control in Cyprus, regardless of its registered seat.

However, it is important to note that if a company is a tax resident in another jurisdiction, the new test will not be applicable to it.

With the above noted, companies managed and controlled abroad shall not be considered as Cypriot tax residents but in the other jurisdiction (in line with the OECD and Double Tax Treaties). The amendment comes in to avoid non-tax residency and non-reporting to any jurisdiction.

For IBCCS TAX LTD clients and prospective clients, we do not advise to rely on the additional test, provided that a) Cyprus Law obliges the companies to report the Ultimate Beneficial Owner; b) the director(s) should be residents or citizens of Cyprus and, lastly, it is highly important for the actual management of the company to have a physical presence and substance in Cyprus. Therefore, although the additional test could be considered, it is not recommended to use it for the tax residency purposes.