Last week the Tax Department issued a Circular along with the Implementing Instructions[1] on the application of the provisions on tax residence and permanent establishment in the context of the circumstances of the pandemic.
Cyprus is following the guidance called “Analysis of Tax Treaties and the Impact of the COVID-19 Crisis” issued by OECD in April this year.
The OECD document analyses various tax issues related to the ongoing crisis from the perspective of the international tax treaty rules.
Since the pandemic has forced governments to take unprecedented measures (travel restrictions, quarantine requirements etc.), many tax questions are raising up. Especially where there are cross-border elements, for example, individuals who are “locked down” in a country that is not their country of residence.
In these unusual circumstances, also Cyprus introduced some temporary relief measures on taxation. The Cyprus Tax Department defined the period from March 21, 2020 to June 9, 2020 as the period of an “objective inability to move due to the pandemic” and therefore allowed it to be not taken into account in the implementation of the provisions of the Income Tax Law
Tax Residence Status of companies
Under tax treaties, when a legal entity is a resident of both tax jurisdictions, it is deemed to be a resident of the country in which the “effective, actual management” is located.
However, the determination of tax resident status (or the location of the actual management) of a company should not be changed if its managing board is only temporarily relocated during an exceptional period, such as the pandemic.
Therefore, a company that is a non-tax resident in the Republic will not be considered as a tax resident in Cyprus due to the stay on its territory of some executives or employees of such company, when their stay in the Republic relates exclusively to the pandemic circumstances.
And vice versa, the tax residence of a company in the Republic will not be affected by the inability of the management team to travel to Cyprus to attend a meeting of the Board of Directors during the indicated time (March 21 to to June 9, 2020).
Tax Residence Status of Individuals
In general, and as per the guidelines from OECD, if an individual was only temporarily residing in a foreign country during the mentioned period of the pandemic, his tax residence status should not change.
Individuals “locked down” in Cyprus
For a person who stays in Cyprus exclusively due to travelling restrictions reasons, the period from 21 March 2020 to 9 June 2020, will be excluded for the purpose of determining his tax residence in the Republic, which means his income will not be taxed in CY.
It is understandable that the person would not be a resident of Cyprus (being only the host country, even if the stay extended the 183 days.
Also, the test from the OECD Model treaty (permanent home, center of vital interests and nationality) would award residence int his case to the home state.
What is important, an individual in this situation, must provide the relevant evidence for his status. The Tax Department mentions that the presentation of a tax residence certificate could support the claims to tax residence in another country in the previous years.
Status of the tax residents of Cyprus
How about the reverse scenario: a person who has acquired residence status in the Republic of Cyprus and temporarily stays abroad due to the pandemic restrictions, but under other circumstances would be in the Republic?
This might be very important for some of the very recent resident in Cyprus, who are uncertain about their current tax residence status.
The days spent abroad in the period from 21 March 2020 to 9 June 2020 will be not taken into account, when determining his tax residence. For the purposes of personal taxation he will be considered as he stayed in the Cyprus during this time.
The relief period can be accordingly extended, depending on the case, which can be individually reviewed by the Tax Department.
However, in an event that the current country where such a person stays is also the “previous home country”, the application procedures can be more uncertain. Usually, the attachment to the previous home country is stronger than as it would be to a host country (Cyprus), described in the first situation. This is why, in case of doubts, CY Tax Department would use the test of “habitual abode” – where the individual lived habitually. Since the COVID-19 crisis is a period of exceptional circumstance, tax authorities will have to take into consideration (and comparison) some ordinary period of time, like the time before or after the pandemic, when assessing a person’s resident status.
The same rules about the personal residence apply to an individual who is a tax resident in Cyprus according to the 60-days rule (and at the same time is not considered as tax resident in another state).
In this case, the person’s stay abroad will be ignored during the above relief period and it will be considered for tax purposes as if the person stayed in the Republic during this time.
Of course, this is possible only if the other conditions of the 60-days rule are met: maintaining permanent residence, conducting business in Cyprus: being employed or holding an office and at the same time not remaining in any other state for more than 183 days (still taking into account the above provisions) – at any time during the tax year or at the end of the tax year.
Permanent establishment
Similarly to the instructions regarding residence, the Circular described the determination of the Permanent Establishment. Exceptional and temporary changes of location where employees exercise their employment because of COVID-19 (such as home office), should not create a new permanent establishment for the employer. A Permanent Establishment requires a degree of permanency and must be at the disposal of the business.
Temporary arrangement of working abroad, in a different location than Cyprus will not be taken into consideration for the purposes of the determining if there is a Permanent Establishment.
The employees will be considered to have carried their activities in Cyprus.
Our view
To sum up, as a rule: temporary changes in place of residence due to the pandemic will not affect the determination of tax residence status.
However, the situation might become more problematic when there is a risk of abuse of the relief measures by a tax resident and a need to use specific provisions from tax treaties.
As always, we strongly advise that each individual or entity shall consider their status, with specific reference to local legislation and common practice along with tests used in OECD Model Treaty, which are also implied in relevant tax treaties between the countries.
From our perspective, it is also important that both individuals and legal persons should gather sufficient evidence of their residence position to ensure their tax residence status, once this is questioned by any authorities.
We find the instructions from the Tax Department crucial in the current, uncertain times, and especially helpful for everyone dealing with cross border activities.
It was a very thoughtful move to follow the initiative of OECD, which wanted “to minimise or eliminate unduly burdensome compliance requirements for taxpayers in the context of the COVID-19 crisis.”
At IBCCS we will be following any new announcements from the Cyprus Tax Department and informing you about any extensions of the relief period or other measures to be taken by other tax authorities
[1] Implementing Instruction No. 4/2020 published on the website of the Department of Taxation (text available in Greek only) for explanation of the provisions on tax residence and permanent establishment according to Income Tax Law (Article 2) in the context of the crisis caused by the COVID-19 pandemic.
