Cyprus does not have the incorporation principle. A company is only resident for tax purposes in Cyprus if it is “managed and controlled” in Cyprus, even if it is incorporated in Cyprus.
This concept has been in place since January 2003.
It is important to observe that this not only applies to the situation of a Cyprus incorporated company owned by non-Cypriot residents. The matter can be somewhat different, at least in practice, when talking about a non-Cypriot incorporated company owned by Cypriot residents.
In fact Cyprus has very little guidance in its law and practice in this regard. There are no clear guidelines and there is certainly no legislation or case law of relevance to the issue in Cyprus. The application of the concept of “managed and controlled” in Cyprus is expected to follow UK law very closely.
UK tax law places great emphasis on the place where the board meets, so this can be expected to be a very influential matter in Cyprus as well. However, the real test is “the place where the decisions of the directors are made”. Formally, the decision of Cypriot and UK companies are only made by a board, either in a meeting or by virtue of a written resolution.
In theory therefore, it is acceptable to have all directors being resident outside Cyprus – so long as their decisions are made in Cyprus. In practice, however, this is very difficult to achieve because even if the board meetings are physically held in Cyprus it could be argued by the Cypriot and/or foreign tax authorities that in fact the decisions are made outside Cyprus and that the board meeting is a merely a “rubber stamp”.
In practice the Cypriot authorities would seem not to have challenged the residency where the majority of directors are resident in Cyprus or even, as far as we are aware where it is 50/50, i.e. where an equal number of Directors are resident in Cyprus and resident outside Cyprus.
Our recommendations and comments are as follows:
Case 1: The only director(s) is/are resident in Cyprus – this is achievable in practice so long as all or the majority of board meetings are held in Cyprus.
Case 2: The majority of directors are resident in Cyprus – this is achievable in practice, so long as all or the majority of the board meetings are held in Cyprus.
Case 3: The 50/50 case - this can be done in practice so long as all board meetings are held in Cyprus. If not, then the more that board meetings are held outside Cyprus the higher the risk that there will be a challenge from the Cypriot and/or foreign tax authorities.
Case 4: There is at least one Cypriot director but the majority of directors are resident outside Cyprus – if all board meetings are held in Cyprus we would not expect there to be a problem but there is still the risk that it would be challenged by foreign tax authorities. If not, then the more board meetings are held outside Cyprus the higher the risk that there will be a challenge from the Cypriot and/or foreign tax authorities.
Case 5: There are no Cypriot directors - there is a reasonable risk that this will be challenged, and an even higher risk if no directors' meetings are physically held in Cyprus.