Cyprus Tax residency
In light of the COVID-19 pandemic, the Cyprus Tax Department issued a circular regarding the provisions on the Tax Residency and Permanent Establishment in accordance to the Income Tax Law (Section 2).
The Tax Department has taken into consideration the impact of the pandemic as well as the special measures imposed not only by the Cyprus Government but also other countries around the globe.
Subsequently, the restriction and the limitation of traveling, and the fact that many employees were forced to work from home or remotely or even suspend employment contracts and employment arrangements, created a domino effect in various aspects of people’s lives. It is noted that the new reality created certain restrictions as to individual’s physical presence in their workplace with consequent effects on the companies’ and a person’s tax status as well as on the business’s permanent establishment.
In light of the above, the Organisation for Economic Cooperation and Development (OECD) has issued guidelines for tax issues in order to regulate this abnormality. It is clarified that such guidelines, although not bounding the Tax Authorities, will be followed by the latter where applicable.
The situation temporarily affected individuals from entering and exiting the Republic to or from countries seriously affected by the Covid-19 pandemic. As a result of the restrictive measures put in place, for the dates 21 March 2020 until 9 June 2020, an individual was unable to travel and therefore this period is not taken into consideration when applying the provisions for the tax residency.
Depending on the individual cases, wherever this period will be taken into consideration, the dates can be extended to either before the 21 March 2020 or after 9 June 2020 and the tax payer will be required to provide evidence for the non-movement that was due to Covid-19 and the restrictions that were put into place.
Tax residency issues- individuals (183 and 60-day rule)
Where an individual’s presence in Cyprus is solely due to pandemic and/or travel restrictions, the period between dates 21 March 2020 and 9 June 2020 will not be taken into consideration for determining tax residency and taxation of income.
However, in order to avoid any abuse, an individual who remains in Cyprus for a period of 183 days and wishes to use the circular of the Cyprus Tax Department must provide all supporting evidence to support a claim (such as a foreign tax residency certificate). It is noted that the Tax Authorities will also take into account the individual’s previous years of history.
In addition, if an individual remains abroad due to Covid-19 restrictions, and would otherwise have been in Cyprus, for reasons determining his/her tax obligations and residency, the individual will be classed as being in Cyprus for the duration 21 March 2020 until 9 June 2020. During the said period, if the individual was not in Cyprus, this period of time will not be taken into consideration, and could be extended depending on the personal circumstances of the individual.
The above arrangement applies also to the 60 day rule when an individual who is a tax resident based on the rule (given that he is not tax resident of another country) and assuming that the rest of the criteria are met.
50% Exemption rules [Section 8 (23)] and 90 days rule [Section 36 (5)] of the Income Tax
For the purposes of application of Section 8 (23) of the Income Tax Law, the exemption provided for in this article will be granted in case the beneficiary of this exemption has a reduction in his income from employment, (i.e. the individual receives an amount less than €100.000 per annum and the reductions are solely because of emergency measures taken by the government and/or employers in the context of the Covid-19 pandemic).
This individual will be considered to have received income from employment of over €100.000 per annum solely for the purposes of this section provided that there is supporting evidence (e.g. monthly pay slips, certificate of emoluments, decision of the employer for a holistic or selective reduction in salaries).
For the purpose of applying the provisions of Section 36(5), if an individual was unable to travel abroad to perform his duties (as per his/her employment contract or taking into consideration the normal working practice) during the Covid-19 period, then the individual’s tax position should not be affected in any way. It is noted that relevant evidence should be submitted accordingly.
- Taking into consideration that all rules and conditions are met, if an individual spent 30 days in Cyprus and was abroad for the remaining days, the dates of the restrictive measures may be considered as part of the number of days physically ‘spent’ in Cyprus.
- If the days ‘spent’ in Cyprus are 325, and 60 of these were due to travel restrictions, and for 40 days this person was abroad, the total number of days to be considered for this individual will be 100 (60 plus 40).
- If by the end of 2020, an individual is in Cyprus for 220 days, of which 60 days are within the dates the travel restrictions were in place, then for tax residence purposes, these 60 days will NOT be taken into consideration if the individual’s usual place of residence is not Cyprus, and when determining tax residence (183 days) when the person chooses to be taxed.
corporate tax residency
If a company is considered a non-Cypriot tax resident company, this does not change if the staff, directors, or representatives were solely in Cyprus due to Covid-19 restrictions.
It is noted that if a Director of the company is unable to travel to Cyprus to attend a Board meeting due to restrictions this will not affect the tax residence of the company. It is noted that each case will be examined separately and supporting evidence should be in place. Permanent Establishment (P.E.)
The issue that may arise is the continuous presence of an individual in a country that is not his/her usual place of employment, or the provision of distance employment during the pandemic that may, as a result, lead to tax obligations and perhaps create permanent establishment.
It is further clarified that any activity due to residents of the Republic being present solely due to the Covid-19 pandemic, will not be classed as permanent establishing activities, but as temporary activities due to the pandemic. Same applies for individuals where the temporary physical presence of individual employees in Cyprus due to restrictions arising from the government measures will not create new permanent establishment for the employer.