Cyprus Registered Companies that may also be taxed elsewhere
Many individuals and corporate groups have set up companies in offshore tax havens to ring-fence their risks, to create flexibility when a particular business is going to be disposed of, for asset protection as well as for many other reasons. However, many tax authorities around the world see them as tax avoidance vehicles usually because they record high income.
Other individuals and corporate groups are not based in offshore tax havens, but in the world’s commercial centers, where the directors of commercial centers companies are often the same persons as the shareholders or beneficial owners and if corporate groups are not properly structured additional taxes may arise.
When may a Cyprus Registered Company also be taxed elsewhere?
If the Cyprus registered company is not considered a tax resident of Cyprus but instead a tax resident of another jurisdiction
Cyprus registered company tax residency
As regards the taxation of a company’s profits, the place of tax residence of a company is of the utmost importance. Tax residence is determined by Cyprus legislation, the parent/subsidiary directive applicable in Europe, the double taxation treaties between Cyprus and other countries, the Organization for Economic Cooperation and Development – OECD and other relevant bodies. It is therefore important to demonstrate that a Cyprus registered company is a Cyprus tax resident Company and is not a tax resident elsewhere. Most countries and most of the bodies mentioned above consider that a tax residency can be determined from the company’s place of effective management. There are several tie-breaker rules in place in determining which jurisdiction a taxpayer is resident in. In the OECD Model Tax Convention on Income and Capital, the tie-breaker clause has been revised as to how the jurisdictions will agree on the issue.
It is therefore important to demonstrate at any time that a Cyprus Registered company is a tax resident of Cyprus, otherwise, it may also be taxed elsewhere.
When key management and decision-makers do not meet in Cyprus and therefore decisions are not taken in Cyprus
Cyprus Registered Company decision-makers and place of effective management
In Cyprus – where the board of directors meets and takes decisions
Cyprus registered companies need to demonstrate that key management and decisions are taken in Cyprus. Even though there is no specific definition in the Cyprus income tax law or in any other Cyprus law, as to what constitutes a place of effective management, the definition of the OECD Model Convention in relation to the “effective management site” is the definition most likely to be followed by the Cypriot tax authorities. It is understood by Cyprus tax authorities that effective management/management and control is where the Board of directors meets and takes decisions.
Generally and globally – making of high-level decisions that set the company’s general policies
Generally and globally the place of effective management is the place where the key management and commercial decisions that are essential to conducting the work of the entity as a whole are essentially made. The key element in the control and direction of a company’s operations is the making of high-level decisions that set the company’s general policies and determine the direction of its operations and the type of transactions it will enter. It is different from the day-to-day conduct and management of its activities and operations, which is not ordinarily regarded as an act of central management and control. However, for small companies, their day-to-day conduct and management of a company’s operations might also be an exercise of management and control.
The type of strategic decisions taken – Investment policies, buying and selling of shares or significant assets, appointing officers
Exercising management and control of a company can involve setting investment and operational policy including buying and selling of a stock or significant assets, appointing company officers, overseeing and controlling those appointed to carry out the day-to-day business of the company, and matters of finance, including determining how profits are used and the declaration of dividends. Matters of company administration such as keeping a company’s share register, accounts, payment of dividends, are not acts of central management and control.
The directors’ knowledge is also relevant. A lack of knowledge sufficient to enable them to make decisions, suggests they are not the real decision-makers.
If an outsider dictates or controls the decisions made by the directors
If an outsider actually dictates or controls the decisions made by the directors, the outsider will exercise management and control of the company. It is therefore important that the company’s directors must not be directed by outsiders or company shareholders, but rather should act independently in the interests of the company.
Management and control is not determined by where the directors live but where they actually control and direct
It is worth noting that where a company’s management and control is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. What is important is where they actually perform the activities to control and direct the company.
It is therefore important that in order for a Cyprus registered company not to be taxed elsewhere but instead only be taxed in Cyprus, key management decisions should take place in Cyprus by real fit and proper decision-makers.
When the place of effective management is not in Cyprus.
Place of effective management
A company will be controlled and directed where the high-level decision-makers make it actually happen. It is not where is registered and formalized, or where the company’s articles of association or statutes require it to be controlled and directed.
Multiple places of effective management
The control and direction of a company may be undertaken by those controlling a company in multiple places. However, a company’s central management and control may be divided between more than one place. For the purpose of the management and control test a company’s management and control will only be exercised elsewhere or other than the place of central management and control, if it is exercised elsewhere to a substantial degree, sufficient to conclude the company, is really managed and controlled elsewhere.
Management and control is not determined by where the directors live
It is worth emphasizing again that where a company’s central management and control is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. What is really important is where the directors actually perform the activities to control and direct the company.
It is therefore important that in order for a Cyprus registered company not to be taxed elsewhere but instead taxed only in Cyprus, the Cyprus Registered Company must demonstrate that it is controlled and directed in Cyprus regardless of whether the directors or shareholders of the Cyprus Registered Company live in Cyprus or elsewhere.
As the world is getting more transparent, corporate groups will have to look at their current structures based on each corporate group’s facts and circumstances and the applicable tax rules of each country concerned. Having established all the relevant requirements and doing the relevant “homework”, risks might be mitigated to a large extend. With the information in hand, corporate groups can decide what to do and make the necessary changes, perform tax filings, or prepare documentation for future defense as appropriate. No corporate group can avoid exposures to tax but know the risks and actively managing them would help win half of the battle.
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