The Cyprus Tax Authority (‘‘CTA'') Issued An Implementing Directive (Εφαρμοστική Οδηγία) To Clarify The Application Of The Cyprus Income Tax Law Provisions Related To Tax Residency And Permanent Establishment (‘‘PE'') During The COVID-19 Crisis

In brief

On 27 October 2020 the CTA issued Implementing Directive No. 04/2020, which clarifies the application of the Cyprus Income Tax Law provisions (Article 2) related to tax residency and PE during the COVID-19 crisis.

In detail

The OECD issued on 3 April 2020 non-binding guidance mentioning that the determination of:

1. the tax residency of individuals
2. the place of effective management in relation to corporate residency
3. the existence of PEs

will not be affected by the temporary nature of the extraordinary circumstances related to COVID-19 and, thus, whereabouts and actions affected by COVID-19 should be ignored by tax authorities, e.g. temporary changes in location of senior executives due to COVID-19 should not trigger a corporate tax residency change.

The CTA, through the said Implementing Directive, is following the essence and norms of the OECD non-binding guidance.

Therefore, the Implementing Directive discusses the determination of the following:

1. the tax residency of individuals (both under the 183 days and the 60 days rules)
2. the place of effective management in relation to corporate residency
3. the existence of PEs

but also discusses the following tax related items that are specific to the Cyprus tax framework:

4. '50% exemption' provided under Article 8(23) of the Cyprus Income Tax Law
5. '90 days exemption' provided under Article 36(5) of the Cyprus Income Tax Law

The Implementing Directive further:

• clarifies that its application is optional on the taxpayer, i.e. the taxpayer may elect to apply for it at his discretion (in all other cases the 'normal' Cyprus Income Tax Law rules will apply)
• sets a default period of time, namely the period between 21 March 2020 to 9 June 2020, during which the CTA considers that 'force majeure' circumstances are applied; the said default period may be extended (i.e. to before 21 March, and/or to after 9 June 2020) by application of, and evidence provided by, the taxpayer
• discusses the said items only from a Cyprus tax law perspective, irrespective of the tax treatment of the said items by another State
• states that each case will be examined on its own merits

Lastly, the Implementing Directive provides three illustrative examples that attempt to clarify the practical application of it.

The takeaway

The Implementing Directive is based on the principle that arrangements that may affect the determination of the tax residency status for individuals and companies, as well as the determination of the existence of PEs, during COVID-19 are temporary in nature and, thus, provides for a relaxation to the application of the Cyprus Income Tax Law rules with respect to the said tax items during the affected period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.