KINANIS LLC > Firm Profile

The firm: Kinanis LLC, a law and consulting firm, is one of the leading business law firms in Cyprus and advises international investors and private clients on all aspects of law, tax and accounting. Kinanis LLC’s involvement and participation in international transactions over the years has established the firm as one of the key players in the field.

Areas of practice
Corporate/M&A and securities: the firm has extensive experience in advisory, procedural and transactional matters for JV transactions, M&A, reorganisation and restructuring, due diligence and legal opinions, pre-IPO compliance, as well as IPO and listings in stock exchanges both locally and internationally.

Taxation: the firm provides consulting on all aspects of Cyprus tax law, to both corporate and private clients, and assists clients in international tax planning, creating tax efficient corporate structures as well as providing ancillary services.

Banking and finance: the firm provides advice on banking and finance transactions consisting of drafting, reviewing and structuring finance projects, including advising on securities, guarantees, pledges and other encumbrances.

Incorporations and management of companies: the experienced corporate team advises clients on company matters such as incorporation, re-domiciliation, administration and management of Cyprus and overseas companies. It provides management services and may assist in the introduction of executive directors. Part of its consulting services include office facilities, IT support and HR consulting. Its specialist foreign desks can assist clients in the incorporation and management of companies of various jurisdictions (EU and Offshore).

Trusts, estate planning and succession: the firm has extensive experience in wills and probate, the establishment and administration of Cyprus international trusts, as well as local and foreign trusts and foundations, including acting as trustee and protector.

Financial services and funds: the team is ready to provide appropriate solutions and may assist with the establishment, registration and licensing of AIFs, CIFs, UCITS, FOREX, BINARY OPTION and insurance companies.

Accounting and VAT: maintaining proper books and records and management reporting under IFRS. The team of accountants provides VAT advice, compliance and payroll, as well as liaising with external auditors.

IP: the firm advises on IP tax structuring as well as on registration and protection of IP rights locally, internationally (CTM)/(WIPO) or EU-wide, as well as handling relevant oppositions at the corresponding fora.

Immovable property: the firm advises on commercial and residential legal issues regarding dealings with real estate, as well as providing ancillary services regarding management of real estate.

Litigation: the highly specialised litigation team represents clients in all aspects of corporate or commercial disputes, injunctions and interim relief, recognition and enforcement of foreign judgments or arbitral awards, representations in arbitration proceedings and pre-court negotiations.

Corporate liquidation: provides advice on the procedure of corporate liquidation and dissolution of companies locally and internationally.

Immigration and migration: the firm advises and assists individuals on making the best choice of citizenship or residency schemes based on their relocation needs. It obtains permanent residence permits, and also handles applications for citizenship by naturalisation or by exemption for Cyprus and Malta, Schengen Visa applications for Malta and other related ancillary services.

Energy: the firm advises on all aspects and activities related to energy operations, including advising on oil and gas finance transactions, advising on renewable energy and environmental law and regulations, and assisting with application/tenders on all types of energy projects etc.

Aviation and shipping: the firm provides advice on all legal, tax and VAT aspects of the acquisition, registration, financing, operation and disposal of vessels and aircrafts.

Press Releases

The Digital Value Group

12th April 2024 It is with great pleasure that Kinanis LLC, a forward-looking law firm, and VFTee, a boutique technology firm, introduce The Digital Value Group (TDVG) Ltd. TDVG is a dynamic new entity offering tailored IT advisory, technology solutions and application development services.

Legal Developments

Immigration permit for Investors The Cyprus Permanent Residency Permit

28th March 2024 HISTORY Due to the fact that Cyprus is part of the EU and is very strategically located at the crossroads of 3 continents,

The Management and Control Test Taxation of Cyprus and Foreign Companies

27th March 2024

I.         INTRODUCTION

In this publication, we shall examine the notion of “management and control” οf companies as this is applicable in Cyprus and how it affects the taxation of Cyprus and Overseas companies.

II.         THE LAW

Basis of Taxation A company or an individual are taxed in Cyprus, if they are residents of Cyprus, subject to specific exceptions[1]. The residency requirement as the basis of taxation, is provided in article 5(1) of the Income Tax Law, No. 118(I) of 2002 as amended, hereinafter referred to as the “Income Tax Law”. Article 5(1) of the Income Tax Law provides the following: “Subject to the provisions of this law, in the case of a person who is resident in the Republic, tax shall be charged at the rate or rates specified hereinafter for each year of an assessment upon the income accruing or arising from sources both within and outside the Republic, in respect of: …”  Meaning of Resident in the Republic The meaning of “Resident in the Republic” is defined in the Income Tax Law article 2 which provides the following: “Resident in the Republic, when applied to an individual, means an individual who stays in the Republic for a period or periods exceeding in aggregate 183 days in the year of assessment and when applied to a company, means a company whose management and control is exercised in the Republic and “non-resident or resident outside the Republic” shall be construed accordingly and non-resident or resident outside the Republic shall be interpreted accordingly”. Pursuant to this provision, a company is considered to be resident of Cyprus, and in effect subject to Cyprus taxation, when its “management and control” is exercised in Cyprus. In addition to the above meaning of Resident in the Republic as to companies, as from 31.12.2022, a company, which is established or registered pursuant to any law in force in Cyprus, will by default be considered as Resident in the Republic, provided it is not tax resident in any other country. In article 2 of the Income Tax Law, the proviso of the definition of the meaning of “Resident in the Republic”, provides the following:  “It is provided that, a company which has been established or registered pursuant to any law in force in the Republic, of which its management and control is exercised outside the Republic, it is considered that it is resident in the Republic, unless the said company is tax resident in any other country”.  This provision is applicable as from 31.12.2022, identified as the incorporation rule for taxation purposes. Meaning of Company The Income Tax Law, in article 2, identifies the notion of company to be “any legal body registered either in Cyprus or abroad”. Taxation of Companies All companies, anywhere registered, being residents of Cyprus are taxed on their worldwide income, accrued or arising from sources in Cyprus and/or abroad.  As per the above provisions of the Income Tax Law, a company:

1. If it is incorporated in Cyprus, it is resident of Cyprus, the incorporation rule applies and it is subject to Cyprus taxation;
2. If it is incorporated in Cyprus with management and control outside Cyprus, as from 3.12.2022, it is resident of Cyprus, unless it is tax resident in any other country[2];
3. If it is incorporated outside Cyprus but its management and control is in Cyprus, then it is resident of Cyprus, subject to Cyprus taxation.

A Cyprus resident Company, is liable to taxation on its worldwide income. Note: A special case may arise when a company has dual residency. This happens when there is fragmentation of the management and control in various countries. In such a case, if a Double Tax Treaty (DTT) is in force between the relevant countries, the company will be tax resident in the country where its effective management is exercised. In case there is no Double Tax Treaty in force between the relevant countries, the company will be tax resident as per the applicable laws of each country where the management and control is exercised. If the laws of the various countries have conflicting rules as to this issue, then there might be a state dispute as to where the company is tax resident.  Permanent Establishment A non - Cyprus tax resident company, despite the fact that it is not tax resident of Cyprus, is taxed on income accrued or arising from a business activity which is carried out through a permanent establishment in Cyprus and/or from sources in Cyprus. Article 5(2) of the Income Tax Law provides the following: (2) Subject to the provisions of this Law, in the case of a person who is not a resident of the Republic, for each tax year a tax is imposed at a rate or rates, as specifically determined in this Law, on the income acquired or arising, in relation to: (a) any profits or other benefits from a permanent establishment situated in the Republic As per Art. 2, of the Income Tax law the meaning of permanent establishment is: "Permanent establishment" means- (a) fixed base of business through which the activities of the business are wholly or partly carried on. (b) The term 'permanent establishment' includes in particular: (i) seat of administration; (ii) branch office; (iii) office; (iv) factory; (n) laboratory; (vi) a mine, oil or gas well, quarry or any other place of extraction of natural gas resources; (vii) offshore activities regarding the mining, exploration or exploitation of the continental shelf, subsoil or natural resources, as well as the installation and exploitation of pipelines and other facilities on the seabed. (c) site or construction or installation work or supervisory activities in relation thereto constitute a permanent establishment only if they last more than three months. (d) Notwithstanding the provisions of paragraphs (a), (b) and (c) hereof, the term 'permanent establishment' shall be deemed not to include: (i) the use of facilities only for the purpose of storing, displaying or delivering goods or merchandise belonging to the business; (ii) keeping stock of goods or merchandise belonging to the business solely for the purpose of storage, display or delivery; (iii) keeping stock of goods or merchandise belonging to the enterprise only for the purpose of processing them by another enterprise; (iv) maintaining a fixed base of business solely for the purpose of purchasing goods or merchandise or gathering information about the business; (v) maintaining a fixed base of business solely for the purpose of carrying out, for the business, any other activity of a preparatory or ancillary nature; (vi) the maintenance of a fixed base of the enterprise only for the purposes of any combination of the activities referred to in sub-paragraphs (i) to (v), provided that the total activity of the fixed base of the enterprise resulting from this combination is of a preparatory or auxiliary nature · (e) Notwithstanding the provisions of paragraphs (a) and (b), where a person - other than an independent agent to whom paragraph (f) applies - is acting on behalf of an undertaking and has, and ordinarily exercises in the Republic, authority to entering into contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in the Republic in relation to any activities that such person undertakes for the enterprise, unless the activities of that person are limited to those referred to in paragraph (d) which, if they were made through a fixed base of business, they would not make it a permanent establishment under the provisions of this paragraph. (f) A business shall not be deemed to have a permanent establishment in the Republic merely because it carries on business in the Republic through a broker, general commission agent or any other independent agent, provided that such persons are acting in the ordinary course of their work. (g) The fact that a company which is a resident of the Republic controls or is controlled by a company which is not a resident of the Republic, or carries out operations outside the Republic either through a permanent establishment or otherwise, cannot in itself make one of these companies a permanent establishment of the other; (h) Regardless of the provisions of paragraphs (a) to (g), the investment of a person who is not a resident of the Republic in a mutual fund or cooperative that operates under the provisions of the Open Type Collective Investment Organizations Law or the Alternative Investment Organizations Law, it is not considered to create a permanent establishment of the person in the Republic with regard to his specific investment: Provided that the management of an Organization for Collective Investment in Transferable Securities (hereinafter "UCITS") and/or an Alternative Investment Organization (hereinafter "UEE") established outside the Republic, by a person who is a resident of the Republic, is not considered to create in said UCITS and /or OEE right of permanent establishment in the Republic. Controlled Foreign Company (CFCs) With effect as from 1 January 2019 Controlled Foreign Company (CFCs) rules apply, i.e., non-distributed profits of CFCs directly or indirectly controlled by a Cyprus resident company, may become subject to tax in Cyprus. Certain exceptions apply. In such a case, foreign taxes paid can be credited against the Cyprus corporation tax liability. The provisions of CFC rules of Cyprus do not apply to individuals, residents of Cyprus, so they do not have any applicability in case the shareholder of the foreign company is an individual resident in Cyprus

III.         DEFINITION OF MANAGEMENT AND CONTROL IN CYPRUS – LACK OF STATUTORY OR JUDICIARY INTERPRETATION

There is no definition in the Income Tax Law or in any other enactment as to the meaning of the notion of “management and control” which will identify whether a company is resident of Cyprus or not. There is no definition in the law, stating who exercises management and control and how it should be exercised. There is also, no definition in the law as to what particular acts substantiate the management and control. Having in mind this interpretation gap as to the meaning of management and control in the Cyprus legislation, we should request assistance from any court judgements in place interpreting this notion.  Unfortunately, though there are no Cyprus court cases interpreting the notion of management and control. The only one court case which touched the notion not directly but indirectly, without giving any interpretation, is, Lanitis Bros Ltd., v. The Central Bank of Cyprus 27/06/1974 – case No. 74/74 which is a recourse case and adopted the notion of management and control as this was adopted in the most known UK court case on the subject, namely, De Beers Consolidated Mines Ltd. v. Howe (1906) A.C., 455. In the Lanitis court case above, J. Loizou, confirmed the following: “…….. a company's residence is where it really keeps house and does its business, ... where the central management and control is exercised, as laid down in the De Beers Consolidated Mines Ltd. v. Howe (1906) A.C., 455”. Article 29 (1) (c) of the Courts of Justice Law no. 14/60 By operation of article 29 (1) (c) of the Courts of Justice Law no. 14/60 as amended, Common Law[3] and the Principles of Equity[4], are among the sources of the Cyprus legal system, provided they do not come in conflict with local statutes. In this respect, since among the sources of the Cyprus legal system are the Common Law and the Principles of Equity, we may refer to English court cases, in the absence of Cyprus court cases, in order to interpret the meaning of management and control.  IV.         INTERPRETATION OF MANAGEMENT AND CONTROL NOTION BASED ON UK COURT JUDGEMENTS  The management and control test to identify the residency of a company was applicable in the UK until 1988 for UK registered companies. In 1988, it was replaced by relevant statutory provision, (Finance Act 1988), and now all UK registered companies are by default treated as residents of UK, taxable in UK, irrespectively of their place of management, unless they can show that their place of effective management is in a country with which UK has relevant double tax treaty[5]. In such a case, where possible dual residency of companies may be in place, the so called “Tie – breaker” article of the OECD model treaty as to effective management, usually included in all double tax treaties signed among the countries, apply and controls the residency of a company. The management and control test, which is the Common Law test of corporate residence, irrespectively of the above statutory provision which applies by default to all UK companies, is according to the UK law, applicable to non-UK companies i.e., foreign registered companies. Under these Common Law provisions, a foreign company i.e., Cyprus, BVI etc., might be taxable in the UK if their management and control is exercised in the UK. This corporate residency test is a fundamental concept of international corporate taxation and is the tool of income tax authorities to impose taxation on foreign companies for their activities undertaken abroad BUT managed and controlled onshore. In view of the provisions of the UK law as above indicated, there is a considerable number of court decisions which deal with the interpretation of the management and control test and from which we are getting guidance as to how this test will be applicable in Cyprus, if a case arise and interpretation of this term will be required by the Cyprus authorities and courts. In this respect, since among the sources of the Cyprus legal system are the Common Law and the Principles of Equity, our courts and the Commissioner of Income Tax, is expected to follow the principles laid down by UK court cases in interpreting the notion of management and control, which court cases, will give the guidance to Cyprus authorities in the interpretation of this notion.

V.         TO WHAT THE MANAGEMENT AND CONTROL OF A COMPANY REFERS TO?

The management and control notion refers to the management and control of the strategic decisions related to the business of the company. Management and control is not:

1. The exercise of powers vested in the shareholders in general meeting (for example, the appointment of directors, the amendment of the Articles, the winding up of the company or the increase or reduction of the share capital);
2. The day-to-day administration of a company’s business (since this is the implementation of the policy and decisions of those who ultimately manage and control the company) – this generally has a more administrative flavour; or

In effect, the management and control of the company refers to the management and control of the business of the company, it is related to the strategic decisions which are issued, as to the fundamental policies of the company, and its implementation, its vision and mission, the identification of its targets and the procedures to be implemented to achieve its targets. As an indication, it is manifestation of management and control, to decide if the company will proceed to expansion of its business, in setting up more factories, in reducing the factories, in setting up more shops, in reducing the shops, as to whether particular contracts will be signed or not, whether the company will be financed or nor, whether it will dispose its assets or not, whether it will expand in other lines of business or not, whether it will merge with other businesses or not, and all related key strategic decisions as to the operation of the company to meet its targets. The above meaning of the management and control notion related to the strategic decisions of the business of the company, is confirmed by a series of court cases along the years, indicatively the following:

1. The management and control notion was first used as the main factor in determining a company’s residence in the cases of Calcutta Jute Mills Co Ltd v Nicholson andCesena Sulphur Co Ltd v Nicholson (1876) LR 1 Exch D 428, which were heard and decided together by the Court of Exchequer.

The Calcutta Jute Mills Co Ltd was incorporated in the UK and its registered office was in London. It conducted its entire business of manufacture and sale of jute in India, where it also kept all its books, papers and documents and where it received its income. The company had no property in the UK. However, its directors and shareholders met in the UK where dividends were declared and paid. The directors also controlled the main operations of the company from the UK although the majority shareholders resided in India. The Cesena Sulphur Company was also incorporated in the UK. It was registered in Italy where it kept its books and documents, where it conducted the whole of its manufacture and sale of sulphur, where its profits were earned and banked. The practical management of the company’s properties and affairs was done by its Italian directors. The company also had directors’ resident in France and in England who met at the company’s registered office in London and with whom the Italian directors were in constant correspondence. The shareholders of the company met in the UK, where only a minority of them were resident. Both companies were held to be resident in the UK on the basis that the direction and control of the business of each company took place in the UK.

2. The ‘control’ test was affirmed by the House of Lords in De Beers Consolidated Mines Ltd v Howe[1906] AC 455, 5 TC 198. There the company was incorporated in South Africa and the whole of its profits were made from mining and disposal of diamonds. The head office of the company was at Kimberley in the Cape of Good Hope, where general meetings were held.

The directors met both in Kimberley and in London but the majority resided and met in London. It was found on the facts that the chief control of the company’s affairs was in the hands of the London directors who controlled the negotiation of contracts, determined policy in regard to the disposal of diamonds and other assets and the working and development of the mines. The South African company, based on these facts, was held to be resident in UK.

3. The place at which a company’s management and control is exercised, and therefore its residence, is to be determined by reference to the facts as they exist, rather than according to any requirement of the law or of the company’s regulations.

It follows that where a subsidiary of a company is under the control of the directors of that company, (parent), it is the place at which that control is exercised and not the location of the meetings of the subsidiary’s directors that determines the residence of the subsidiary (Unit Construction Co Ltd v Bullock [1960] AC 351).

4. Further, the residence of those directors will not necessarily determine the residence of the company; the directors of a company may all be UK resident but if they exercise central management and control of a company outside of the UK, the company will not be UK resident (Laerstate BV v R & C Commrs [2009] TC 00162).

In conclusion, the management and control notion, refers to the management and control of the strategic decisions as to the business of the company and not to the management and control of the company itself which is another matter related to the shareholders’ powers.

VI.         THE CORE ELEMENTS OF THE MANAGEMENT AND CONTROL NOTION

In the following chapters we shall deal with the interpretation of the notion of management and control and we shall try to identify its core elements. In this respect we shall examine:

1. Who exercises the management and control of the business of the company?
2. In which place a company is considered as resident according to the management and control test?
3. Which are the substance requirements that connect the exercise of the management and control with a particular place?
4. How the management and control must be exercised in order for a company to be considered as resident in the place where the management and control is exercised?

VII.          ANALYSIS OF THE CORE ELEMENTS OF THE MANAGEMENT AND CONTROL NOTION

A.       Who exercises the management and control of the business of the company?

 The question in effect is, which company body has been entrusted with the power to decide the fundamental policies and the key strategic decisions as to the business of the company? The board of Directors? The shareholders? Third persons? Who? The distribution of powers between the general meeting of shareholders and the board of directors as per the Companies’ Law Cap 113, is left to the Articles of Association which in practice confer extensive powers on the directors. The Articles of Association generally follow Table A of the Companies’ Law Cap 113 as to the distribution of powers. Table A, in section 80, provides that the business of the company shall be managed by the directors, subject to any special provisions of the Articles of Association of the company or the law. Section 80 provides the following: Powers and Duties of Directors

80. The business of the company shall be managed by the directors, who may pay all expenses incurred in promoting and registering the company, and may exercise all such powers of the company as are not, by the Law or by these regulations, required to be exercised by the company in general meeting, subject, nevertheless, to any of these regulations, to the provisions of the Law and to such regulations, being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the company in general meeting but no regulation made by the company in general meeting shall invalidate any prior act of the directors which would have been valid if that regulation had not been made.

Following the above, as per the Articles of Association, a plethora of powers is generally granted to the directors who manage and control the business of the company and its day-to-day activities. In effect, as a general rule, the shareholders control the company through their votes at general meetings as per the powers granted to them according to the provisions of the Companies’ Law Cap 113, while the directors control the business of the company by its management. In this respect, As already discussed, the control that we are discussing in this publication, is that which relates to the highest level of management of the company’s business related to its strategic decisions and must not be confused with the control which vests in the company’s shareholders. In this respect, the management and control of the business of the company, by default is exercised by the directors, (section 80 of Table A) and not by the shareholders who control the company itself. Superiority of decisions taken by the board of directors The distribution of powers among the board of directors and the shareholders is such that any decision taken by the board of directors in respect of management matters as to the business of the company cannot be overruled by the shareholders in general meeting. A case illustrating the significance of the Articles of Association as regards the division of powers between the board of directors and the general meeting of shareholders is that of Automatic Self – Cleansing Filter Syndicate Company v Cunninghame [1906] 2 Ch. 34, where the court of Appeal supported and upheld the directors’ refusal to carry out a sale of corporate property in defiance of simple resolution passed in general meeting which purported to authorise the sale. Such power was reserved by the Articles to the directors and the shareholders could not intervene. In effect, the powers delegated to the board of directors cannot be exercised by the shareholders in General meeting. Additional relevant authority supporting this separation of powers is Breckland Group Holdings v London Suffolk Properties [1989] BCLC 100, where the 51% shareholders instructed their lawyers to file a court case on behalf of the company. The court held that such power was left with the board of directors as per the Articles and the majority shareholders were effectively precluded from initiating such an action on behalf of the company. In this respect, the company was not obliged to pay the lawyers’ fees. Also, in the case John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, the board of directors decided to institute court proceedings for a debt owed to the company. Subsequently, the shareholders by a relevant resolution purported to discontinue the case. It was held that the decision of the board of directors it could not be overruled by the shareholders’ resolution which was invalid. In the case Stanley v Gramophone and Typewriter Ltd (1908) 5 TC 358 the general position that the directors are not the servants or agents of the shareholders to obey their orders was emphatically stated. The facts The appellant company (resident in England) held all of the shares in a German company. The appellant company was assessed on the monies retained by the German company, and the case depended on whether the unremitted funds considered as the gains of a business ‘carried on’ by the English company as opposed to a separate entity. The Issue Whether the appellant company was liable under the Income Tax Act, 1853? Held The Court of Appeal held that the fact that the appellant company owned shares in a German company was not enough to make the business of that German company the business of the appellant company (resident in England). Thus, the appellant company did not bear liability under the Income Tax Act, 1853. The court further held that the directors are not the servants of the shareholders. They shall not obey shareholders’ directions. They are not the agents of shareholders. In this case it was accepted that the management and control of the business of the company, was exercised by its own directors from the place where they met and decided the matters of the company, and not by the board of directors of its parent company. The fact that the shareholders through their voting rights can remove the directors from their office does not affect the above principle. The business of the company will still be managed and controlled by its board of directors. It is clear from the cases so far that the shareholders cannot interfere with the directors’ discretion and cannot instruct the directors how to exercise their discretionary functions. Pawers of shareholders The Companies’ Law, Cap 113, reserves certain powers to the general meeting of shareholders such as the alteration/amendment of the Memorandum and Articles of Association, an increase or reduction of the share capital, the removal of the directors from their office and the voluntary winding up of the company,  actions which are relate to the control of the Company but not related to the decision making process as to the business of the company and do not affect the management and control notion related to the business of the company. Important note as to articles of association Despite the above general principle, there are though in some cases, specifically drafted Articles of Associations which deprive the directors of the management and control of the business of the company or give them limited authorities subject to the approval of the shareholders. This is a serious qualification moving the central management and control of the business from the directors to the shareholders and each case must be carefully examined. If such serious step is taken, the company might be considered as resident at the place of meetings and decision-making process of the shareholders as the management and control of the business is exercised by them. Shadow Directors In addition, once the appointed directors follow blindly the instructions of third persons, such as auditors or lawyers or other consultants, again, it might be considered that the management and control of the business of the company is exercised by these third persons and not by the appointed directors. Again, there might be a serious risk the residency of the company to move to the place of the residence of the instructing person. In such a case the shadow director notion comes into play as this is provided in art. 192(9) of the Companies’ law, Cap 113. The instructing persons are considered as shadow directors and are the actual persons who manage and control the business of the company. In conclusion, the answer to the question, who exercises the management and control of the business of the company by default, pursuant to section 80 of Table A of Companies, Law Cap 113, this is the board of directors, subject to any specific provisions of the Articles of Association or the presence of any shadow directors.

B.       In which place a company is considered as resident according to the management and control test?

  Place of management and control

1. The leading case on company residency is De Beers Consolidated Mines Ltd v Howe [1906] AC 455, 5 TC 198. In this case it was established that a company resides, there where its real business is carried out. In the same case it was decided that the real business of a company is carried out, not there where the trading operations are taking place, but where the central management and control of its business actually takes place, as said in the judgement, “there where the central management and control actually abides”.

As per the facts of this case, the company was incorporated in South Africa and the whole of its profits were made from mining and disposal of diamonds. The head office of the company was at Kimberley in the Cape of Good Hope, where general meetings were held. The directors met both in Kimberley, South Africa, and in London but the majority resided and met in London. It was found as a fact that the chief control of the company’s affairs was in the hands of the London directors who controlled the negotiation of contracts, determined policy in regards to the disposal of diamonds and other assets and the working and development of the mines. The House of Lords, confirming the decision in both courts below, unanimously held that the company was resident in the UK. In the course of his opinion Lord Loreburn observed (at p. 213): “The decision of Chief Baron Kelly and Baron Huddleston, in the Calcutta Jute Mills v Nicholson and the Cesena Sulphur Co. v Nicholson, now thirty years ago, involved the principle that a Company resides, for purposes of Income Tax [now Corporation Tax], where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule; and the real business is carried on where the central management and control actually abides. It remains to be considered whether the present case falls within that rule. This is a pure question of fact, to be determined, not according to the construction of this or that regulation or byelaw, but upon a scrutiny of the course of business and trading.” De Beers is a case where the majority of the directors of the overseas company, incorporated in South Africa, were reside and met in London and the company was held to be resident in the UK as the central management and control of the business of the company was conducted by the directors from London. The De Beers case has been adopted in the Cyprus case: Lanitis Bros Ltd., v. The Central Bank of Cyprus 27/06/1974 – case No. 74/74 This was a recourse case in relation to exchange control law. As the law stood those days, only with the licence of Central Bank of Cyprus someone could transfer funds to any country in the world. Also, except with the permission of the Central Bank, no person resident in the Republic shall lend any money or securities to anybody corporate resident in the Republic which is by any means controlled (whether directly or indirectly) by persons resident outside the Republic. The firm Lanitis Bros, had as shareholder a Bahamian company in which Bahamian company 3 out of the 4 directors were non-residents.   The shareholders of the Bahamian Company were Cypriots residents in Cyprus. The argument that the Bahamian company was controlled by Cypriot shareholders and in effect the Cyprus Company was controlled by resident Cypriots and no licence was needed, was rejected based on the De Beers. It was accepted that the directors controlled the Bahamian Coamony who by majority were non – residents and in effect Lanitis Bros was controlled by a non-resident company.

1. Loizou, confirmed the following:

“…….. a company's residence is where it really keeps house and does its business, ... where the central management and control is exercised, as laid down in the De Beers Consolidated Mines Ltd. v. Howe (1906) A.C., 455”. Cyprus hypothetical case based on the facts of De Beers If we transform the facts of De Beers to a Cypriot hypothetical case, such as that a Cypriot individual resident of Cyprus registers a BVI company to handle its overseas business and manages and controls the business of this BVI company form Cyprus, such a BVI company will be considered as resident of Cyprus and will be liable to Cyprus taxation for its worldwide income.

2. Important is also the Court of Appeal case in Bullock v Unit Construction Co Ltd (1959) 38 TC 712 at 729 – 730 also at, [1960] AC 351.

The Facts The case concerned a UK-resident subsidiary of Alfred Booth & Co Ltd, a UK-resident parent company. This UK subsidiary made certain payments to three fellow subsidiaries in Kenya and claimed these as allowable business expenses in arriving at its UK taxable profits. However, these payments would only have been allowed for tax purposes if the three subsidiaries to which they were made were resident in the UK, not Kenya. They were incorporated in Kenya and their Articles of Association expressly stated that management and control rested with the directors and also required directors’ meetings to be held outside the UK. Presumably this had been done with the intention of protecting the company from any future accusation of residence outside Kenya. The Issue  Whether the companies were resident in the UK and thus taxable in UK. Held It was found as a fact that due to trading difficulties at the material times the boards of directors of the Kenyan subsidiaries were standing aside in all matters of importance and also many matters of minor importance affecting the central management and control and that real control of them was being exercised by the Board of Alfred Booth & Co Ltd in London. Therefore, all subsidiaries physically located in Kenya were in fact UK tax residents. Lord Radcliffe said that on the facts ([1960] AC at p. 364): ‘… the seat of the ‘central management and control’ of the subsidiaries changed, and passed from Africa to the United Kingdom. This is a straightforward case of de facto control being actively exercised in the United Kingdom, while the local directors ‘stood aside’ from their directorial duties and never purported to function as a board of management.’ This case confirmed the view that, where the business of a subsidiary of a company is under the control of the directors of its holding company, it is the place at which that control is exercised and not the residency of the subsidiary’s directors that determines the residence of the subsidiary. Bullock is a case where the foreign subsidiaries, incorporated in Kenya, were managed and controlled by the board of directors of the holding company situated in UK and the subsidiary companies was held to be resident in the UK and thus taxable in UK. Place of management and control Vs. Place of business operations of the company The central management and control of the business must be distinguished from where the company’s business is actually taking place. The management and control of the business need not be in the same place where the actual trading activities and operations of the company are conducted.

1. The same principle has been reconfirmed in R v Dimsey (1999) STC 846, where the court emphasised that the central management and control test is a composite test designed to identify where the decisions of fundamental policy are made as opposed to the place where the day - to - day profit earning activities are undertaken.

Central management and control of the business must be distinguished from (and need not be in the same place as) the place of business, where the actual trading and business operations of the company are conducted. We need to distinguish where the strategic decisions of fundamental policy are made as opposed to the place where the day-to-day profit earning activities are undertaken. The central allegation in those cases was that companies incorporated in Jersey and other tax heavens, and of which Mr Dimsey, a solicitor, was a Jersey resident director, were in fact centrally managed and controlled in the UK, such that the companies were liable to UK corporations’ tax. The evidence accepted by the jury was that Mr Dimsey’s client in the UK (Mr Allen), who was not an actual director, was a shadow director, and was in fact actually managing and controlling the companies in respect of board level decisions. The result for the companies was that they were resident in the UK rather than Jersey. R v Dimsey is a case of a shadow director residing in UK who was instructing the company director residing in Jersey how to act[6].

2. In addition, inTrevor Smallwood Trust v HMRC [2010] EWCA Civ 778, the Court of Appeal confirmed that a Mauritian trust that has been arranged and orchestrated in the UK was ultimately controlled and managed in the UK.

This was a case about the residence of a trust, not about a company and although there are important differences between a Trust and a Company, the concept of management and control is applicable in the same way. The facts Mr. Smallwood was the settlor and beneficiary of two trusts established for himself and his family in 1989 and he also had the power to appoint trustees. The trusts were based in Jersey and held shares in companies and the shares grew in value. There would potentially be a capital gain of over £6million on their disposal. The taxpayer appointed trustees in Mauritius. He relied on the double tax convention between the UK and Mauritius which has the effect of transferring the right to tax the gain in Mauritius, where the trustees were based at the time of the disposal of the shares’ property of the trust. The trustees sold the shares and considerable profit was made. Shortly afterwards the taxpayer and his wife, who were based in the UK, both became trustees. HMRC raised an assessment on the trust for £2.7million. The taxpayer appealed. The issue Whether the gain which arose on the disposal of the shares done by the trustees in Mauritius, was exempt from capital gains tax in the United Kingdom. The Decision of the commissioners The commissioners found for HMRC: the place of effective management of the trust had been where Mr Smallwood was located, i.e., in UK. He directed and orchestrated the trust from UK. So, the income was taxable in UK. Held on Appeal The Court of Appeal confirmed the commissioner’s findings that the trust was managed from UK so the assessment and taxation imposed was correct. Trevor Smallwood Trust is a case where the foreign trustee who conducted the trust business abroad, was in effect following the instructions of the settlor and beneficiary resident in UK. It was held that the taxation imposed on the settlor and beneficiary for the overseas activity was correct. Cyprus hypothetical case based on the facts of R v Dimsey and Trevor Smallwood Trust If we transform the facts of R v Dimsey and Trevor Smallwood Trust to a Cypriot case, such as a Cypriot nominee director is appointed in a Cyprus company and it follows the instructions of the foreign shareholder of the company, such a company will be considered as managed and controlled from the place of residency of the instructing shareholder wherever this will be. It is for this reason that currently, a lot of requests are addressed to Cyprus income tax authorities for Cyprus companies from foreign income tax authorities trying to discover whether the director is simply a nominee following the instructions of the foreign shareholder and in effect the tax residency of the company is moved from Cyprus abroad. Such a company might be held liable to foreign taxation by operation of foreign laws as it might be considered to be resident in the place of residency of the instructing shareholder. Future important change In December 2021, the European Commission proposed that member states adopt the Third Anti-Tax Avoidance Directive known as "ATAD 3". The proposed Directive, as will be discussed further below, aims to prevent the use of shell companies for obtaining tax advantages and in the cases where the minimum pre-requisites of substantial residence in the Member State country are not present, (substance requirements), unfavourable tax consequences for the shell company are provided. In conclusion, the residency of a company is identified by determining where the central management and control is exercised. If the central management and control of a company is exercised in Cyprus then such a company, anywhere registered, is a tax resident of Cyprus.   A Cyprus registered company with management and control outside Cyprus, as from 31.12.2022, is resident of Cyprus, irrespectively of where the management and control is exercised, unless it is a tax resident in another country in which case the company will be considered, for Cyprus law purposes, as resident in that other country. In answerιng to the question, in which place is a company deemed to be resident under the management and control test, the answer is that it is located in the place where the central management and control of its business is exercised and that is where the person or persons issuing its strategic decisions are located.

 C.       Which are the substance requirements that connect the exercise of the central management and control with a particular place?

The question as to which are the substance requirements that connect the exercise of the central management and control with a particular place is a question of fact. We need to identify the facts that connect the exercise of the central management and control with a particular place. Indicatively these are: Location of Board meetings It has been decided and stressed repeatedly in court cases that, the place where the directors meet in order to reach their strategic decisions on company’s policy, finance and related matters, subject to various qualifications which will be discussed further below, will be the place of central management and control of the company’s business. If the intention is to have a Cyprus resident company, avoiding any possible allegations that the company is resident abroad, then all board meetings should be held in Cyprus. It is best practice therefore, to avoid a moving / transit board, since that makes it harder to demonstrate clear residence in any one location and might create issues of multiple residencies. In effect, the place where the directors meet for their board meetings, deciding on strategic company’s issues such as its policy, finance and related fundamental matters, is the location of the central management and control of the company’s business and consequently once the other factors are in place, the company is resident at that location. Art. 191A of the Companies Law Cap 113 As to this issue, it is worth noting the provisions of Art. 191A of the Companies Law Cap 113, which provides the following: “Participation in the directors meeting by electronic means 191A. Unless expressly provided for in the company's articles of association, a meeting of the directors may be held by telephone or by any other means by which persons participating in it can simultaneously listen and be heard by all the other persons participating in it and the persons participating by in this way, for the purposes of establishing a quorum and for any other purpose, and the people participating in this way are counted as present at the board meeting: Provided that, in the above case, the meeting of the directors is considered to have taken place where the person who kept the minutes of the relevant meeting of the directors is located”. In effect, in case the board meetings are held through electronic means such as the Zoom platform, once the directors are located in various jurisdictions, the place of the meeting is considered to be the place of the person who kept the minutes of the relevant meeting of the directors. In such a case the decision is considered as taken in the place where the minutes are kept. Directors’ permanent residence The residence of the directors is closely connected to the place where the board meetings are held. If the intention is to have a Cyprus tax resident company, the directors or at least the majority of them must be permanent residents of Cyprus. In this way, it is easily proved that the board meetings are taking place in Cyprus and the management and control is exercised in Cyprus. Appointment of directors residing outside Cyprus If a Cyprus company resident is desired, the appointment of directors residing outside Cyprus, although possible, must be avoided. In case it is impossible to avoid such appointment, then the law of the country of residence of the foreign director to be appointed, must be very carefully examined to avoid adverse possible tax effects. There are countries which apply the management and control test in a similar manner that Cyprus does, i.e., UK, and in implementing this test, they might consider that, if a foreign company (i.e., Cyprus) is managed by a director who resides in their jurisdiction, becomes their tax resident of UK and impose or claim taxation from the company concerned. The fact that as from 31.12.2022 such a Cyprus company, from Cyprus law perspective, will be considered resident of Cyprus unless it is tax resident in another country, does not save the situation. The foreign country might claim that the company is resident in its jurisdiction and impose taxation, despite the implication of the Cyprus law. In such a case we may have dual residency issues which will be explained further below under chapter, “IX. Double Tax Treaties – Their impact on the residency issue of Cyprus Companies”. Appointing directors residing in countries in which the management and control test for foreign companies is applicable, such as the UK as explained above, must be avoided. There are considerable risks which need not be taken. Appointment of directors residing in the place where the income of the company is generated It is also advisable to avoid appointing directors who reside in the foreign country where the income of the Cyprus resident company is expected to arise or in which country tax issues might be raised as to the taxation of the Cyprus company or as to the taxation of its beneficial shareholder. If for example, the activities of the company are in Romania and the income is generated in or from Romania, it seems not proper to appoint as directors of the Cyprus resident company, persons residing, living and working in Romania. In case of such appointments, one leaves room for arguments, that the company or its real beneficial shareholder are taxable in Romania, as the effective management of the company is situated in Romania. Also, an argument which can be put forward is that the company is not resident of Cyprus as its management and control might be alleged not to be exercised in Cyprus. Again, in such cases, there is possibility for dual residency issues as discussed in chapter “IX. Double Tax Treaties – Their impact on the residency issue of Cyprus Companies of this brochure”. We would like to clarify though, that the crucial issue is not the nationality of the director but his / her residency, where he / she permanently resides. A foreign national permanently residing in Cyprus, being a resident of Cyprus, will be a suitable director. Appointment of directors residing in Cyprus, as directors in foreign / overseas companies The same factors that will strengthen the position of a Cyprus company to be considered as managed and controlled in Cyprus, will be also considered to examine whether a foreign / overseas registered company is managed and controlled from Cyprus. In this respect, it is not advisable to appoint directors residing in Cyprus as directors in companies registered in tax haven countries like BVI, Panama, Bahamas, Nevis, Cayman Islands, etc. In such a case, there might be a real risk that these companies may be considered to be managed and controlled in Cyprus, and consequently taxable in Cyprus, as a consequence of the applicability of the management and control test. If such a claim is put forward by the Inland Revenue, BVI, Panama, Bahamas, Nevis, Cayman Islands, etc., companies, in order to avoid taxation in Cyprus, will need to prove that the Cypriot director acts only on instructions of the real owners or other advisors situated abroad transferring the management and control abroad, there where the shareholders or other advisors, reside. In effect, the director who follows blindly the instructions of the shareholders, or other advisors, is a mere cipher, simply stamping documents and doing what he is told, not managing and controlling the company. Relevant evidence and confidential information will need to be disclosed to the Inland Revenue to prove the director’s symbolic status. Risk of permanent settlement in Cyprus What must be noted in this case is that the director appointed to the foreign company, being resident of Cyprus, does not have authorization to enter into contracts in the name of the company, because this company can be considered to have a permanent establishment in Cyprus in relation to any activities that this person undertakes for the business with the result that these activities are also taxable in Cyprus. There is no need though to be engaged in such complications since the possibility can easily be avoided with the appointment of directors not residing in a country which applies the management and control principle. Frequency of Board meetings Board meetings should be sufficiently frequent to enable the directors to exercise control over the strategic affairs of the company. Depending on the level of activity in the company, a minimum of six board meetings in each year with each board meeting taking no more than two months after the last one. Administrative Office A fully fletched office must be established in Cyprus where the actual management and control of the company’s business will be exercised. In this office, the fundamental policy and management decisions must take place, and the properly recorded board minutes must be kept. The company secretary should be resident of Cyprus and accounting records, corporate records and other significant original documents should be maintained. Employees Employees must be employed and paid reasonable salaries according to market levels. Stationery Stationery must be printed with the letterheads of the company and its office address and other contact details such as telephone, fax numbers, email address and website. Bank accounts Bank accounts must be opened also in Cyprus and managed by the local directors or employees. Accounting records Maintenance of accounting records should be in Cyprus. In conclusion, as to the factors which will support the argument that the management and control is exercised in Cyprus in order to have a resident company in a particular place, the directors must meet, manage and control the affairs of the company in Cyprus, proper board meetings with minutes must be taken place in Cyprus, all or at least the majority of the directors to be permanent residents of Cyprus and the positive surrounding factual circumstances to be present in Cyprus and avoid the negative surrounding factual circumstances as explained above. The provisions of Art. 191A discussed above must be born in mind. Any appointments in a Cyprus company of directors not residents of Cyprus, raise serious risks as the company might be considered as resident in another jurisdiction with adverse tax consequences. The provision of the law that such company without being officially tax resident in another jurisdiction, as from 31.12.2022 will be considered as tax resident of Cyprus, does not save the situation. The foreign jurisdiction where the directors reside and decide, might claim the residency for such company and claim to impose taxation for its activities. The appointment of Cypriot resident directors in foreign companies, should be avoided because the company may be considered to be managed and controlled from Cyprus and in effect resident in Cyprus with adverse tax consequences.

D.     How the management and control must be exercised in order for a company to be considered as resident in the place where the management and control is exercised?

This is the most crucial and most important criterion in order for a company to be considered as resident in the place where the management and control is exercised.

1. Real exercise of management and control by the board of directors - Decision process – effective consideration and knowledge of the facts

A long line of court judgements has established that the board of directors, who meet in execution of their duties and powers, must in fact exercise management and control over the company’s affairs. The directors must apply their mind and decide at their own discretion, on all the company’s strategic issues and express their free opinion on the parameters which govern the activities and operations of the company. In effect, the management decisions must be taken by the board of directors who, independently, without any external influence, think and decide on all policy matters, strategies, financing, declaring of dividends, marketing and all other relevant strategic key matters and execute all their functions as members of the board, acting in the best interests of the company. This policy making, is the primary expression of management and control. The directors must reach their decision NOT by simply following the instructions of the shareholders or of any third person such as the consultants, lawyers’, accountants or other advisors of the shareholders or the board of directors. They must think and decide at their own discretion for each case that arrives or put forward for consideration and implement the company’s policy in an autonomous way. The directors MUST decide the policy and crucial decisions as to the company and NEVER be directed by external bodies. They must think and decide on the “key strategic mattes” of the company based on sufficient knowledge they must have in order to decide accordingly. In simple words, the directors must take the strategic decisions of the company. Key Strategic company matters - decisions What are regarded as “key strategic matters” of the company depends on the nature of the company in question but might include, inter alia, decisions relating to:

• • The acquisition or disposal of assets;
  • Capital expenditure;
  • Budgets approval;
  • Operational decisions;
  • Financial decisions such as granting or receiving loans;
  • Decisions on the engagement or dismissal of directors and other senior personnel;
  • Concluding and execution of contracts;
  • Mergers and acquisitions;
  • Expanding or changing the line of business;
  • Appointment of consultants; and,
  • Nominating accountants and auditors.

If the directors simply act on instructions received from third persons or the shareholders or lawyers or accountants or other consultants acting on behalf of the shareholders, they are mere ciphers simply stamping documents and doing as they are told. This is not management and control but secretarial execution of orders. The board of directors will of course consider the suggestions put forward by the advisors or the shareholders, but in each case, they must only consider these suggestions and proceed to decide applying their thinking only having in mind the interests of the business of the company. They must be ready to refuse adopting decisions not to the benefit to the company’s interest and be ready even to resign if their decision is not followed. Autonomous status of the board In effect, the board must act autonomously and be in the position to reject requests which it considers not to be in the interests of the company or contrary to local law.  Knowledge of the business of the company The directors must know the business of the company and genuinely determine its affairs, acting from Cyprus. If they simply obey the instructions of the beneficial owner or his/her advisors who reside in another jurisdiction, the central management and control, and therefore the residency of the company for the purpose of its tax liabilities will be the location/residence of the ultimate beneficial owner or the advisor or as the case might be. Professional Directors A board must consist of directors with sufficient knowledge, experience, and expertise to manage the strategic affairs of the company. Directors must be able to consider genuinely the company’s affairs and reach a reasonable, commercial decision, justified by the activities of the company and their expertise and knowledge. The directors should be appropriately qualified and experienced in the relevant sector to enable them to consider (rather than merely follow) proposals and reach a reasonable conclusion. They must be paid reasonable fee applicable to the market for such positions. Nominee directors should not be used. Records and administrative matters Full and accurate minutes of each board meeting should be taken, mentioning the below:

• • The time and place of the meeting and who was present;
  • What was resolved and the reasons for such resolution should be recorded in as much detail as possible. Discussions in board meetings should be recorded in detail. Any views or debates or agreements or disagreements are important to be recorded in detail as these are important evidence that the directors applied their minds to the relevant questions. Establishing a pattern of decision making is also important. The key point is that these minutes are likely to be more comprehensive than is perhaps the norm.

Copies of notices, agendas and other documentation circulated to directors should be kept at the company’s office.  Minutes should be prepared as soon as possible, be approved and signed. Decisions of the board should not be made by unanimous written resolutions circulated among the board members as these can suggest “rubber stamping” procedures.

• • The provisions of Art. 191A discussed above must be born always in mind.

Directors’ remuneration Directors should be paid market price directorship fees and not nominal fees as nominee directors usually receive. The directors must be properly paid for the work and meetings they have in such manner that demonstrates that this fee is sufficient to allow them to spend time to get to know the business of the company. Nominee directors with nominee fee, should NEVER be used. Signing of Contracts Signing of contracts, issuing of invoices, and any other relevant company documents relating to the management, control and administration of the company must be executed in Cyprus by its directors and or local employees properly authorised. Appointment of Nominee directors Nominee directors, non-professionals, appearing in hundreds of companies should NEVER be used. If such type of directors is used it is a clear indication that such directors do not think and decide the affairs of the company but simply “rubber stamp” the decisions directed to them by the shareholders or other advisors. In such a case the location of the management and control is moved to the place of residency of the shareholder or the advisors. Delegation of powers No key, strategic decisions should be made other than by a formal meeting of the directors. Where discretionary powers have been delegated to any person (including a director), that power should only relate to day-to-day affairs and should not include the power to make key strategic decisions. Parent Company directing the decisions of its subsidiary There is a risk that a parent company, may exert significant influence over a subsidiary. The exercise of powers available to a shareholder in general meetings (appointments to the board, changes to financial structure etc.) do not on their own affect the residence of the subsidiary. It is, however, important to avoid the parent/holding being deemed to have usurped the functions of the subsidiary board, and thereby to exercise central management and control over the subsidiary’s business. The degree of autonomy of the subsidiary board is important in conducting the business of the company, including the extent to which the directors take decisions on their own authority as to investments, production, marketing and procurement, without reference to the parent/holding. It is the management and control of the subsidiary’s business, rather than the location of shareholder control, that determines residence. Relevant is the case discussed already Bullock v Unit Construction Co Ltd (1959) 38 TC 712 and the cases to be discussed further below, Laerstate BV v HMRC [2009] UKFTT 209, and HMRC v Development Securities plc and others [2020] EWCA Civ 1705. Cyprus companies with holding companies registered in UK A lot of Cyprus resident companies have as their holding companies, companies registered in UK. Usually for prestige reasons. In such a case, extra attention must be paid as if the holding company with its board of directors residing in UK, controls and directs the business of the Cyprus subsidiary, then the Cyprus subsidiary might be considered from UK law perspective, as resident of UK and relevant taxation to be imposed on its income. Advisers / consultants Similar questions of influence can arise in relation to advisers/consultants, or other officers of the company giving instructions to directors residing overseas. In the case Calcutta Jute Mills v Nicholson (1876) 1 TC 83, the director of the company, although residing in Calcutta, India, was receiving instructions from the company’s office in London. This fact was sufficient for the court to consider that the company was resident of UK instead of India and then taxable in UK. The case, Wood v Holden, 2005 BTC 253 - High Court 18.4.2005, the facts of which are analysed further below, clearly directs to the avoidance of such appointments. Similar considerations apply to the presence of observers or other non-directors at board meetings. Inviting a particular person to be present at the board meetings on a particular subject on an ad hoc basis does not present concerns. However, where an individual is a regular attendee of meetings covering a range of subjects, Income Tax may argue that he/she is in fact taking part in the central management and control of the company and, if that person is based in any foreign country, this may point to the decisions being taken outside Cyprus with possible risks. Rubber-stamping Decisions In all cases where proposals, suggestions or other advice is being submitted to the company’s board by a person or entity who is resident or otherwise present abroad, the directors should examine them critically and adhere to a proper decision-making process. It is important that the board meeting at which such proposals etc. are considered cannot be seen as a sham or as merely “rubber stamping” decisions which have been taken not in Cyprus. The independence and expertise of the board, together with the manner of communication between the parties, is crucial here. Issuing of general powers of attorney General powers of attorney should never be granted to non – residents or otherwise. If a general power of attorney is issued, there is real risk the management and control of the business to be considered that is exercised in the country of residence of the attorney. Specific, (and not broad) powers of attorney, may be granted to non-resident-based persons. The issuing of general powers of attorney to persons who are not directors and granting them full authority and power to decide on fundamental matters and operations of the company, such as to sign contracts, to have unlimited investment powers and to generally deal in blank with all the affairs of the company, may be considered as abdication of authority and a serious reason to consider that the management and control of the company is entrusted and passed to the attorneys. In such a case, there is a high risk of the company being considered to be resident at the place of the residency of the attorney and not in Cyprus. General powers of attorney giving unlimited and wide authorities to the attorneys, as a rule, must be avoided. The company can perfectly do its business by issuing special resolutions or special powers of attorney for the execution of particular acts. Such a step does not affect the management and control test. On the contrary it strengthens it. Consultants’ involvement in the affairs of the Company The various advisors and shareholders who would like a particular company to be resident of Cyprus, must be very careful in the way they draft their opinions / requests to the directors. They must avoid phrases as “I instruct you to do this” or “I order you to do that” or similar phrases. The proper wording would be that they request the board to consider the particular matter and if accepted by the board to be within the interest of the company, then to implement it. Not only the old court decisions mentioned above but also very recent ones support the above principles[7]. The recent court cases that direct the way the management and control should be exercised We shall examine in more depth three court cases as they play an important role in the development of the principle of central management and control and represent its current version.

1. Wood v Holden, 2005 BTC 253 - High Court 18.4.2005

This is a case where consultants (PWC) resident in UK were advising directors of a Dutch company resident in holland. The Special Commissioners in the UK found that a Dutch resident company, paying taxes in Holland and acting through its board of directors in Holland, was also resident and taxable in the UK. Park J, rejected the above approach on the facts of the case but not on the principles put forward by the Special Commissioners, something which is highly important to have in mind. The Court in this case reaffirmed the above principles as to the management and control. On the facts, the judge accepted that PWC, acting from UK, never directed the directors to do anything and were not in position to do so. PWC gave them only advice and asked that the directors consider the offer, subject matter of the case, and further decide whether they will accept it or not. The court accepted that the directors applied their mind and decided whether the offer was within the interest of the company and so were not merely going through the motions and simply stamping and signing documents. It was clear that, if the directors just mindlessly followed the advice of PWC, the taxation imposed in the UK on the Dutch company would have been upheld due to the PWC and shareholders’ intervention, both residing in the UK. As Park J mentioned in this case, “if directors of an overseas subsidiary sign documents mindlessly, without even thinking what the documents are it would be difficult to argue that the subsidiary was tax resident where the directors met. But if they apply their minds to whether or not to sign the documents, the authorities… indicate that is a very different matter”. The above court case on 26/01/2006 has been upheld by the court of Appeal [Wood v Holden (HM Inspector of Taxes) 2006 BTC 208]. What Wood v Holden established is that once the board of directors applied their mind on the relevant issue that was sufficient not to disturb the place of central management and control. They followed a formalistic approach.

2. Laerstate BV v HMRC [2009] UKFTT 209

This is a case where a UK parent company was instructing the board of directors of its subsidiary. In this case, the First Tier Tribunal held that a company's residency cannot be established merely on the basis of the location of board meetings as decided in Wood v Holden. In this case the First-tier Tax Tribunal found that a company incorporated in the Netherlands was centrally managed and controlled by its sole shareholder and director, in the UK. The existence of a dominant shareholder does not of itself determine the residency status of a company; it is still necessary to establish who exercises central management and control of the company and from where. Central management and control require to look beyond the board meetings and board resolutions and requires wider examination of company’s ‘course of business and trading’. The board of directors would need to really exercise management and control and would need certain minimum amount of information to make decisions. The court said that: "… there is no assumption that central management and control must be found where the directors meet. It is entirely a question of fact where it is found. Where a company is managed by its directors in board meetings it will normally be where the board meetings are held. If the management is carried out outside board meetings one needs to ask who is managing the company by making high level decisions and where, even where this is contrary to the company's constitution." “We do not consider that the mere physical acts of signing resolutions or documents suffice for actual management … What is needed is an effective decision as to whether or not the resolution should be passed and the documents signed or executed and such decisions require some minimum level of information. The decisions must at least be informed decisions. Merely going through the motions of passing or making resolutions and signing documents does not suffice.” The court also went on to state that: "There is nothing to prevent a majority shareholder indicating how the directors of the company should act. If they consider the wishes and act on them, it is still their decision." The question is whether the directors have the absolute minimum amount of information that a person would need in order to be able to make a decision at all on whether to agree to the shareholder's wishes or to decide not to sign the documentation. In this case, that would have included information or advice on whether the price was sensible. There was no such information or advice given to the director. As a consequence of the key decisions having been taken in the UK, Laerstate was held to be UK resident under domestic law. It is not enough just to have the formal acts of a company documented as occurring outside the UK in order to maintain that it is not UK resident. It is essential that the directors are kept informed so that they can properly make their decisions (whether they accede to the shareholder's wishes or not). Sufficient knowledge of the affairs of the company plays an important role in reaching an independent decision. Laerstate BV v HMRC abandoned the formalistic approach followed in Wood v Holden and followed a substantial approach as to how the board of directors must act in reaching the decisions in issue.

3. HMRC v Development Securities plc and others [2020] EWCA Civ 1705

This is a case where the UK parent company was directing the acts of the board of directors of the subsidiary in Jersey. This case considered whether certain wholly-owned Jersey-incorporated subsidiaries of a UK property development and investment group were resident in the UK for corporation tax purposes. The Court of Appeal (CA) has overturned the decision of the Upper Tribunal (UT) and restored the decision of the First-tier Tribunal (FTT) that the Jersey-incorporated companies were centrally managed and controlled (and therefore tax resident) in the UK at the material times. They were acting under instructions from the UK, and were thus UK resident. In Wood v Holden it was held that mere influencing of the decision of the directors by a third party (e.g.: a parent or third-party adviser) does not necessarily lead to a conclusion that the central management and control is removed from the non-UK company’s directors. In this case, {HMRC v Development Securities plc and others}, it has now been held that the UK parent could be taken to effectively take the decision for the non-UK company by giving instructions to proceed with the specific transactions notwithstanding that the non-UK’s director considered (or satisfied themselves of) the legality of the relevant transactions but did not give any decision to the merits of the transactions. This led to the conclusion that the central management and control was conducted by the parent and therefore in the UK and not in Jersey where the subsidiaries were incorporated. This shows that there may be a high bar in future to establish that central management and control is exercised outside the UK in case of a UK parent company in place. The Court of Appeal’s decision also serves as a timely reminder that resident directors cannot provide a purely "administrative" service for the benefit of the parent owner but each director carries all the duties and responsibilities of a director generally, and as such, must ensure that they have sufficient knowledge and understanding of the business of the company and individually decide on all company matters. This case has shown that,

1. 1. Decisions by subsidiaries should be taken at proper board meetings and that,
   2. Such board meetings properly consider the merits of any decisions to be taken as well as the legality of those steps. Particular care should be taken that, in implementing proposals given by a parent company, directors do not treat such proposals as instructions and that they consider carefully the commercial context for the decision.

In Wood v Holden a formalistic approach was adopted as to what was constituting a proper decision taken by the board of directors of the subsidiary. It was enough that the directors applied their mind and decided whether the decision was within the interest of the company and lawful. In HMRC v Development Securities plc a clear substantial approach was adopted, following in effect the approach of Laerstate BV v HMRC. The board of directors must substantially be involved in the taking of the decision, knowing the facts and the surrounding environment to reach such decision. The question is simple: Did they take the decision or this was directed to them? In conclusion, in order to have a resident company in the place where the board of directors meets and decides, the directors must always genuinely meet in that place, apply their mind, think and decide on all fundamental strategic issues and policy decisions of the company with regard to its best interest using their own experience, knowledge and judgement.  They must be well informed of the business of the company and this information must be recorded and in discharging their duties must make informed decisions and keep proper minutes showing that the corporate formalities are met. They must never act on instructions of third persons, whoever these may be, by simply stamping resolutions sent to them. Following other root, might move the tax residency of the company in the place where the instructing person is situated, outside the place of residence of the directors, with possible adverse tax consequences.

VIII.        TAX RESIDENCY OF CYPRUS COMPANIES AND SUBSTANCE REQUIREMENTS UNDER THE PROPOSED THIRD ANTI-TAX AVOIDANCE DIRECTIVE, KNOWN AS “ATAD 3”

The European Commission on the 22nd of December 2021 published a legislative proposal for a Directive to be issued, named, the Third Anti-Tax Avoidance Directive, known as “ATAD 3”, which sets forth rules to prevent the misuse of shell companies for tax purposes. The Proposed Directive should have been adopted early 2022 by the European Union Council and be implemented by the Member States by the 30^th of June 2023 at the latest. The provisions should subsequently be effective in all Member States as from the 1^st of January 2024. The Directive lays down a uniform test that will help Member States to identify undertakings that are engaged in an economic activity, but which do not have minimal substance and are misused for the purpose of obtaining tax advantages. Once these minimum substance requirements are not met, the undertaking will be classified as “shell entity” and will sustain certain adverse tax consequences. In order to examine if an entity meets the minimum substance requirements, so that not to be characterised as “shell entity”, the following information must be provided:

• • Whether the entity has an office space, (owned or rented), through which it exercises its activities;
  • Whether the entity has an active EU bank account; and
  • Whether at least one of its directors is an in-house director properly qualified to handle the business of the undertaking or the majority of its full - time employees reside in the same country as the undertaking.

ATAD 3 with its requirement as to particular substance conditions in order to avoid the characterization of the company as a shell company, officially gives a way out to the substance issue which should have been present in identifying the place of management and control of a company. In effect, once the substance requirements of ATAD 3 are met, in the case where the in-house qualified director has been appointed, and who is indeed managing the affairs of the company from Cyprus, the management and control test identifying the tax residency of a company is strengthen and supports the allegation that such a company is managed and controlled from the place where the director is resident and decides the affairs of the company. The substance requirement as per ATAD 3 is also met if the majority of the full-time employees are resident for tax purposes in the Member State of the undertaking. This condition of substance though, cannot be connected with the management and control of the company which is a notion related to the directors’ powers or related to the powers a person managing the company.  If the substance requirements as per ATAD 3 are met only by the majority of the employees stationed in Cyprus, in the absence of the directors’ involvement and the capacity residing and deciding from Cyprus, then such a company might not be managed and controlled from Cyprus and in this respect, if it will be considered as resident in another jurisdiction, where it has been also considered as tax resident of that jurisdiction then the Directive will not be applicable to it. So, in the case where the company has the majority of its employees stationed in Cyprus, but the management and control is outside Cyprus, the directors or third persons meet and decide abroad, such a Cyprus company despite the application of incorporation rule, if is a tax resident of the jurisdiction where the management and control is exercised, the proposed Directive, ATAD 3, does not apply, despite the fact that the company meets the substance requirements. ATAD 3 applies only tax resident companies of Member States. If the company is a Cyprus registered company, as from 31/12/2022, irrespectively of the fact that the management and control will be exercised abroad, and provided that such company does not have a tax residency in any country abroad, it will be considered, by reason of its registration in Cyprus, as tax resident of Cyprus as well. Reservations put forward After the initial draft of the Proposed Directive which has been published by the European Commission on the 22nd of December 2021, doubts arose as to whether the Proposed Directive would succeed through the EU legislative process – requiring the unanimous approval of all EU Member States for adoption. Serious concerns were expressed by various bodies and authorities related to the legality of the measure, its effectiveness and its necessity. Also, the current presidency of the European Council, Sweden, has circulated a compromise text on the Proposed Directive, suggesting various extensive changes to be effected and asked the opinion of all delegations on this draft. Various proposals have been put forward. It remains to be seen the final outcome and what recommendations will be put forward amending the current version of the initial draft. European union parliament recommended changes The EU Parliament on the 17^th of January 2023, approved a revised version of the Proposed Directive and suggested several amendments to be made on the initial draft. The EU Parliament in its recommendations acknowledges the possible legitimate setting up of undertakings with minimal substance and according to its recommendations, this possibility must be observed, but on the other hand it urges to adopt stronger minimum substance requirements to be effective in combating tax fraud, evasion and aggressive tax planning through the use of shell entities. It should be noted that these recommendations are not binding on the European Commission/Council but they will be taken into consideration. Some of the recommendations put forward make the Proposed Directive stricter and some of them adopt a more relaxed approach. Distinction between management and control principle and substance conditions as per ATAD 3 In view of the above analysis, we have to distinguish the following:

• the principle of management and control which will identify whether a company is resident of Cyprus, being a principle related to the directors’ and third persons powers to decide the policy issues and business of the company, and
• the substance requirements as per ATAD 3 which substance requirements will identify whether the company is a shell one or not.

The management and control principle is related to the residency of companies while the ATAD 3 Directive and the substance requirements, identify whether a company is a shell company or not. ATAD 3 applies only once we have a tax resident company in a Member State. In effect, in order for its provisions to apply, the management and control test which will identify if a company is tax resident of Cyprus, must have already been examined and concluded that the company is managed and controlled in Cyprus so that, this inference will generate the provisions of ATAD 3 Detailed analysis of ATAD 3 is given in our article, “The Third Anti-Tax Avoidance Directive (ATAD 3) The EU Parliament Recommendations The End of Shell Companies” published March 2023, and can be found here

IX.         DOUBLE TAX TREATIES – THEIR IMPACT ON THE RESIDENCY ISSUE OF CYPRUS COMPANIES

Cyprus has signed a considerable number of Double Tax Treaties which regulate taxation on various matters between the contracting states. In order for a company to take advantage of the provisions of the Double Tax Treaties, it must be resident of one of the two contracting states. In our case, the Cyprus company, must be resident of Cyprus for tax purposes. A definition of what a “resident of a Contracting State” means, is given in article 4.1 of the Organisation for Economic Co-operation and Development - OECD, model treaty which provides the following: “RESIDENT For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein”. Further, according to the Commentary to the OECD Model Tax Convention: “The place of effective management is the place where the key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made. To determine the tax residency of a company, tax authorities would be expected to take into account various factors, including among others where the chief executive officer and other senior executives usually carry on their activities and where the senior day-to-day management of the person is carried on.” Place of effective management as per relevant article in Double Tax Treaties. Tie – breaker article Article 4.3 of the OECD model treaty, provides the following: “Where by reason of the provisions of paragraph 4.1, cited above, a person other than an individual is a resident of both Contracting States then it shall be deemed to be a resident only of the State in which its place of effective management is situated”. The above crucial provision, known as the “Tie – breaker article”, which provides the solution to a possible problem of dual residency, is included nearly in all treaties that Cyprus has signed. Definitions of the terms in the Double Tax Treaties There is no definition of the terms, place of management, effective management, head office, registered office, place of registration, headquarters, place of incorporation, or other similar criteria which are used in the Double Tax Treaties. Applicability of local laws as to residency The lack of any definition of the above terms used in respect of all legal bodies in the Double Tax Treaties, leads to the consideration of the laws of contracting States, Cyprus law in our case, in order to establish the residency of a Cyprus company, under such law, for tax purposes and consequently for treaty purposes as well. In effect, the treaties point to the local laws of the contracting States, in order to identify, under which conditions a company registered in their jurisdiction, or not registered there, will be considered as their tax resident. Local tax law provisions will need to be examined in order for a company to be considered as tax resident under the provisions of the Double Tax Treaties. In considering whether a Cyprus company is a resident of Cyprus, and consequently being benefited from the provisions of the Double Tax Treaties, the analysis provided in the previous chapters of this brochure as to the management and control test, applies. Dual residency There might be a situation where a company is a resident of more than one country. This might be the case when the management and control of the affairs of the company is not centred in one country but is divided or distributed among one, two or more countries. Such situations might appear when the directors of the company, which form the highest level of management of the company, are resident in various countries and execute their management duties from their place of residence and not from only one country. Also, such situations might appear when the advisors or the shareholders of the company reside in different countries than where the board meets and from their place of residence direct the decisions of the board. If such factual situations exist, then the allegation and possibility of dual residency of a company can be raised by Inland Revenues with drastic tax effects. It is for this reason that we are of the opinion that if a Cyprus tax resident company is needed, the appointment of directors with effective management, residing outside Cyprus must be avoided, as dual residency issues may arise. The above possibilities as to the dual residency of a company have been considered in many court cases[8]. The authorities clarify and confirm that there where there is a fragmentation of the management and control of the business of the company exercised in effect from two or more countries, there can be dual residency for the company with further tax issues to be considered. Allegation of dual residency by a treaty country If dual residency exists or if such allegation is raised by any one of the treaty States, e.g., that a Cyprus company is also resident in that other State which claims taxation, then the solution is provided by the “tie – breaker” article of the Double Tax Treaties, article 4.3 discussed above. According to article 4.3, if dual residency exists, the company is deemed to be resident where its effective management is exercised.  The answer to the question, where the effective management is exercised, identifies the tax residency of the company and in effect the country of its taxation. As to the effective management test and its conditions, the analysis provided in the previous chapters of this brochure relating to the management and control test, apply accordingly. In the court case, Wensleydale’s Settlement Trustees v IRC [1996] STC (SCD) 241, a Special Commissioner considered that the place of effective management is there where the shots are called, implying realistic positive management.  In effect, the analysis of the management and control test provided above applies for this issue too. Case study Suppose that the Russian or the UK tax authorities or the Inland Revenue of any other treaty country, allege that a resident Cyprus company, for matters of management, domicile or other similar issues, is also resident of Russia or UK or in that other country and not only in Cyprus. Because of this conclusion, they seek to impose taxation on the Cyprus resident company for a particular operation. In case of such a dual residency problem, (Cyprus also alleges that the company is a resident of Cyprus liable to taxation in Cyprus) article 4.3 of the Double Taxation Treaty signed between Cyprus and Russia, and the relevant article of the UK treaty or as the case might be with the other treaty countries, applies and gives the solution. This tie – breaker article, as being a provision of an international treaty, supersedes any local laws and directs that the residency of the company is deemed to be there where the effective management of the company is exercised. If the effective management is exercised in Cyprus, taxation cannot be imposed in Russia or in the UK or in the other contracting State by operation of the Double Taxation Treaty. In view of this provision which provides a solution, special attention must be paid to what has been said above in order to establish and to secure that the management and control of the company’s affairs is exercised in Cyprus. Similar arguments can be put forward in all other cases where Double Tax Treaties have been signed with the above provision in place. The judgement in Wood v Holden mentioned above, handles also the issue as to the effective management test, due to the fact that a relevant provision is in the Double Taxation Treaty between UK and Holland and the case was decided on this principle. It was decided that the effective management was situated in Holland and not in the UK. In more recent court cases though, it was decided that the effective management was situated in UK and not overseas where the companies were registered and the board of directors was situated. See, HMRC v Development Securities plc and others [2020] EWCA Civ 1705 and Laerstate BV v HMRC [2009] UKFTT 209 and Laerstate BV v HMRC [2009] UKFTT 209, discussed above.

X.         THE CYPRUS INLAND REVENUE APPROACH IN IMPLEMENTING THE NOTION OF MANAGEMENT AND CONTROL

The Cyprus Inland Revenue has not yet issued any practice guidelines as to how it will deal with the management and control test, its interpretation and implementation.

1. Cyprus companies under investigation by Cyprus Inland Revenue

It is clear that the Cyprus Inland Revenue will not disturb on its own initiative a Cyprus company which has decided to get registered as tax resident of Cyprus. Such a company after 31/12/2022, due to the incorporation rule in place, is taxable in Cyprus on its worldwide income and the Inland Revenue will not object to such a request for obvious reasons. As a matter of practice, still despite the incorporation rule in place, the Cyprus Inland Revenue in order to accept a company as a tax resident of Cyprus requests the directors to declare that they exercise the management and control of the company in Cyprus. Once this declaration is signed and submitted to the Inland Revenue, then the company is accepted and registered as a resident of Cyprus liable to the Cyprus taxation. Relevant Tax residency certificate is issued by the Inland Revenue, if requested. In such a case though, a relevant questionnaire is completed confirming that the management and control is exercised in / from Cyprus. No other conditions at this early stage of registration of the company as tax resident are examined or demanded by the Cyprus Inland Revenue. As from 31.12.2022 all Cyprus companies, except in the case they are tax residents in another country, are considered as residents of Cyprus by virtue of their registration and the Inland Revenue approach must be amended accordingly. With the application of ATAD 3, obviously the above unilateral declaration will not be enough as the companies will have to declare whether they meet the minimum conditions of substance and if they do not, then the tax authority will either not issue the tax residence certification or if it issues it, it will make relevant note that the company is a shell company.

2. Foreign registered Companies under investigation by Cyprus Inland Revenue

The Cyprus Inland Revenue, if a case arise, might claim that a foreign registered company is resident of Cyprus if its management and control is exercised in Cyprus. The burden of establishing that a foreign company is Cyprus resident, and liable to tax by virtue of its Cyprus residency, lies with the Cyprus Inland Revenue authority. In order for the Cyprus Inland Revenue to claim that a company is within the Cyprus tax net, they will need to argue that:

1. 1. The directors of that foreign company exercise management and control in Cyprus; or
   2. Someone other than the appointed directors, such as consultants, shareholders, or third parties, acting in effect as shadow directors, exercise management and control from within Cyprus over the business of the foreign company; or
   3. It has a permanent establishment in Cyprus.

In these cases, the Cyprus Inland Revenue, is expected to follow the above steps in order to identify the place of central management and control of such companies, and if found to be in Cyprus, local taxation laws will apply as the foreign coamony will be considered as resident of Cyprus. Important note A lot of Cyprus based service providers, for various foreign companies they manage, i.e., BVI, Bahamas, Belize, Seychelles, Cayman Island, etc., for their convenience, appoint as directors Cyprus resident persons. This is very risky as the Inland Revenue may institute an investigation whether the particular foreign company is tax resident of Cyprus based on the management and control principle having in its board local resident Cypriot directors managing its affairs from Cyprus.

3. Cyprus companies under investigation by foreign Inland Revenue departments

Tax residency problems though, might arise for Cyprus tax resident companies in foreign jurisdictions. A foreign country, if a Cyprus company is managed and controlled from its territory, might allege that it is resident in its jurisdiction, and may claim to impose taxation to it. In such a case, in order to avoid and be able to defend such allegation, the above factors strengthening the tax residency of a Cyprus company as being in Cyprus must be met. In case a Double Tax Treaty between Cyprus and the claiming of residency country is in place, the effective management rule, “tie-breaker” provision, pointing to Cyprus must be invoked to defend such allegation. If there is no Double Tax Treaty in place, then the local laws of each country will be invoked to solve the issue. A conflict of laws might appear if the two countries do not coincide on the result.

XI.         THE MANAGEMENT AND CONTROL TEST IN ONE PAGE

What has been discussed in this publication is summarized below in the following diagram:

Cyprus Registered Company

Irrespective of place of Management and Control as from 31/12/2022

Resident of Cyprus

 

Cyprus Company		Management and Control outside Cyprus – Tax resident in another country		NOT Tax Resident of Cyprus
Overseas Company		Management and Control outside Cyprus		NOT Resident of Cyprus

                   

Overseas Company

Management and Control in Cyprus

Resident of Cyprus

 

Cyprus Company or Overseas Company

Management and Control not centred in one country. Dual Residency DTT-Double Tax Treaty in place

Resident there where the effective management is exercised - “tie-breaker” provision of DTT

 

Cyprus Company or Overseas Company

Management and Control not centred in one country. Dual Residency. NO Double Tax Treaty in place

Resident as per local laws of each country the management and control is exercised

 XII.         FINAL CONCLUSIONS As per above analysis, a company:

• If it is incorporated in Cyprus, it is resident of Cyprus, the incorporation rule applies, and it is subject to Cyprus taxation;
• If it is incorporated in Cyprus with management and control outside Cyprus, it is still resident of Cyprus unless it is tax resident in any other country;
• If it is incorporated outside Cyprus but its management and control is in Cyprus, then it is resident of Cyprus, subject to Cyprus taxation.
• The management and control is exercised in Cyprus, if the board of directors resides or at least the majority resides in Cyprus and genuinely holds board meetings in Cyprus having in mind all the positive and negative factors explained above;
• The directors, at the board meetings held in Cyprus, give genuine consideration as to the affairs and business of the company and decide its policy, structural and main issues without simply following the instructions of the owners or their advisors. The directors must apply their mind, think and decide autonomously on all issues of the company and in its best interests; Knowledge of the business of the company and the business factual situation is of paramount importance.
• Any instructions and decisions relating to the business, management matters of the company, must be generated and given solely by the board of directors.
• Dual residency issues might be raised in case of fragmentation of power, namely, the management and control of the company’s business is exercised by the directors / shareholders / advisors, in various countries. In such a case, if there is a Double Tax Treaty in place, the effective management rule “tie-breaker” article applies and identifies the residency of the company. If there is not any Double Tax Treaty in place, local laws will apply and give the solution.

XIII.        DISCLAIMER

This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case.  No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.

---

Author:  Christos Kinanis

---

Footnotes [1] See further below under the heading,” Taxation of Companies” at page 5, what is provided as to the taxation of non-resident companies of Cyprus. [2] The law provides … of being tax resident in any other country. There is no condition that the taxation laws of that other country impose any taxation on the income earned. So, any country, where the Cyprus company is tax resident, meets the requirement. [3]  “Common Law” is the body of legal rules, based upon court decisions and not on statutory law made by a parliament, embodied in reports of decided cases, that has been administered by the common-law courts of England since the Middle Ages. Common laws vary depending on the jurisdiction, but in general, the ruling of a judge is often used as a basis for deciding future similar cases. [4] “Principles of Equity” are set of rules which rectify injustice done by the rigid application of court precedents and statutory law. It is the rectification of legal justice. [5] FA 1994 s.249. [6] The shadow director principle is also provided in Cyprus companies’ Law Cap 113, in section 192(9). [7] Re Little Olympian Each Ways Ltd [ 1994] 4 All ER 561; Untelrab Ltd v McGregor [1996] STC (SCD) 1; R v Crown Court at Kingston [2001] STC 1615; Esquire Nominees Ltd v Commissioner of Taxation [1971] 129 CLR 177; New Zealand Forest Products NV v Commissioner of Inland Revenue [1995] 17 NZTC 12,073}; Wood v Holden, 2005 BTC 253 - High Court 18.4.2005; Laerstate BV v HMRC [2009] UKFTT 209; and, HMRC v Development Securities plc and others [2020] EWCA Civ 1705.     [8] Swedish Central Rly Co Ltd v. Thomson [1925] 9 TC 342; Union Corp Ltd v IRC [1952] 34 TC 207; Koitaki Para Rubber Estates Ltd v Federal Comr of Taxation [1940] 64 CLR 15; R v Holdon, High Court 18.4.2005.  

LISTING ON THE CYPRUS EMERGING COMPANIES MARKET: AN UNDERESTIMATED POTENTIAL?

19th March 2024 The Emerging Companies Market (“ECM”) is a recognised unregulated market of the Cyprus Stock Exchange (“CSE”), offering the opportunity to Cyprus and international companies to list their shares or bonds.

RESIDENCY OF CYPRUS COMPANIES APPLICABILITY OF THE INCORPORATION RULE AS FROM 31/12/2022

12th January 2023 As from 31/12/2022, an important development applies as to the residency of Cyprus companies and in effect their taxation under Cyprus tax laws.

HEADQUARTERING AND BUSINESS RELOCATION TO CYPRUS

21st March 2022

INTRODUCTION

By now everybody knows that Cyprus belongs to the EU, about our unrivalled sunny days and our strategic location. This is old news. Why bring Cyprus back on the Headquartering map? Does Cyprus have something new to offer to businesses and individuals that wish to relocate their businesses to Cyprus?

The Third Anti-Tax Avoidance Directive (ATAD 3) The tombstone of shell entities

15th March 2022

A. INTRODUCTION

The European Commission on the 22nd of December 2021 published a legislative proposal for a Directive to be issued, the Third Anti-Tax Avoidance Directive, known as “ATAD 3”, which sets forth rules to prevent the misuse of shell companies for tax purposes. The Directive should be adopted early 2022 by the Council and be implemented by Member States by 30 June 2023 at the latest. The provisions should subsequently be effective in all Member States from 1 January 2024. The Directive lays down a uniform test that will help Member States to identify undertakings that are engaged in an economic activity, but which do not have minimal substance and are misused for the purpose of obtaining tax advantages. Once these minimum substance requirements are not met, the undertaking will be classified as “shell entity” and will sustain certain adverse tax consequences. The methodology followed by the proposed Directive to identify shell entities There are 7 steps to be followed:

1. Identification of undertakings being at risk to be classified as shell companies;
2. Substance reporting requirements;
3. Exempted undertakings from reporting;
4. Presumption of being classified as a shell entity or not, for tax purposes;
5. Rebuttal of the presumption of being classified as shell entity - Exemption;
6. Tax Consequences of not meeting the substance requirements;
7. Exchange of information, tax audits and Penalties.

B. SUMMARY OF THE PROVISIONS OF THE PROPOSED DIRECTIVE

The proposed Directive will be applied following the above identified methodology, step by step. At first, undertakings, tax residents of member states which are engaged in economic activity, will be examined whether they meet cumulatively the following three conditions:

1. Whether the undertaking has passive income more than 75% of its revenues, such as interest, dividends and royalties; and
2. Whether it is engaged in cross border activity; and
3. Whether it outsources its management and administration to third parties.

Once ALL of the above prerequisites are met, the undertaking is considered as at risk to be classified as shell entity and misused to obtain tax advantages by reference to a set of features common in such entities. Once this is observed, the undertaking must report the following, in order to examine if it meets minimum substance requirements:

1. Whether the undertaking has an office space, (owned or rented), through which it exercises its activities;
2. Whether the undertaking has an active EU bank account; and
3. Whether at least one of its directors is an in-house director properly qualified to handle the business of the undertaking or the majority of its full - time employees reside in the same country as the undertaking.

Certain undertakings, such as listed companies, regulated financial undertakings and undertakings with at least 5 full - time employees, are exempted from this reporting. Once the undertaking does not meet the minimum substance requirements and does not fall among the categories of exempted undertaking, it is presumed to be a shell entity. The presumption can be rebutted if the undertaking can prove that it is conducting a genuine economic activity and / or it can prove that the undertaking does not create a tax benefit to itself, its group of companies or to its shareholders, despite the fact that it does not meet the substance requirements. If the undertaking does not meet the substance requirements and has not reputed the presumption, certain adverse tax consequences will follow. In addition, automatic exchange of information as to the shell entities, tax audit and heavy penalties for non-compliance as to substance reporting requirement, apply.

THE PROVISIONS OF THE PROPOSED DIRECTIVE IN DETAIL

Definitions - Interpretation For the purposes of this Directive the following definitions shall apply: “Undertaking” means any entity engaged in an economic activity, regardless of its legal form, that is a tax resident in a Member State1; “Member State of the undertaking” means the Member State where the undertaking is resident for tax purposes2; In effect, any type of a legal body engaged in economic activity, being tax resident in a Member State, is subject to the provisions of the Directive. Cyprus Local or International Trusts, not being a legal person, and not liable as such to taxation in Cyprus, do not fall within the provisions of the Directive. Their subsidiary companies being tax residents of Cyprus might be caught by the provisions of the Directive unless exempted. “Relevant income” shall mean income falling under any of the following categories:

1. interest or any other income generated from financial assets, including crypto assets,
2. royalties or any other income generated from intellectual or intangible property or tradable permits;
3. dividends and income from the disposal of shares;
4. income from financial leasing;
5. income from immovable property;
6. income from movable property, other than cash, shares or securities, held for private purposes and with a book value of more than one million euro;
7. income from insurance, banking and other financial activities;
8. income from services which the undertaking has outsourced to other associated enterprises3.

STEP 1 - Identification of undertakings being at risk to be classified as shell companies Undertakings meeting ALL the following criteria are considered as being at risk to be classified as shell entities and misused to obtain tax advantages by reference to a set of features common in such entities:

1. more than 75% of the revenues accruing to the undertaking in the preceding two tax years is relevant income as relevant income is above identified;
2. the undertaking is engaged in cross-border activity on any of the following grounds:
   1. more than 60% of the book value of the undertaking’s assets that fall within the scope of points (e) and (f) above, was located outside the Member State of the undertaking in the preceding two tax years;
   2. at least 60% of the undertaking’s relevant income is earned or paid out via cross-border transactions;
3. in the preceding two tax years, the undertaking outsourced the administration of day-to-day operations and the decision-making on significant functions4.

Once the undertaking meets ALL the above conditions, it is considered as an undertaking at risk to be classified as shell undertaking and which is misused to obtain tax advantages by reference to a set of features common in such entities. Due to the fact that these undertakings are at risk to be classified as shell entities, they are asked to report on their substance in their tax return. STEP 2 - Substance reporting requirements Each undertaking considered at risk under Step 1 must declare in its annual tax return, for each tax year, whether it meets the following indicators of minimum substance:

1. the undertaking has own premises in the Member State, or premises for its exclusive use;
2. the undertaking has at least one own and active bank account in the Union;
3. the undertaking meets one of the following two indicators:
   1. One or more directors of the undertaking:
      1.  are resident for tax purposes in the Member State of the undertaking, or at no greater distance from that Member State insofar as such distance is compatible with the proper performance of their duties; and,
      2. are qualified and authorised to take decisions in  relation to the activities that generate relevant income for the undertaking or in relation to the undertaking’s assets; and,
      3.  actively and independently use the authorisation referred to in point (2) on a regular basis; and,
      4. are not employees of an enterprise that is not an associated enterprise and do not perform the function of director or equivalent of other enterprises that are not associated enterprises;
   2. The majority of the full-time equivalent employees of the undertaking are resident for tax purposes in the Member State of the undertaking, or at no greater distance from that Member States insofar as such distance is compatible with the proper performance of their duties, and such employees are qualified to carry out the activities that generate relevant income for the undertaking5.

A director’s dedication to the activities of the undertaking may be demonstrated in his qualifications, which should be such as to allow the director to have an active role in the decision-making processes, the formal powers that he/she is vested and the director’s actual participation in the day-to-day management of the undertaking. Nominee directors used by service providers offering directorship services, will not meet the requirements of such position any more. The undertakings that have the obligation to report their substance conditions as above, shall accompany their annual tax return declaration with documentary evidence. The documentary evidence shall include the following information:

1. address and type of premises;
2. amount of gross revenue and type thereof;
3. amount of business expenses and type thereof;
4. type of business activities performed to generate the relevant income;
5. the number of directors, their qualifications, authorisations and place of residence for tax purposes or the number of full-time equivalent employees performing the business activities that generate the relevant income and their qualifications, their place of residence for tax purposes;
6. outsourced business activities;
7. bank account number, any mandates granted to access the bank account and to use or issue payment instructions and evidence of the account’s activity6.

STEP 3 - Exempted undertakings from reporting The undertakings falling within any of the following categories are  exempted from reporting of the substance conditions:

1. companies which have a transferable security admitted to trading or listed on a regulated market or multilateral trading facility;
2. regulated financial undertakings;
3. undertakings that have the main activity of holding shares in operational businesses in the same Member State while their beneficial owners are also resident for tax purposes in the same Member State;
4. undertakings with holding activities that are resident for tax purposes in the sameMember State as the undertaking’s shareholder(s) or the ultimate parent entity;
5. undertakings with at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income7.

STEP 4 - Presumption of being classified as a shell entity or not, for tax purposes An undertaking that it has been classified under STEP 1 as a risk case, but whose reporting reveals that it has all relevant elements of substance set out above under STEP 2, and provides the satisfactory supporting documentary evidence, shall be presumed to have minimum substance for the tax year and shall be presumed not to be a “shell” for the purposes of the Directive i.e., it is not lacking substance and is not being misused for tax purposes. An undertaking that it has been classified under STEP 1 as a risk case, and whose reporting also leads to the finding that it lacks at least one of the relevant elements of substance set out above under STEP 2, or does not provide satisfactory supporting documentary evidence, shall be presumed to be a “shell” for the purposes of the Directive i.e., it is lacking substance and is being misused for tax purposes8. STEP 5 - Rebuttal of the presumption of being classified as shell entity - Exemption Rebuttal This step involves the right of the undertaking which is presumed to be shell and misused for tax purposes, for the purposes of the Directive, to prove otherwise, i.e., to prove that it has substance or in any case it is not misused for tax purposes. This opportunity is very important because the substance test is based on indicators and as such, may fail to capture the specific facts and circumstances of each individual case. Taxpayers will therefore have an effective right to make the claim that they are not a shell in the sense of the Directive9. To claim a rebuttal of a presumption of shell the taxpayers should produce concrete evidence of the activities they perform and how. The evidence produced is expected to include information on the commercial (i.e., non-tax) reasons for setting up and maintaining the undertaking which does not need own premises and/or bank account and/or dedicated management or employees. It is also expected to include information on the resources that such undertaking uses to actually perform its activity. It is also expected to include information allowing to verify the nexus between the undertaking and the Member State where it claims to be resident for tax purposes, i.e., to verify that the key decisions on the value generating activities of the undertaking are taken there. While the above information is essential and required to be produced by the rebutting undertaking, the undertaking is free to produce additional information to make its case. This information should then be assessed by the tax administration of the undertaking’s State of tax residence. Where the tax administration is satisfied that an undertaking rebuts the presumption that it is a shell for the purposes of the Directive, it should be able to certify the outcome of the rebuttal process for the relevant tax year. As the rebuttal process is likely to create a burden for both, the undertaking and the tax administration while leading to the conclusion that there is minimum substance for tax purposes, it will be possible to extend the validity of the rebuttal for another 5 years (i.e., for a total maximum of 6 years), after the relevant tax year, provided that the legal and factual circumstances evidenced by the undertaking do not change. After this period, the undertaking will need to renew the process of rebuttal if it wishes to do so. Exemption for lack of tax motives An undertaking that meets the conditions of STEP 1 and/or does not fulfil the minimum substance requirements as per STEP 2, might be used for genuine business activities without creating a tax benefit for itself, the group of companies of which it is part or for the ultimate beneficial owner. Such an undertaking should have an opportunity to evidence this, at any time, and to request an exemption from the obligations of this Directive10. To claim such an exemption, the undertaking is expected to produce elements allowing to compare the tax liability of the structure or the group to which it is part with and without its interposition. STEP 6 - Tax Consequences of not meeting the substance requirements If an EU tax-resident company is presumed to have inadequate substance based on its self-assessed reporting or a failed rebuttal process, the following consequences shall kick in:

• Other Member States will disregard application of tax treaties and disregard the application of the Parent-Subsidiary and Interest and Royalties Directives in relation to transactions with the reporting entity. The relevant Member State may nonetheless allow benefits under domestic law or tax treaties to apply in relation to the shareholder of the reporting company (i.e., look-through treatment)
• If the reporting entity has an EU shareholder, the EU jurisdiction of the shareholder will tax the relevant income of the reporting company as if it had accrued to them directly, according to its national rules, with a credit for taxes paid at the level of the reporting company, and
• The reporting entity will, in principle, no longer receive a certificate of tax residency, or the respective tax authority will issue an amended tax residency certificate indicating that the reporting company is no longer entitled to benefits of treaty or relevant EU Directives.

STEP 7 - Exchange of information, tax audits and penalties Exchange of information As a final step, the Commission proposes that all Member States shall have access to information on any entities considered at risk under STEP 1, even if such entities meet any of the exceptions in the subsequent steps. This information will be exchanged automatically. Tax audit Furthermore, a Member State would be able to request another Member State to audit a tax resident entity if the former suspects that this entity lacks minimal substance. Penalties Although the draft Directive leaves it to Member States to establish penalties, a minimum penalty for non-compliance is provided which is at least 5% of the entity’s turnover.

THE PROCESS OF THE PROPOSED DIRECTIVE IN A DIAGRAM

The methodology of the proposed Directive in order to identify shell entities proceeds as follows:  

E. OUR OBSERVATIONS

Tax residency of Cyprus Companies and substance requirements under ATAD 3 The proposed Directive is applicable only to tax resident undertakings having economic activity. As per art. 2 of the Income Tax Law No. 118(I)/2002 as amended, a company, anywhere registered, is tax resident of Cyprus only if its management and control is exercised in Cyprus. In addition, as from 31/12/2022 Cyprus registered companies, which are managed and controlled from abroad, will be automatically considered as tax residents of Cyprus by registration, unless they are tax residents of any other foreign country. Relevant analysis of this concept has been given in our publication, “The Management and Control Test – Taxation of Cyprus and Foreign Companies” published, January 2022, which can be found at https://www.kinanis.com/Publications The Income Tax Law above, does not specify the meaning of management and control, neither the Commissioner of Income Tax has given any guidance as to the interpretation of this principle, so as to identify which companies are managed and controlled from Cyprus and consequently to be tax residents of Cyprus. In this respect, in order to interpret and apply this notion, we refer to UK court cases as we have pointed out in detail in our above-mentioned publication. As per the interpretation given to the principle of management and control, if the directors of the company meet and decide independently the business issues of the company in Cyprus, the company is considered as having its management and control in Cyprus and consequently the entity is a tax resident of Cyprus. Important role to identify whether the board of directors meets and decides in Cyprus, is the substance issue of the company and especially if the company maintains an office in Cyprus where the board of directors meets and decides the company issues accordingly. Also, important issue is the residency of the directors and whether the company employs personnel stationed in Cyprus to undertake the business of the company from Cyprus. These were crucial factors in identifying whether the management and control of the Cyprus company is exercised in Cyprus but were not officially framed so far. ATAD 3 with its requirement as to particular substance conditions so that the characterization of the company as a shell company is avoided, officially gives a way out to the substance issue which should have been present in identifying the management and control of a company. In effect, once the substance requirements of ATAD 3 are met, in the case where the in- house qualified director has been appointed, and is indeed managing the affairs of the company from Cyprus, the management and control test identifying the tax residency of a company is strengthen and supports the allegation that such a company is managed and controlled from Cyprus and therefore is a tax resident of Cyprus. The substance requirement as per ATAD 3 is also met if the majority of the full-time employees are resident for tax purposes in the Member State of the undertaking. This condition though, cannot be connected with the management and control of the company which is a notion related to the directors’ powers. If the substance requirement as per ATAD 3 is met only with the majority of the employees stationed in Cyprus in the absence of the directors’ involvement and capacity residing and deciding from Cyprus, then such a company might not be managed and controlled form Cyprus and in this respect, it might not be a tax resident of Cyprus and the Directive will not be applicable to it. The below diagram clarifies the particular situation under discussion. So, in the case where the company has the majority of its employees stationed in Cyprus, but the management and control is outside Cyprus, the directors meet and decide abroad, such a company is not a tax resident of Cyprus and consequently the Directive does not a apply despite the fact that the coamony meets the substance requirements.  If the company is a Cyprus registered company a from 31/12/2022, irrespectively of the fact that the management and control will be exercised abroad, and provided that such company does not have a tax residency in any country abroad, it will be considered, by reason of its registration in Cyprus, as tax resident of Cyprus as well. Corporate Service Providers The substance requirements of ATAD 3 and the whole approach of the Directive points to the fact that the tax resident company, in order to meet the substance requirements must have a self-managed office situated there where is tax resident. This requirement, in addition to the requirement of the Income Tax Law, that in order to have a tax resident Cyprus company the Cyprus company must be managed and controlled from Cyprus, renders redundant the provision of administrative services such as nominee directorships by the various corporate service providers. If the Directive will be implemented the provision of such services will be considerably weakened and the role of the administrative service providers will be diminished. Also, the provision of the well-known services of “virtual offices” without real substance and without full-time employees working in the office of the tax resident company will be diminished and gradually will come to an end. Real headquartering structures will then be brought up creating a more solid business environment with in house management and real substance in Cyprus. Criticism of the proposed Directive The proposed Directive has received a strong criticism as not being in compliance with the EU Law and especially with the principles of proportionality and subsidiarity. It is not though the aim of this article to discuss these possible complications and if these principles are infringed. In any event, we do not consider that such arguments will easily walk through or have positive outcome, having also in mind the political aspect of such type of Directives and their background. It is certain that, if the Directive is finally implemented as it is proposed, it will affect drastically holding companies without substance which are used extensively. As a result, the allocation of taxes among the Member States will be disturbed and re-distributed. The exceptions though provided in the Directive, might give sufficient protection and a way out for holding companies that can prove that they exercise genuine business activities or that the structure implemented does not create any tax benefit to themselves or to their groups or to their shareholders. The particular facts of each case will need to be examine accordingly. What the proposed Directive has not provided for, is what happens with the subsidiary companies of a parent company which parent meets the substance requirements. Do all the companies in the row need to fulfil the substance requirements, in addition to the parent, or the fulfilment of the conditions by the parent will be satisfactory? It remains to be seen if this issue will be clarified. Future Planning Tax resident companies which do not fall within the exceptions of the Directive must plan their future set up to avoid the disadvantages of being characterised as shell companies. Shell companies, unless they fall within the exceptions do not have future. They will face, from various angles, adverse tax consequences. Headquartering has a promising future once is based in real business environment, with real substance and proper central management and control form Cyprus.

F. HOW KINANIS LLC CAN HELP YOU

We shall be glad to assist you to assess the impact of this Directive on your structure and examine the steps that need to be taken in case of final implementation. The Directive seems to have serious impact on holding companies and some requirements to meet the tests and parameters employed, have retrospective effect as from 2022. In this respect, planning as from now seems imperative.

G. DISCLAIMER

This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case.  No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.

---

1 Article 3(1) of the proposed Directive. 2 Article 3(4) of the proposed Directive. 3 Article 4 of the proposed Directive. 4 Article 6(1) of the proposed Directive. 5 Article 7(1) of the proposed Directive. 6 Article 7(2) of the proposed Directive. 7 Article 6(2) of the proposed Directive. 8 Article 8 of the proposed Directive. 9 Article 9 of the proposed Directive. 10 Article 10 of the proposed Directive.

DAC6 and Hallmark E1 Use of unilateral safe harbour rules in Cyprus

2nd February 2022 The purpose of this tax bulletin is to shed some light on the use of unilateral safe harbour rules in Cyprus and specifically as to when an arrangement becomes reportable for DAC6 purposes for meeting the requirements of Hallmark E1.

The Management and Control Test: Taxation of Cyprus and Foreign Companies

27th January 2022

INTRODUCTION

With this publication, we shall explore the notion of management and control as this is applicable in Cyprus and affects the taxation of Cyprus and Overseas companies.

The Defence of Illegality – “Ex turpi causa non oritur actio” – The Cyprus Approach

13th January 2022

HISTORICAL BACKGROUND

There is a long-standing common law principle, that the courts will not assist a party whose case is based upon an immoral or illegal act.  

EXPRESS TRUSTS: THE REGISTER FOR BENEFICIARIES

2nd July 2021 INTRODUCTION  On the 18^th of June 2021, the Cyprus Securities and Exchange Commission (the “CySec”) pursuant to Article 61C of the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2021 (the “AML Law”) issued a regulation (Regulatory Administrative Act 257/2021) (the “Directive”), identifying the obligations and procedure for the registration, notification, administration, maintenance and update of the information in relation to the Beneficial Owners (the “BOs”) of express trusts and other similar legal arrangements with the electronic system created by CySec (the “System”).

COMMENCEMENT OF THE BENEFICIAL OWNERS REGISTER WITH THE REGISTRAR OF COMPANIES

25th March 2021

INTRODUCTION

On the 12th of March 2021, the Registrar of Companies and Official Receiver (the “Registrar”) pursuant to Article 61A of the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2021 (the “AML Law”) issued a regulation (Regulatory Administrative Act 112/2021) (the “Directive”), identifying the obligations, methodology and procedure companies and legal bodies will have to follow in order to register their Beneficial Owners with the register it created accordingly.

CYPRUS – THE REGISTERS FOR REAL BENEFICIARIES (Companies – Trusts and other Legal Bodies)

9th March 2021

A. INTRODUCTION

On 18/02/2021 the Cyprus House of Representatives has enacted the amending law on the Prevention and Suppression of Money laundering and Terrorist Financing Law of 2021 (the “AML Law”) transposing at a national level the 5th Anti-Money Laundering EU Directive 2018/843 (the “AMLD”) which imposes minimum standards to the Member States for the prevention of the flow of illicit funds and terrorist financing activities. Under the implementation of the AMLD at a national level, it has been decided to establish central registries of ultimate beneficial owners (the “UBOs”) which are set to contain information on the physical persons who ultimately own or control companies or other legal entities, legal bodies, trusts or other legal arrangements. In accordance with the provisions of the AML Law, the following registers as to ultimate beneficial owners must be established:

1. the Central Registry of real Beneficiaries of Companies and other legal entities;
2. the Central Registry of real Beneficiaries of legal bodies;
3. the Register of express trusts and similar legal arrangements.

B. ULTIMATE BENEFICIAL OWNERSHIP REGISTERS

As per the AML Law, a ‘UBO’ means any physical person who ultimately owns or controls a legal entity through direct or indirect shareholding ownership of 25 per cent (25%) plus one share.

1. The Central Registry of real Beneficiaries of Companies and other Legal Entities

Companies and other legal entities that have been incorporated in the Republic of Cyprus must ensure that adequate, accurate and current information on their UBOs, including the name, date of birth, nationality, country of residence and extent of the interest held, are kept in their records and submitted to the Registrar of Companies and Official Receiver in Cyprus. The Central Registry of real Beneficiaries of Companies and other legal entities will be maintained by the Registrar of Companies and the following persons shall have access to this Registry:

1. The responsible Supervisory Authority, as defined by Section 59 of the AML Law, the Unit for Combating Money Laundering (the “Unit”), Police, Customs and Excise Department and Tax Department without any limitations;
2. Obliged entities* in the context of customer due diligence; and
3. The public that will have access ONLY to the following information of the UBO: name and surname, month and year of birth, nationality, country of residence and nature and extent of the beneficial interest.

*Obliged Entities as defined by Section 2A of the AML Law means (i) credit institutions, (ii) financial institutions and (iii) natural or legal persons acting in the exercise of their professional activities which among other include the auditors, external accountants and tax advisors, notaries and other independent legal professionals and company service providers. The above-mentioned information of the UBOs will be available upon registration and payment of a small fee. Further, the Competent Authorities (including the Cyprus Bar Association, the Central Bank and CySec), Unit, Police, Customs and Excise Department and Tax Department will have unlimited and fast access to the Registry without notifying the relevant companies of their access. The obliged entities will have fast access to the Registry in the context of customer due diligence. In exceptional circumstances, it is possible to provide for exemptions to the access to information in relation to the UBOs, in part or in whole, where that information would expose the UBO to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation or where the UBO is a minor or is legally incompetent. The information on the UBOs of the Companies and other legal entities shall be available through the Register maintained by the Registrar and through the system of interconnection of registers for ten (10) years after the corporate or other legal entity has been struck off from the Register. However, five (5) years after the date of strike off of the Company or other legal entity from the Register, access to such information contained in the Registry will be permitted only in the course of administrative or criminal enquiry conducted by the Supervisory Authority, Unit, Customs Department, Tax Department and the Police.

Announcement of the Registrar of Companies and Official Receiver dated 19/02/2021

The collection of information of UBOs of Companies and Other Legal Entities shall commence on 16/03/2021. It is emphasized that a grace period of six (6) months for the registration of the information concerning the UBOs in the system has been granted by the Registrar.

Regulations

Within the following days, the Registrar is expected to publish the regulations for the maintenance and operation of the registry along with a manual on the operation of the system that has been developed for this purpose. The Registrar of Companies is also expected to revert with an informative seminar on the implementation of the regulations and the mechanisms available to the public.

2. The Central Registry of real Beneficiaries of Legal Bodies

Legal bodies refer to bodies not registered with the Registrar of Companies which include clubs, federations, unions and charitable foundations. Clubs, federations and unions are defined and governed by the Clubs and Foundations and Other Related Matters Law of 2017, No. 104(I)/2017 while charitable foundations are governed by the Charities Law, Cap. 41. The Charities Law, Cap 41 though, will be rendered soon obsolete, (there is a pending bill as to this issue) and any charitable foundation will need to be registered under the Clubs and Foundations and Other Related Matters Law of 2017. It is worth noting that charitable trusts, which are those trusts created for a charitable purpose(s), must be distinguished from charitable foundations. A charitable trust may be also set up as per the provisions of the International Trusts Law provided that it meets the requirements mentioned therein. Clubs, federations, unions and foundations must ensure that adequate, accurate and current information on their UBOs must be submitted with the General Commissioner. The General Commissioner (who is the general director of the Ministry of Interior) is appointed as the competent authority for the maintenance of the Central Registry of UBOs of Legal Bodies and the persons who shall have access to this Registry are identical to the ones having access to the Central Registry of real Beneficiaries of Companies and Other Legal Entities. The information on the UBOs of the legal bodies shall be available through the Register maintained by the General Commissioner and through the system of interconnection of registers for ten (10) years after the legal body has been struck off from the Register. However, five (5) years after the date of strike off of the legal body from the Register, access to such information contained in the Registry will be permitted only in the course of administrative or criminal enquiry conducted by the Supervisory Authority, Unit, Customs Department, Tax Department and the Police.

3. The Register of express trusts and similar legal arrangements (the “Trusts’ Registry”)

Following the implementation of the AMLD in Cyprus, CySec is responsible for the creation and maintenance of the Trusts’ Registry in which information as to the UBOs of express trusts and other legal arrangements must be included. The exact procedure of maintaining and updating the Trusts’ Registry as well as the meaning of ‘express trusts’ will be provided by CySec through a relevant circular.

Conditions for registration

The registration of express trusts in the Trusts’ Registry is obligatory and applies to express trusts of which:

1. the trustee is placed or resides in Cyprus; or
2. the trustee is placed or resides outside the EU but concludes a business relationship or acquires immovable property on behalf of the express trust.

Exceptions

The registration requirement does not apply to the following express trusts that have been registered in the register of another member state and,

1. the trustee is placed or resides in another member state other than Cyprus; or
2. in the case there are more than one trustees and the one is placed or resides in Cyprus; or
3. the trustee concludes various business relationships on behalf of the trust in various member states including Cyprus.

Trustees’ obligations

The application to CySec for the registration of an express trust in the Trusts’ Registry must be made by the trustee of the trust by submitting information regarding the trust and its UBOs. The timeframe relevant to the application for the registration of an express trust and the information to be included there in as well as the procedure of registration will be determined by CySec with a relevant circular. The trustee of an express trust which is administered in Cyprus is obliged to maintain adequate, precise and updated information as to the UBOs of the trust which identify of the following:

1. Settlors;
2. Trustees;
3. Protectors, if any;
4. Beneficiaries or the classes of persons for the benefit of which the trust has been set up;
5. Any other physical person who exercises control over the trust through direct or indirect ownership or with other means.

Therefore, the trustee is under an obligation to update and submit to CySec any amendments to the information already submitted to them. The fees payable for the registration and maintenance of an express trust with the Trusts’ Registry must be settled by the trustee.

Powers and obligations of CySec

The trustee of an express trust registered in the Trusts’ Registry must comply with all requests and/or recommendations of CySec. Pursuant to the AML Law, CySec may:

1. Approve or reject an application for registration in accordance with the conditions of the circular;
2. Remove a registered express trust from the Trusts’ Registry in the event that the conditions for registration are not fulfilled or in the event that the trust is no longer effective;
3. Postpone the registration of an express trust in accordance with the conditions of the circular;
4. Impose monetary penalties for failure to submit the required information for registration;
5. Impose monetary penalties or suspend or delete the registration of an express trust in the following cases:
   1. for failure to comply with the provisions of the AML Law or the circulars issued by CySec;
   2. for submission of false or misleading information or for not disclosing essential information.

Following the removal of a registered express trust for the reasons stated above, CySec is obliged to maintain in the Trusts’ Registry information as to the said trust or other legal arrangement and its UBOs for a period of ten (10) years from the date of deletion.

Access to the Trusts’ Registry

CySec may grant access to the Trusts’ Registry:

1. to the Supervisory Authority, Unit, Customs and Excise Department, Tax Department and Police without any limitations;
2. to obliged entities for due diligence purposes and identification of their clients upon payment of respective fee;
3. to legal or physical persons that can demonstrate legitimate interest in accessing the registry and proving the same through relevant procedure to be implemented, upon payment of respective fee;
4. to legal or physical persons in relation to a trust which holds or owns a controlling interest in a company that is not incorporated in Cyprus upon the written request of the said persons and payment of respective fee;

The information accessible to the categories b) - d) above are limited to:

1. The name of the beneficiary;
2. The month and year of birth;
3. The country of residency;
4. The nationality of the beneficiary; and
5. The type and extend of the rights they have in the express trust.

Legitimate interest by the applicant is established in the event that the physical or legal person shows that his interest relates exclusively and contributes to the prevention of legalization of income from illegal activities and terrorist financing based on the facts and information, including facts and information for past activities and actions conducted towards this direction, and is decided by CySec case-by-case. Following an application for access to the Trusts’ Registry, CySec may:

1. approve application for disclosure or reject it;
2. specify the procedures for applying, approving or rejecting the applications, for accessing the Trusts’ Registry and procedures as to the type of information for which access will be granted.

Five (5) years after the date of removal of a registered express trust, access to the information contained in the Trusts’ Registry is permitted only in the course of administrative or criminal enquiry conducted by the Supervisory Authority, Unit, Customs and Excise Department, Tax Department and the Police. CySec may not grant access to information in relation to the UBOs of express trusts, in part or in whole, only in exceptional circumstances and following a detailed assessment of the exceptional nature of the facts, if:

1. such disclosure would expose the UBO to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment violence or intimidation; or
2. the UBO is a minor or legally incompetent.

The above exception does not apply in the case that application for access is made by:

1. obliged entities that are credit and financial institutions;
2. by the responsible Supervisory Authority, Unit, Customs and Excise Department, Tax Department and the Police.

C. CONCLUSION

Undoubtedly, the current reality paves the way to a new era of disclosure and transparency. Guidelines on the registration and application process for accessing the registers and applicable timeframes are expected to be announced by the authorities responsible to maintain each register. Although companies and other legal entities are required to disclose information on their UBOs, disclosure can be limited in the event that an express trust is included in the company’s holding structure. In this case, where a company has a trust as a shareholder and not a nominee it is expected that only the name of the trust or trustee(s) in place shall be included in the Registry of Companies. The details of the UBO of the express trust included in the company’s structure shall be submitted only to the Trusts’ Registry which, in contrast to the Registry of Companies, is not available to the public unless legitimate interest is proved. Hence, protection on the information of the company’s UBO is enhanced without overruling the provisions of the AMLD and AML Law.

DISCLAIMER

This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.

AUTHORS

Maria Pavlou Associate Lawyer - Corporate Department Maria.Pavlou@kinanis.com CorporateLegal1@kinanis.com Androniki Onisiforou Associate Lawyer – Corporate Department Androniki.Onisiforou@kinanis.com CorporateLegal1@kinanis.com

CYPRUS AND DAC6

5th March 2021

INTRODUCTION

The Directive (EU) 2018/822 expand once more the provisions of the Directive 2011/16/EU - Directive on Administrative Cooperation (DAC), regarding mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. The Directive (EU) 2018/822 represents the 6th modification of DAC, and for this purpose it is called DAC6. DAC6 reflects new initiatives in the field of tax transparency at the level of the EU, through the introduction of an early warning mechanism for tax avoidance schemes. DAC6 is expected to be enacted in Cyprus within the following months. The below is a summary of the provisions of the implementation of DAC6 in Cyprus, in accordance to the draft bill circulated by the Cyprus Tax Authorities.

WHO WILL REPORT?

Reporting will be done by Intermediaries to National Tax Authorities, or by the Taxpayers in certain cases. The definition of Intermediary includes:

1. any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement, or
2. a person that based on the information in his possession and his relevant expertise and understanding required to provide such services, knows or could be expected to know that such persons have undertaken aid or advice with regards to the above.

In order to be considered as an Intermediary falling in the above categories, the person needs to meet at least one of the following additional conditions:

1. be resident for tax purposes in an EU Member State;
2. have a permanent establishment in an EU Member State through which the services with respect to the arrangement are provided;
3. be incorporated in, or governed by the laws of an EU Member State;
4. be registered with a professional association related to legal, taxation or consultancy services in an EU Member State.

The concept of Taxpayer is defined as any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement. Reporting will be done by taxpayers only if there is no Intermediary (i.e. the taxpayer designs and implements a scheme in-house) or the Intermediary qualifies for exemption under the confidentiality rule as mentioned below.

EXEMPTIONS

The draft bill provides for an exemption on the reporting requirements where the Intermediary is a lawyer who practice the profession as defined in the Lawyers Law and complies to the following requirements:

1. Is subject to legal confidentiality, and
2. Has notified the reporting obligations to any other Intermediary or, if no other Intermediary, the taxpayer concerned.

WHAT SCHEMES ARE REPORTABLE

A scheme or arrangement is reportable if the following apply:

1. It is Cross-Border, as defined and
2. It falls in the Hallmarks, as defined.

CROSS-BORDER

In order for an arrangement to be categorized as cross-border, it must be an arrangement concerning either more than one EU Member State, or a Member State and a third party or country, whereby at least one of the following conditions is met:

1. Not all participants in the arrangement are tax resident in the same jurisdiction;
2. A permanent establishment linked to any of the participants is established in a different jurisdiction and the arrangement forms part of the business of the permanent establishment;
3. At least one of the participants in the arrangement carries on activities in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
4. At least one of the participants has residency for tax purposes in more than 1 jurisdiction;
5. Such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

THE HALLMARKS

The draft bill provides for five specific Hallmarks (i.e. characteristics or features of arrangements) in order to determine whether the cross-border arrangement is reportable or not. In certain cases, the hallmarks have to satisfy a Main Benefit Test in order to be disclosed to the authorities. Main Benefit Test is satisfied if it can be established, having regards to all relevant facts and circumstances, that the main benefit or one of the main benefits of entering into such an arrangement is the obtaining of a tax advantage. Tax Advantage includes the following:

1. Tax Relief or increased tax relief;
2. Tax refund or increased tax refund;
3. Tax avoidance or reduction of tax liability;
4. Postponement of tax or acceleration of tax refund;
5. Avoidance of withholding tax;

The Hallmarks are divided into categories as follows:

• Category A: Generic Hallmarks Linked to Main Benefit Test- these include the following provided that they fulfil the “Main Benefit Test”:

1. 1. An arrangement where the taxpayer or a participant, undertakes the obligation to comply with a condition of confidentiality that may require him not to disclose the manner in which the arrangement could secure a tax advantage to other intermediaries or to the Tax Authorities;
   2. An arrangement where the Intermediary receives a fee for its services proportionate to the amount of the tax advantage received by the tax payer or a success fee in case that a tax advantage is obtained;
   3. An arrangement that has substantially standardised documentation and/or structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation;

• Category B: Specific Hallmarks Linked to Main Benefit Test – these include the following provided that they fulfil the “Main Benefit Test”:

1. 1. The acquisition of loss-making companies and entering into such arrangements for the purpose of benefiting through group tax relief, including the transfer of taxable losses to another jurisdiction or acceleration of such losses;
   2. Conversion of income into exempt or lower-taxed revenue streams (such as capital, gifts etc);
   3. Circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without other primary commercial function or transactions that offset or cancel each other or that have other similar features;

• Category C: Specific Hallmarks Related to Cross-Border Transactions: these include:

1. 1. Arrangements that involve deductible cross-border transactions between associated enterprises in cases where:
      1. the recipient is not resident for tax purposes in any jurisdiction, or
      2. the recipient is resident for tax purposes in a jurisdiction:
         1. charging corporate income tax at the rate of 0% or almost 0%, or
         2. the recipient is resident for tax purposes in a jurisdiction of third-country jurisdictions which is assessed as non-cooperative by the EU or the OECD;
      3. the payment benefits from full exemption from tax in the jurisdiction where the recipient is resident for tax purposes, or
      4. he payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes;
   2. Tax deductions for the same depreciation of assets are claimed in more than one jurisdiction;
   3. Tax relief is claimed for the same income/capital in more than one jurisdiction;
   4. Arrangement that includes transfer of assets where there is a material difference in the amount being treated as payable in consideration for the transferred assets in the jurisdictions involved.

In respect of the above hallmarks, the “Main Benefit Test” has to be taken into account for points 1(b)(i), (c) and (d). For the rest of the hallmarks the Main Benefit Test does not have to be fulfilled.

• Category D: Specific HallmarksConcerning the Automatic Exchange of Information and Beneficial Ownership - these include the following, under conditions:

1. Arrangements that undermine the EU reporting obligations or of equivalent significance reporting obligations in relation to the exchange of Financial Account information, including obligations raised from conventions with 3^rd countries;
2. Arrangements involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures;

• Category E: Specific HallmarksConcerning Transfer Pricing- these include the following:

1. Arrangements that involve unilateral safe harbour rules;
2. Arrangements that involve transfer of hard-to-value intangibles, subject to conditions;
3. An arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 % of the projected annual EBIT of such transferor or transferors if the transfer had not been made;

SUMMARY OF DISCLOSURE SCENARIOS

AUTOMATIC EXCHANGE OF INFORMATION

Automatic exchange of information amongst the relevant Authorities of all the Member States will be carried out through the common communication network (‘CCN’). Automatic exchange of information by the authorities will occur within one month from the end of the quarter in which the information was submitted or the reporting was made. The first automatic exchange of information shall be made by 30 April 2021.

HOW AND WHAT INFORMATION WILL BE DISCLOSED?

It is expected that reporting will be made via a standard prescribed format, and the following details will be included in the mentioned-form:

1. Identification of taxpayers, associated parties thereof and intermediaries involved.
2. Details of the hallmarks that generated the reporting obligation.
3. A summary of the reportable arrangement.
4. The date which the first step in implementing the reportable cross-border arrangement was made (or will be made).
5. Details of the relevant domestic rules forming the basis of the reportable arrangement.
6. The value of the reportable cross-border arrangement.
7. The Member State of the taxpayer and any other Member State which are likely to be concerned by the reportable cross-border arrangement.
8. Any other person in a Member State likely to be affected by the reportable cross-border arrangement and the Member State in which such person is linked.

The lack of response from relevant authorities or tax authorities of a member state against a reportable arrangement does not imply acceptance of the arrangement or its tax treatment.

TIME FRAMES AND DEADLINES

Action	Date / Timeframe
Entry into Force	01 January 2021
Filing information for the first, second and third period.	The deadline is on 31.03.2021 however, no penalties will be imposed for the filing of information up to 30.06.2021 for the following cases: First reporting period - Arrangements occurring as from 25 June 2018 till 30 June 2020 (initial deadline was on 28.02.2021). Second reporting period - Arrangements occurring as from 01 July 2020 till 31 December 2020 (initial deadline was on 31.01.2021). Arrangements occurring as from 01 January 2021 till 31 May 2021.
Reporting by Intermediary (primary or secondary)	Within 30 days following the day that: the reportable arrangement is made available for implementation, or is ready for implementation to the taxpayer, or the first step of such arrangement has been implemented, whichever is the earlier thereof. Also, reporting should be made within 30 days following the day they provide directly or by means of other persons aid, assistance or advice to the taxpayer. For cross-border arrangements that are designed, marketed, ready for implementation or are made available for implementation without requiring substantive customization, reporting will be made quarterly.
Reporting by Taxpayer concerned	Within 30 days from the day that: the reportable arrangement is made available for implementation, or is ready for implementation to the taxpayer, or the first step of such arrangement has been implemented, whichever is the earlier thereof.
Disclosing of Information by Intermediary or taxpayer concerned	Within 14 days from the date of receipt of the written request by the relevant Authorities.

CONSEQUENCES OF NON-COMPLIANCE

Failure of compliance to the reporting requirements entails to heavy penalties, depending on the reasoning for such failure. The penalties are as follows:

Penalty	Reasoning
The penalty starts from EUR 10,000 up to EUR 20,000	Omission of Reporting by the Intermediary or the taxpayer concerned.	Failure of notification by the Intermediary to either another Intermediary or the taxpayer concerned, their respective obligation for reporting, due to the Intermediary’s exemption from reporting.
The penalty starts from EUR 1,000 up to EUR 5,000	Delay of reporting by either Intermediary or taxpayer concerned, for a period of up to 90 days from the date that the reporting obligation is raised.	Delay of notification of the Intermediary to either another Intermediary or the taxpayer concerned, their obligation for reporting due to the Intermediary’s exemption from reporting, for a period of up to 90 days from the date that the reporting obligation is raised.
The penalty starts from EUR 5,000 up to EUR 20,000	Delay of reporting by either Intermediary or taxpayer concerned, for a period in excess of 90 days from the date that the reporting obligation is raised.	Delay of notification of the Intermediary to either the another Intermediary or the taxpayer concerned, their obligation for reporting due to the Intermediary’s exemption from reporting, for a period in excess of 90 days from the date that the reporting obligation is raised.
The penalty starts from EUR 1,000 up to EUR 10,000	If the Intermediary or the taxpayer concerned submits incomplete or untruthful information.	If the Intermediary or the taxpayer concerned fails to submit the information within 14 days from the date of receipt of the written request from the Authorities.

  The relevant Authorities shall notify the person concerned before imposing the penalty, granting him the right to report/submit information requested within fifteen business days from on the day of notification. The person concerned has the right to appeal within 30 days from the date of notification of the imposture of penalty. Where the person concerned does not pay the penalty imposed, or continues the infringement, the penalty may be increased up to the maximum amount of EUR 20,000.

DISCLAIMER

This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case.  No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication. February 2021

Author

 Charalambos Meivatzis Partner – Head of Tax, Accounting and VAT Charlambos.Meivatzis@kinanis.com Marios Palesis Partner – Tax Department Marios.Palesis@kinanis.com

ANNEX A

The EU list of non-cooperative jurisdictions for tax purposes as of date of publication of this article are the following:

BLACK LIST	GREY LIST
•          American Samoa •          Anguilla •          Dominica •          Fiji •          Guam •          Palau •          Panama •          Samoa •          Seychelles •          Trinidad and Tobago •          US Virgin Islands •          Vanuatu	•          Australia •          Barbados •          Botswana •          Eswatini •          Jamaica •          Jordan •          Maldives •          Thailand •          Turkey

CYPRUS – THE TAX TREATMENT OF INTEREST

1st March 2021

A. INTRODUCTION

With this publication we outline the main provisions of the Taxation Laws in relation to the tax treatment of interest income and interest expense and we elaborate on the various financing schemes available.

B. THE BASIS OF TAXATION OF INTEREST INCOME

Generally, the Taxation Laws in Cyprus are applicable only to tax residents of Cyprus, both individuals and companies, on their world-wide income.

Definition of tax resident

1. In the case of an individual – means an individual who stays in Cyprus for one or more periods exceeding, in aggregate 183 days in the year of assessment.
2. In the case of a company – means a company whose “management and control” is exercised in Cyprus.

The management and control of a company is exercised by its board of directors. The nationality or the residence of the shareholders is irrelevant. It is also irrelevant where the company was registered, whether in Cyprus or abroad. Incorporation in Cyprus is not sufficient to qualify the company as a tax resident of Cyprus. There is no definition in the Law as to the meaning of “management and control”. The main factors that will identify this issue are: -

• The place of directors’ meetings. Where board decisions are taken. This factor is treated as being the most crucial;
• The residence of the directors or at least the majority of them;
• The degree of control exercised by the directors on company decisions;
• Whether the directors think and decide on the crucial management decisions affecting the business of the company or they simply follow instructions and rubber stamp;
• Where the general policy of the company is formulated and by whom.

Non-residents of Cyprus are not taxable in Cyprus. Despite this general rule, non - residents having income from within Cyprus (Cyprus source income) i.e., through a permanent establishment are taxable in Cyprus only as to this Cyprus source income. For a detailed analysis as to the applicability of the taxation laws, kindly see our publication "The Management and Control Test – Taxation of Cyprus and Foreign Companies” as well as our publication “Immigration and Retirement in Cyprus – The Tax Aspect”.

Taxation of Interest Income

Taxation on interest income is imposed according to: -

• The “Income Tax Law’’; or
• The “Special Defence Contribution for the Republic Law’’.

The applicability of each of the above laws (herein referred to as the “Law”) depends on the type of interest income a person will acquire which is divided into two main categories: -

1. Interest income acquired from the ordinary activities of the business or closely connected with those activities.
   1. In this case the interest is treated as active interest and is regarded as trading income and taxed according to Income Tax Law at the rate of 12.5% on any resulting net taxable profits, and
2. Interest income not acquired from the ordinary activities of the business or closely connected with those activities.
   1. In this case the interest is considered as passive interest and is taxed under Special Defense Contribution Tax at the rate of 30% on the interest income accrued or credited.

Interpretation of “ordinary activities” and “activities closely connected with ordinary activities”

As the definition of what is regarded as “ordinary activities” or activities closely connected with ordinary activities” is not clearly identified in the Law, The Commissioner of Income Tax, has interpreted the above provisions of the Law in a separate circular as follows: - 1. Interest that is acquired “from the ordinary activities of the business”: - This type of interest is considered to be: -  a) The interest of banking businesses. This category includes all the banks, co-operative credit institutions and enterprises that have as their main purpose the granting of loans such as the Housing Finance Corporation. b) The interest that is acquired by financing companies. These are the companies which provide finance by the method of hire - purchase or leasing agreements or any other type of financing. In effect, the interest that the banks and financial institutions or financing companies receive or credited, is considered as trading income and is NOT liable to Special Defence Contribution Tax but only liable to Income Tax  at 12.5% on any resulting  net profits. 2. Interest that is acquired from “activities closely connected with the ordinary activities of the business”:-    This type of interest is considered to be:- a) The interest received or credited from trade debtors: For example, the interest received or credited by companies or individuals when their normal business activity is the buying, selling or development of immovable property, or the interest received or credited by companies or individuals that are selling or re-selling cars or other vehicles or machinery or other products. In effect, the interest that companies or individuals receive or credited from their ordinary trading activities with their debtors is considered as interest closely connected with the ordinary activities of the business and is not subject to Special Defence Contribution Tax but only to Income Tax.   b) Interest on current accounts The interest that companies or individuals receive from banks in their commercial banking accounts (current accounts) used for their ordinary trading activities. c) The interest of Insurance Companies; d) The interest that companies receive or credited when they act as the vehicle through which the companies of the group are financed.  In effect, companies which are used as a financing vehicle of their group, i.e. financing a mother, subsidiary or other related company (associate), then the interest received or credited is considered as trading income and is not subject to Special Defence Contribution Tax, but only subject to Income Tax at a rate of 12.5% on any resulting net profits.

The meaning of “group companies”

The meaning of group of companies is defined in the Companies’ Law Cap. 113, where  according to Art. 2 of this law, “group of companies” means the whole body of companies which consists of the mother and its subsidiary or its subsidiaries. Further, according to Art.148 of the Companies’ Law Cap. 113, the meaning of subsidiary and holding companies is defined as follows:- A company is deemed to be a subsidiary of another if, but only if,

1. that either –
   1. is a member of it and controls the composition of its board of directors; or
   2. holds the majority of the voting shares (rights) ; or
   3. is its member and controls the majority of the voting shares (rights) by agreement which has been signed with other members.
2. the first mentioned company is a subsidiary of any company which is that other’s subsidiary.

A company controls the composition of the board of directors if, but only if, that other company can appoint or remove the holders of all or the majority of the directorships without the consent or concurrence of any other person. For the purposes of the Companies Law, a company shall be deemed to be another’s holding company if, but only if, that other is its subsidiary. Further, according to International Financial Reporting Standards applicable in tax audit matters, an associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Significant influence is defined as the power to participate in the financial and operating policy decisions of the investee but without being able to exercise control over those policies. If an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessary preclude an investor from having significant influence. The commissioner of Income Tax considers within the definition of a “group of companies”, any parent or subsidiary company as specified in the Law as well as any associate company (holding more than 20% of the voting shares). In view of the above, full disclosure as to the group structure will need to be provided to the company’s auditors in order to be able to assess the correct tax treatment of the interest income.

Interest received or credited liable to Special Defence Contribution Tax

Examples of interest liable to Special Defence Contribution Tax: -

• Interest received by the resident company/individual from fixed deposit accounts and bonds that are not held as a trading activity;
• Interest received or expected to be received from loans granted by companies that do not qualify as an ordinary activity or an activity closely connected with the company’s ordinary activities.

C. TAX DEDUCTIBILITY OF INTEREST EXPENSE

According to the Income Tax Law, for an expense to be considered as tax deductible the general rule is that it must be made wholly and exclusively for the production of taxable income.

The general rule

In regards to the tax treatment of the interest expense, the decisive factor is the purpose for which the loan that generates the relevant interest expense was used for. If the loan was used for the production of taxable income, i.e. for the acquisition of a business asset, then such interest expense is regarded as a tax deductible expense for income tax purposes. If, on the other hand, the loan was acquired for the acquisition of a non-business asset, i.e. an asset that will not be used in the business for the production of taxable income, then such interest expense will not be regarded as tax deductible. It must be stressed that shares or other non-interest bearing titles are considered as non-business assets. Therefore, when the acquisition of shares in other companies is financed by interest bearing loans, the interest expense will not be deductible for taxation purposes. The acquisition, however, of interest bearing titles such as debentures and bonds are considered as business assets as they generate taxable income (i.e. interest income) for the company. This restriction on the deductibility of interest expense on loans obtained for the acquisition of non-business assets will apply for a period of seven years from the date of acquisition of these assets or up to the date of disposal of such assets. If a loan acquired is used for the acquisition of both business and non-business assets, then the restriction is apportioned according to the acquisition cost of each asset.

Notional Interest Deduction (NID) provisions on Qualifying Equity

The Law provides that a company can to claim a Notional Interest Deduction (NID) on the new capital introduced into the company. The NID can be set against any income generated by the company during the specific tax year. The NID will equal the multiple of the “Reference interest rate” and the “new equity” as defined below: “Reference interest rate” is defined as the 10-year government bond yield of the country in which the new equity is invested increased by 5%. The 10-year government bond yield used for the calculation of the NID is the rate as at 31^st December of the year preceding the tac year in which the NID and there is no minimum reference rate. The 2020 reference rates that have been announced by the Cyprus Tax Department are set out on the table below.

Country	10-year Bond Yield	2020 NID Reference Rate
Armenia	7.485%	12.485%
Abu Dhabi	1.618%	6.618%
Albania	N/A	N/A
Argentina	3.269%	8.269%
Australia	1.005%	6.005%
Austria	-0.433%	4.567%
Azerbaijan	N/A	N/A
Bulgaria	0.190%	5.190%
Belgium	-0.388%	4.612%
Belarus ($ USA)	6.075%	11.075%
Bermuda (US $)	1.783%	6.783%
British Virgin Islands	N/A	N/A
Canada	0.675%	5.675%
Cayman Islands	N/A	N/A
China	3.180%	8.180%
Cyprus	0.136%	5.136%
Costa Rica	9.627%	14.627%
Croatia	0.548%	5.548%
Czech Republic	1.252%	6.252%
Denmark	-0.459%	4.541%
Dubai (€)	N/A	N/A
Dubai (US $)	2.594%	7.594%
Egypt	14.006%	19.006%
Egypt ($ USA)	6.678%	11.678%
Estonia	-0.211%	4.789%
Finland	-0.425%	4.575%
France	-0.343%	4.657%
Germany	-0.388%	4.612%
Greece	0.190%	5.190%
Guernsey	N/A	N/A
Hong Kong	0.541%	5.541%
Hungary	2.135%	7.135%
India	5.865%	10.865%
Ireland	-0.318%	4.682%
Isle of Man	0.985%	5.985%
Israel	0.770%	5.770%
Israel ($ USA)	1.551%	6.551%
Italy	0.541%	5.541%
Ivory Coast	N/A	N/A
Jordan (US $)	4.480%	9.480%
Kazakhstan (€)	0.653%	5.653%
Kazakhstan (US $)	4.030%	9.030%
Kenya	11.977%	16.977%
Latvia	-0.180%	4.820%
Luxembourg	-0.415%	4.585%
Lithuania	-0.197%	4.803%
Marocco	2.403%	7.403%
Mauritius	1.580%	6.580%
Netherlands	-0.490%	4.510%
Nigeria (€)	N/A	N/A
Nigeria	7.261%	12.261%
Norway	0.944%	5.944%
Poland	1.229%	6.229%
Portugal	0.026%	5.026%
Romania	2.959%	7.959%
Russia	5.910%	10.910%
Russia ($ USA)	1.546%	6.546%
Saudi Arabia	2.399%	7.399%
Serbia	3.480%	8.480%
Singapore	0.834%	5.834%
Slovakia	-0.520%	4.480%
Slovenia	-0.187%	4.813%
South Africa	8.736%	13.736%
Spain	0.043%	5.043%
Switzerland	-0.523%	4.477%
Sweden	0.022%	5.022%
Taiwan	0.300%	5.300%
USA	0.916%	5.916%
Ukraine (€)	N/A	N/A
Ukraine ($ USA)	6.062%	11.062%
United Arab Emirates	N/A	N/A
United Kingdom	0.192%	5.192%
Vietnam	2.202%	7.202%

“New Equity” is defined as any equity introduced in the business on or after 1^st January 2015 in the form of issued share capital and share premium (provided it is fully paid either in cash or in kind). New equity does not include amounts that have been capitalised and which are the result of a revaluation of movable or immovable property. Further there are several anti-abuse provisions in order to ensure that the NID is only calculated on New Equity introduce to the company after 1^st of January 2015. It is important to note that the NID granted on new equity cannot exceed 80% of the company’s taxable profits. In addition, the NID cannot create tax losses and it cannot be brought forward to be set off against future profits. Effectively, this means that the NID cannot create or increase a tax loss. In addition, the NID is considered as interest expense and as such is subject to the same limitation rules as interest especially when the New Equity is invested in non-business assets.

Exceptions of assets from the interest restriction calculation

The above mentioned restriction on the deductibility of interest expense on loans obtained for the acquisition of non-business assets will not apply for assets acquired under the following situations:-

• In case the acquisition of the non-business assets was financed through the issue of new share capital without any actual cash movement (i.e. share for share exchange) given that there will not be a reduction of capital while the non-business asset is still held by the company, for a period of seven year from the date of the acquisition of such asset.
• In case the acquisition of the non-business assets was financed through the issue of new share capital given that this can be clearly verified and that the payment for the acquisition of such assets is made within 6 months from the date of the issue of the new share capital.
• In case the acquisition of the non-business assets was financed through an interest free loan received from a related party specifically for the purpose of obtaining the non-business assets, given that this can be clearly verified, and provided that the payment for the acquisition of such assets is made within 6 months from the date the interest free loan was obtained. Such interest free loan must remain outstanding for at least a period of seven years or up to the date the non-business asset is disposed.
• In case the acquisition of the non-business assets was financed through the company’s own capital and reserves given that within a period of six months from the acquisition of the non-business assets the company has not created any other loan obligation, provided that for a period of seven years from the acquisition or up until the disposal of the non-business asset, there will be no capital reduction or dividend payment.
• In cases of back to back to loans, either between related parties or between the company and third parties, and given that it can be clearly verified that it relates to back to back loans, then there will be no interest expense restriction on the loan acquired, provided that the time between the date of obtaining the loan and the date of granting the respective loan will not exceed a period of six months.

D. INTRA-GROUP BACK-TO-BACK FINANCING

The term intra-group financing transaction refers to any activity consisting in the granting of loans or cash advances remunerated by interest to related parties. The companies are considered to be related if they fall within the scope of Article 33 of the Income Tax Law. As per Article 33 of the Income Tax Law where a business or person(s) in the Republic participates directly or indirectly in the management, control or capital of a business and conditions are made or imposed between the two businesses in their commercial or financial relations which differ from those which would be made between independent businesses, then any profits which would have accrued to one of the businesses, but, by reason of those conditions, have not so accrued, may be included in the profits of that business and taxed accordingly. The law provides for a very wide definition of “connected parties” as well as a wide definition of what constitutes “control” of a company. As per the Circular issued by Tax Department of Cyprus dated 8^th of February 2017 such transactions should be supported by a Transfer Pricing Study. The Transfer Pricing legislation is put in place to ensure that transactions between related parties are performed based on the at arm’s length principle (ALP). This means that a commercial or financial transaction between two or more related parties should not differ from those which will be made between independent parties.

E. TAX IMPLICATIONS OF LOANS GRANTED BY THE COMPANY TO ITS SHAREHOLDERS AND DIRECTORS

The Law makes a distinction on the loans or other facilities granted by the company to its shareholders or directors based on whether they are legal or natural persons.

To legal persons

Loans provided by the company to legal persons acting as directors or shareholders of the company are treated as normal loans granted to related parties and should therefore be made in accordance with the arms-length principle, i.e. they must be provided at an interest rate according to the market rates prevailing at the date the loan was granted, as if the transaction was performed between unrelated parties.

To natural persons

On the loans provided by the company to natural persons acting as directors or shareholders of the company there is a deemed benefit of 9% per year on the outstanding balance. This deemed benefit is allocated and taxed on the natural person receiving the loan and not to the company granting it. If this natural person will be a tax resident of Cyprus (i.e. spends more than 183 days in Cyprus) then this benefit will be added to his worldwide income and be taxed according to the income tax rates applicable for individuals. If however, this person is not a tax resident of Cyprus, then this benefit will be taxable in Cyprus if the  Cyprus income of  non-tax resident exceed the EUR 19.500.

Unpaid Share Capital

It must be noted that the above principles will apply also in the case where the company’s share capital remains unpaid, as this unpaid share capital is regarded in effect as a loan facility from the company to its shareholders, legal or natural persons.

F. THE USE OF DOUBLE TAX TREATIES, EU DIRECTIVES AND UNILATERAL TAX CREDIT RELIEF

For the operations of the Cyprus companies with international financing activities in foreign countries, the wide network of double tax treaties as well as the applicability of the EU Interest and Royalty Directive, is of immense importance as it allows for interest income to be received from treaty countries or from other EU member states with low or no withholding tax deductions at the country from which interest is paid. Under the EU Interest and Royalty Directive, interest payments from one member state company to another should not be subject to any withholding tax at source. The directive allows countries to impose some minimum shareholding or minimum duration of investment holding conditions in order for the directive to be applicable. Under the relevant provisions of the Double Tax Treaties, the amount of withholding tax deduction on interest is agreed between the states. Usually the withholding tax rates between treaty countries are significantly lower than withholding tax rates between countries that they have not concluded into a Double Tax Treaty. On payments of interest from Cyprus to a foreign lender in any country, under local legislation there is no withholding tax deduction. A table with all the double tax treaties Cyprus have signed and the respective withholding tax rates for dividends, interest and royalties can be found in Appendix I of this publication. In cases where there will be a withholding tax deduction on the interest income that a Cyprus company will receive from abroad, there is the possibility for the Cyprus Company to claim a tax credit relief on the taxation paid abroad in any foreign country so that taxation will not be paid on the same income twice. In these cases, proper documentation evidencing the payment of taxes on the same income in the foreign country will have to be provided.

G. CONCLUSION

It is evident from the above analysis of the tax treatment of interest in Cyprus has significantly evolved in order to improve the jurisdiction’s attractiveness for conducting financing activities. The flexibility of the legal and tax legislation, the applicability of the Interest Directive as well as the wide network of double tax treaties makes the Cyprus company one of the most efficient vehicles for conducting financing activities in Europe. The international investors should always be aware of the possibilities that are offered when doing business through Cyprus. The above analysis of the Law can provide to the international investor an excellent overview on the tax treatment of interest in Cyprus.

H. DISCLAIMER

 This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case.  No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.

Appendix I – Double Tax Treaties Table

The following table gives a summary of the withholding taxes for dividends, interest and royalties received in Cyprus provided by the double tax treaties entered into by Cyprus. It must be mentioned that for payment made from Cyprus to any foreign jurisdiction, there is no withholding tax deduction under the local legislation. In case royalties are paid on rights used within Cyprus, there is a withholding tax of 10% unless restricted by a treaty.

Received in Cyprus
Payer	Dividends (%)	Interest (%)	Royalties (%)	Notes	Payer	Dividends (%)	Interest (%)	Royalties (%)	Notes
Treaty countries:					Treaty countries:
Andorra	0	0	0		Latvia	0	0	0	*
Armenia	0	5	5	*	Lebanon	5	5	0
Austria	10	0	0		Luxembourg	5	0	0	*
Bahrain	0	0	0		Lithuania	0	0	5	*
Barbados	0	0	0		Malta	15	10	10
Belarus	5	5	5	*	Mauritius	0	0	0
Belgium	10	10	0	*	Moldova	5	5	5	*
Bosnia	10	10	10	*	Montenegro	10	10	10	*
Bulgaria	5	7	10	*	Norway	0	0	0	*
Canada	15	15	10	*	Poland	0	5	5	*
China, P.R.	10	10	10		Portugal	10	10	10
Czech Republic	0	0	0	*	Qatar	0	0	5	*
Denmark	0	0	0	*	Romania	10	10	5	*
Egypt	5	10	10	*	Russia	15	15	0	*
Ethiopia	5	5	5		San Marino	0	0	0
Estonia	0	0	0		Saudi Arabia	0	NA	5	*
Finland	5	0	0	*	Serbia	10	10	10	*
France	10	10	0	*	Seychelles	0	0	5
Georgia	0	0	0		Singapore	0	10	10	*
Germany	5	0	0	*	Slovak Republic	10	10	5	*
Greece	25	10	0	*	Slovenia	5	5	5	*
Guernsey	0	0	0		South Africa	5	0	0	*
Hungary	5	10	0	*	Spain	0	0	0
Iceland	5	0	5	*	Sweden	5	10	0	*
India	10	10	15	*	Switzerland	0	0	0	*
Iran	5	5	6	*	Syria	0	10	10	*
Ireland, Rep. of	0	0	0	*	Thailand	10	15	5	*
Italy	15	10	0		United Arab Emirates	0	0	0
Jersey	0	0	0		Ukraine	5	5	5	*
Kazakhstan	5	0	10	*	United Kingdom	0	0	0	*
Kuwait	0	0	5	*	United States	5	10	0	*

Cryptoassets in Cyprus – Under the ambit of the 5th AML Directive

1st March 2021

A. INTRODUCTION

The enactment of the amending law to the Prevention and Suppression of Money Laundering and Terrorist Financing Law 188(I)/2007 on 18.02.2021 (“the new AML Law”) fully implementing the EU Directive 2018/843 (“the 5th AML Directive”), constitutes the introduction of cryptoassets in the Cyprus regulatory system.

Cyprus implements the 5th AML Directive

23rd February 2021 Key developments and the introduction of cryptoassets service providers

The Management and Control Test – Taxation of Cyprus and Foreign Companies

16th February 2021

I. THE LAW

For taxation purposes, companies and individuals, are categorised as: (a) residents or (b) non – residents.

NEW RULES EXPANDING THE CROSS-BORDER MOBILITY OF EU COMPANIES WITHIN EU – DIRECTIVE (EU) 2019/2121

15th February 2021

Introduction

The freedom of establishment, one of the fundamental principles of Union law, allows for the mobility of businesses within the EU. Up until the entry into force on the 1^st of January 2020 of the new Directive (EU) 2019/2121 on cross-border conversions, mergers and divisions (hereafter “the 2019 Directive”) one could argue that the harmonisation of the European company law system was sluggish and behind.

Cyprus, a “bonus stage” in the gaming business world?

9th February 2021 Cyprus has long been an established hub for international business and recent years have seen an increasing number of tech companies and start-ups choosing Cyprus for their regional headquarters from where to service clients in, amongst others, Europe, Middle East and North Africa. In addition to being established as a safe and reliable jurisdiction, Cyprus is also high in the list of choices because of its cost-effective services, favourable tax and business environment, including more than 60 double tax treaties, as well as its skilled workforce.

The Disclosure of Companies’ Beneficiaries – The implementation of the 5th AML Directive

8th January 2021 The 5^th AML Directive As per the 5^th AML EU Directive, (the “Directive”) member states should import the Directive into national legislation.

Analysis of the Protocol amending the Agreement for the Avoidance of Double Taxation between Cyprus

21st October 2020

EQUITABLE ESTOPPEL and LACK OF JURISDICTION for the refusal of injunctive relief

21st October 2020

The Cyprus International Trust – a practitioner’s approach

18th August 2020

Amended notional interest deduction provisions

18th August 2020 On 16 June 2020, amendment provisions on the Income Tax Law (N.66(I)/2020) were published in the Cyprus Government Gazette relevant with the application of the Notional Interest Deduction (NID).

5% reduced vat rate applicable on tourism services

18th August 2020 VAT Decree κ.δ.π 268/2020 was issued by the cabinet on the 23rd of June 2020 to temporarily reduce the vat rate on tourism services.

The end for visa requirements

9th July 2020 FAMILY MEMBERS OF EU CITIZENS WHO ARE NOT EU NATIONALS BUT HOLD PERMANENT RESIDENCE CARDS On the 18/06/2020 the Court of Justice of the European Union (΄CJEU΄) issued a judgement based on a request for a preliminary ruling in  Case C-754/18 between Ryanair Designated Activity Company v Országos Rendőr-főkapitányság where it ruled, amongst others, on the issue of whether possessing a permanent residence card from a Member State exempts that person, not being a national of a Member State but who is a family member of an EU Citizen, from the requirement to obtain a visa in order to enter the territory of other Member States. With its judgement, the CJEU ruled that such persons, should be exempt from the entry visa requirement for the territory of Member States.

COVID–19 AND THE PERFORMANCE OF CONTRACTUAL OBLIGATIONS

18th May 2020

TAX INVESTIGATIONS ON CROSS BORDER STRUCTURES FROM FOREIGN TAX AUTHORITIES

18th May 2020 WHAT A TAXPAYER SHOULD EXPECT Introduction The last financial crisis changed the landscape around taxes throughout the world. The world has moved to greater transparency and additional measures were introduced in order to combat tax evasion and tax avoidance.

Cyprus and DAC6

28th April 2020

Transfer Pricing in Malta

28th April 2020 The tax environment has experienced significant changes the past years, in view of the international consensus to combat harmful tax practices. Countries around the world are collaborating to improve the coherence of international tax rules and ensure a more fair tax environment, through the OECD recommendations.

Renegotiating the Cyprus Russia Double Tax Treaty – Suggestions

28th April 2020

Data Protection in the Employment Sector During Covid-19 Outbreak in Cyprus

27th April 2020 Over the past few weeks, we have witnessed governments, public authorities as well as private organizations and companies within the EU, taking measures to contain the pandemic outbreak of Covid-19. Such measures have inevitably affected the processing of special categories of personal data especially with the context of employment.

Covid-19 is «pushing» for the use of Electronic Signatures

27th April 2020 As the epidemic of the Covid-19 spreads around the globe, more and more professionals are required to work from home, a situation that leads to new challenges, one of which being the signing of documents. In order to tackle such an issue, more and more businesses are now using electronic signatures for the completion of agreements. What are however the legal implications that may follow from the use of electronic signatures with respect to their validity and how will the Courts in Cyprus treat such electronic signatures should their validity be challenged?

OECD releases Transfer Pricing Guidance on Financial Transactions

5th March 2020 On the 11th of February OECD released the final Transfer Pricing guidance on financial transactions (the Report). The existing OECD TP Guidelines ( the Guidelines) will be updated to include these new guidelines which are expected to contribute to the avoidance of transfer pricing disputes and double taxation.

DOUBLE TAXATION – Dispute resolution mechanism between EU member states

5th March 2020 INTRODUCTION The House of Representatives of the Republic of Cyprus has recently voted for the amendment of the Taxation of Income Law 118(I)/2002 (the ‘Law’) in order to be harmonized with the EU Directive 2017/1852 on tax dispute resolution mechanisms in the EU (the ‘Directive’).

Rent Control Law (Law no. 23/1983) – Recent amendments on eviction for non – payment of rent

5th March 2020 Ι. Introduction In order to speed up procedures for eviction of tenants for purely reasons of non – payment of rent parliament has recently passed a law amending the Rent Control Law of 1983 (hereinafter referred to as the “Law”) which came into effect on the 31 January 2020.

A critical approach on th Law Regulating the provision of Administrative Services

26th February 2020

(Please refer to our website for the full article)

A. INTRODUCTION – THE LAW

TAXATION ON DIGITAL ECONOMY THE UNIFIED APPROACH

11th February 2020 A. INTRODUCTION A major change is expected to incur by the end of the new year 2020 in the tax environment at an international level, since new tax rules shall apply on digital economy.

RELOCATION AND RETIREMENT IN CYPRUS THE TAX ASPECT

11th February 2020 A. INTRODUCTION Since 2004, Cyprus is a full Member State of the European Union. This fact, along with its good strategic location, highly skilled human capital, excellent infrastructure, reliable communications, relatively low cost of living, sound and stable legal system, warm climate and hospitality of its people, are some of the advantages which contribute to Cyprus’ continuous development as a competitive international financial, tourist, retirement and relocation centre.

Cyprus – The ideal IP holdings jurisdiction

11th February 2020 A. INTRODUCTION Companies owning intangible assets, such as patents, copyrights etc. are often in need of an IP Holding vehicle through which they will hold these assets, license them for the generation of royalty income and conduct their business activities.

Cyprus – The ideal IP holdings jurisdiction

31st January 2020 A. INTRODUCTION

SECURITY TOKEN OFFERINGS: EQUITY OR DEBT? HOW FINANCIAL STATEMENTS ARE AFFECTED

31st January 2020

Cjeu Ruled On The Application Of The Beneficial Ownership Concept

11th October 2019 The judgment of the Court of Justice of the European Union (CJEU) on February 26, 2019, in the “Danish Beneficial Ownership Cases”, can be perceived as a landmark on the interpretation of the Beneficial Ownership concept under the Interest and Royalties Directive (IRD) and the Parent-Subsidiary Directive (PSD).

Beneficial Ownership Concept new interpretation from the Russian federal tax service

11th October 2019 The recent interpretative letter issued by the Russian Federal Tax Services (“FTS”) on 08th August 2019, has provided further guidance as to the application of the Beneficial Ownership Concept, further to the letter initially provided on the 12th of April 2018 which adopted a strict approach of the concept. 

THE DECLINE OF THE MANAGEMENT AND CONTROL TEST and THE EU DIRECTIVE 2017/828

12th September 2019

THE FULL DISCLOSURE OF EVERYTHING TO EVERYBODY DOCTRIN

INTRODUCTION

The law as to Listed Companies will undergo significant changes upon the implementation of the European Union Directive 2017/828, (hereinafter to referred to as “the Directive”).

Cyprus: A Relocation and Headquartering Center

2nd September 2019 WHY CYPRUS Cyprus, a services-oriented economy with years of experience in servicing international clients, is transposing itself as one of the top relocation and headquartering centers in Europe. The skills and knowhow obtained from lawyers and accountants during the past years are now put at work in servicing the international groups that are setting up regional headquarters in Cyprus. With a good choice of English-speaking private schools to ensure top class education as well as a range of private clinics to ensure access to good healthcare combined with the great climate conditions and the crystal clean beaches make Cyprus the obvious choice.

EU Directive 2019/1151 – Formation of Companies and registration of Branches to be completed fully o

29th August 2019

The European Parliament and the Council of the European Union on 20 June 2019 decided to amend the existing Directive in regards to the rules and procedures on the formation of companies, registration of branches, and filing of documents and information by companies and branches (“Online Procedures”) by issuing the Directive 2019/1151 (the “Directive”). 

Blockchain Services in Cyprus

5th June 2019

Cyprus as your Blockchain Jurisdiction of choice

Cyprus being an EU jurisdiction with a well-organized and regulated regime in full compliance with European legislation, provides additional comfort to prospective investors to rely on ICOs or STOs having Cyprus as their base. Further, Cyprus has a favorable tax system along with an extensive network of the double tax treaties making Cyprus an ideal jurisdiction from a financial aspect as well for both the issuing company and the investor. The flexible and well-organized infrastructure of Cyprus as well as the low costs for setting up an office in Cyprus for the ICO or STO project, are some additional advantages to be considered favorably for such a choice of jurisdiction.

Re-domiciliation of foreign companies to Cyprus

4th June 2019 A. INTRODUCTION As from 28.7.2006, the Companies Law Cap.113 (the “Law”) has been amended and the re-domiciliation of foreign companies to Cyprus is permitted, as per the provisions of the Law.

Cyprus introduces legislation implementing the provisions of the EU Anti – Tax Avoidance Directive

24th May 2019

A. INTRODUCTION

The Cyprus House of Representatives has recently voted a new law transposing the provisions of the European Union Anti-Tax Avoidance Directive (the “ATAD” or “Directive”) into the local legislation.

Amendments to the Prospectus Law – L.114(I)/2005

23rd May 2019

NO OBLIGATION TO PUBLISH A PROSPECTUS FOR PUBLIC OFFERING OF SECURITIES UP TO €5.000.000

A. INTRODUCTION

On 19 April 2019, the House of Representatives passed Law No. 57(Ι)/2019 amending the Public Offering and Prospectus Law No. 114(I)/2005, (the “Prospectus Law”).

Listing on the Regulated Market of Cyprus Stock Exchange

23rd May 2019

E. LISTING PROCESS

Depending on the method of listing, market and complexity of the issuer, the listing preparation and procedure can be summarized as follows:

(Please refer on our website for the chart)

The Alternative Investment Fund (aif)

16th May 2019

A. INTRODUCTION

Cyprus is dynamically positioning itself as one of the top emerging investment fund centres in Europe. The fully upgraded and modernised legislative and regulatory framework, which is in full compliance with the European legislation, has enhanced competiveness and has placed the country in the league of important jurisdictions for the Alternative Investment Funds industry.

The Government, the Regulator and the Professionals have firmly committed in providing their full support in developing further the Funds industry in Cyprus and there is strong belief that this joint effort will create even more positive results. 

Blockchain Services In Malta

16th May 2019

Malta as your Blockchain Jurisdiction of choice

Malta is the perfect jurisdiction for your blockchain business. It is the first jurisdiction to effectively introduce a holistic regulatory framework targeting all the cryptocurrency and blockchain business.

Film Industry In Cyprus And Its Future – The Cyprus Film Scheme

16th May 2019 A. INTRODUCTION The Cyprus Film Scheme (the “Scheme”) which was drafted in accordance with European regulations, the objective of which is to promote the European culture and to provide investment aid for small and middle-sized enterprises (the “SMEs”), was approved in September 2017 as a means for promoting and advancing the film industry in Cyprus.

The Alternative Investment Fund for Limited Number of Investors

15th April 2019 A. INTRODUCTION Cyprus is dynamically positioning itself as one of the top emerging investment fund centres in Europe. The fully upgraded and modernised legislative and regulatory framework, which is in full compliance with the European legislation, has enhanced competiveness and has placed the country in the league of important jurisdictions for the Alternative Investment Funds industry.

The Registered Alternative Investment Fund

15th April 2019 A. INTRODUCTION Cyprus is dynamically positioning itself as one of the top emerging investment fund centres in Europe. The fully upgraded and modernised legislative and regulatory framework, which is in full compliance with the European legislation, has enhanced competiveness and has placed the country in the league of important jurisdictions for the Alternative Investment Funds industry.

The Taxation Of Benefits In Kind In Cyprus

22nd March 2019

1. INTRODUCTION 

The Tax Department has announced in October 2018 its intention to terminate the previous tax practice in relation to the benefits in kind, and instead provide clear guidelines as to the proper valuation of the benefits in kind, for the purpose of consistency, clarity and uniformity, clearing any ambiguities.

The broad definition of the Article 5 of the Income Tax Law in relation to the tax treatment of the benefits in kind, necessitate for a change as the previous tax practice was leaving room for the taxpayers to define and calculate the value of the Benefits in Kind in accordance to their discretion, allowing a more relaxed approach.

Based on the guidance, clear provisions for the valuation of the benefits in kind are set out, applicable as from 01.01.2019. Nevertheless, the subject provisions may be applied for previous years as well.

The Vat E-commerce Package

19th February 2019

A. INTRODUCTION

 

The VAT E-commerce Package adopted by the Council on the 5th of December 2017 includes several changes that will be gradually implemented, some changes will be effective as from the 1st of January 2019 and the rest as from the 1st of January 2021.

Beneficial Ownership Concept – The approach of the Russian Federal Tax Service

9th January 2019

The beneficial ownership of the income concept (“the Concept”) is nowadays a material aspect affecting the eligibility of the taxpayers to claim treaty benefits.

The Concept is defined by the OECD, however, it is not very specific leaving room for Tax Administrations of each jurisdiction to adopt a more relax or strict approach. In either case the Concept is a weapon to the tax authorities which enables them to attack aggressive tax planning by refusing granting treaty benefits to the entities that are not beneficial owners of the income. The most recent example is the new interpretation of the Russian Federal Tax Service (“FTS”) issued on 12th of April 2018 which followed a strict approach as of the concept.

MALTA – ICOs – THE NEW LEGISLATION (Updated 4th edition)

3rd January 2019

Initial Coin Offering, known as “ICO”, is a relatively new phenomenon that has quickly become the main player in the Financial Services and Crowdfunding industries, as well as being the key subject of discussion in the Blockchain communities. In essence, it is one of the most advanced methods of raising finance from the public and is becoming increasingly popular to fundraise start-ups.

Security Token Offerings (STOs): The Future of Coin Offerings

5th December 2018

The term ICO has been at the epicentre of discussions in the FinTech industry, being the main method of fundraising used by startup companies to develop innovative ideas on the Blockchain technology or other applications using Distributed Ledger Technology (“DLT”).

The Financial Instrument Test

27th August 2018

A. INTRODUCTION

By enacting the Virtual Financial Assets Act (VFAA), the Maltese Government has regulated the Blockchain / ICO / DLT industry. The law appoints the Malta Financial Services Authority (MFSA) as the designated authority to oversee this business.

Since this industry has elements of the Financial Service Regulations (namely MiFID), it is important to clearly distinguish one from the other.

In order to ensure a clear difference, the MFSA has sought to further clarify the instances under which the new legislation applies. It has done this by introducing the Financial Instrument Test, which will be analysed below.

MALTA – ICOs THE NEW LEGISLATION

9th August 2018

A. INTRODUCTION

Initial Coin Offering, known as “ICO”, is a relatively new phenomenon that has quickly become the main player in the Financial Services and Crowdfunding industries, as well as being the key subject of discussion in the Blockchain communities. In essence, it is one of the most advanced methods of raising finance from the public and is becoming increasingly popular to fundraise start-ups.

While all jurisdictions are shying away from regulating this industry, Malta has recently introduced a specific regulatory framework for ICOs and has become the first jurisdiction worldwide to regulate ICOs and Blockchain Technology.

This publication in fact seeks to give an overview of the recent laws and regulations relating to ICOs.

Malta – Virtual Financial Asset Services The New Legislation

9th August 2018

A. INTRODUCTION

Blockchain technology has revolutionized the way of doing business globally. In fact, similar to Investment Services, a number of ancillary business activities are now connected to the industry, ejecting the Blockchain technology to endless fields of everyday life.

Instead of shying away from the technological challenge, the Maltese government has adopted legislation that regulates the offering of certain services (known as Virtual Financial Asset Services) to cryptocurrencies, which includes the operation of platforms to exchange such cryptocurrencies, portfolio management and providing investment advice amongst others. This makes Malta a pioneer in this sector and offers legal certainty, to such an extent that following such a commitment from the Government, crypto-giants are already relocating to Malta, seeking to benefit from a regulated environment and a beneficial tax rate.

THE CYPRUS BANKING CRISIS General Court of the European Union Judgments in Cases T-680/13 & T-786/14

24th July 2018

On 13 July 2018 the General Court of the European Union ("the Court") issued its judgments on the cases T-680/13 and T-786/14 whereby the claims for compensation based on non-contractual liability launched by several individuals and companies in relation to the Cypriot banking sector claiming damages from the European Union have been rejected.

Listing on the Emerging Companies Market of the Cyprus Stock Exchange

28th June 2018

A.     INTRODUCTION

The Cyprus Stock Exchange provides to Cyprus and international companies a unique opportunity to list their shares or bonds on the Emerging Companies Market, a recognised eurozone unregulated exchange, which provides potential investors with an indication that the company is active and transparent, while the cost of listing is low comparing to the regulated market and other jurisdictions.

Brief Outline on Cyprus Taxation on Interest Dividends and Profits from the Sale of Titles

15th June 2018

A. General

The below mentioned comments relate only to companies which are tax residents of Cyprus and refer to the worldwide income these companies may have. Precise reference to relevant provisions of the Income Tax Law or Special Defence Contribution Law, examples and definitions of terms used may be found in our separate extensive reports:-

MALTA – ICOs AND DIGITAL INNOVATION TECHNOLOGY – THE IMMINENT REGULATED ENVIRONMENT

14th June 2018

While jurisdictions and legal systems around the world are expressing concern about cryptocurrencies, Malta is promulgating legislation that should give exchange owners and users certainty about the future. The rules are considered to be a one-stop-shop package that will deal with the establishment of a new authority, regulated exchanges and license Initial Coin Offering (ICO) companies and related business. The main aim is to offer legal certainty to the industry.

Initial Coin Offering (ICO) through Cyprus The Tax & VAT aspect

2nd May 2018

ICOs have recently exploded and become an increasingly popular method of fundraising for start - ups and other companies with the intention to fund innovative projects based on the Blockchain technology.

Initial Coin Offering (ICO) Through Cyprus

22nd March 2018

Initial Coin Offering, known as “ICO”, is a relatively new phenomenon in the crowdfunding industry being the main subject of discussion in the Blockchain and financial communities.

The new Prospectus Regulation EU

22nd March 2018

On 30th June 2017, the European Parliament and the European Council published in the Official Journal of the European Union the Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (the “New Prospectus Regulation”).

Relocation and Retirement in Cyprus – The Tax Aspect

22nd March 2018

Since 2004, Cyprus is a full Member State of the European Union. This fact, along with its good strategic location, highly skilled human capital, excellent infrastructure, reliable communications, relatively low cost of living, sound and stable legal system, warm climate and hospitality of its people, are some of the advantages which contribute to Cyprus’ continuous development as a competitive international financial, tourist, retirement and relocation centre.

The new EU regulation on general data protection 2016/679 (“GDPR”)

7th March 2018

A. INTRODUCTION

Globalization has rapidly and radically increased the ease in which data may be collected, stored and transmitted. The current Directive (95/46/EC) is out dated and does not correspond to today’s needs. Various reasons has led to the increased need for a united legal framework in relation to the protection of personal data, including the rapid technological developments, the excessive use of the internet, the use of internet banking, social media and more importantly the ease in which personal data are now made publicly available.

Notional Interest deduction 11/17

20th November 2017 Introduction Via the 2018 Budget Laws, the Maltese Government seeks to introduce new rules regarding deductions of notional interest on risk capital. The aim of the Notional Interest Deduction (NID) is to achieve neutrality between debt and equity financing. Such rules come into effect as from the year of assessment of 2018. Also in light of the international tax measures such as BEPS, the NID seeks to bring into line the tax treatment of the cost of equity with the cost of debt, since this latter is a tax-deductible expense. With this measure, debt financing is put on the same level playing field with equity financing, as entities now have the option to claim a deduction of a notional interest against their income.

Ecj Case C-28/26 – Recoverability Of Input Vat Of A Holding Company

9th March 2017

Case C-28/26 - Examines the right of a holding company to deduct input VAT on services acquired in the interest of its subsidiaries where those services are offered to its subsidiaries with no consideration.

On 12 January 2017, the European Court of Justice delivered its judgment in the case of MVM (C-28/16), concerning the right of MVM to deduct input value added tax (VAT) paid in relation to services procured in the interest of its subsidiaries.

European Commission proposes new VAT rules to support e-commerce and online businesses in the EU

9th March 2017

On 1 December 2016, the European Commission has published proposals to improve the Value Added Tax (VAT) environment for e-commerce businesses in the EU. Particularly, the proposed changes, aiming to allow start-ups and SMEs, to buy and sell goods and services more easily online.

Common Reporting Standards – a practical review. (CRS)

7th February 2017

>A. INTRODUCTION

The Common Reporting Standard (CRS) has been initiated by the Organization for Economic Cooperation and Development (OECD) aiming at improving international tax compliance and preventing tax evasion, through the automatic exchange of information between the countries that implement CRS. The participating countries are listed in Appendix I.

Article – EU commission proposal on E-commerce

3rd February 2017

Article - European Commission proposes new VAT rules to support e-commerce and online businesses in the EU

On 1 December 2016, the European Commission has published proposals to improve the Value Added Tax (VAT) environment for e-commerce businesses in the EU. Particularly, the proposed changes, aiming to allow start-ups and SMEs, to buy and sell goods and services more easily online.

The Malta Individual Investor Programme (MIIP)

31st January 2017

A. INTRODUCTION

The whole process to obtain a Malta passport via the Malta Individual Investor Program (MIIP) is divided into a number of stages.

With each stage, different documentation, forms and fees need to be submitted and paid accordingly.

The Malta Individual Investor Programme (MIIP)

31st January 2017

A. INTRODUCTION

The whole process to obtain a Malta passport via the Malta Individual Investor Program (MIIP) is divided into a number of stages.

With each stage, different documentation, forms and fees need to be submitted and paid accordingly.

Comparative Guides

• Cyprus: Blockchain

  Published: November 2023

  Authors: Andri MichaelSavvina Miltiadou

  This country-specific Q&A provides an overview of Blockchain laws and regulations applicable in Cyprus.

• Cyprus: Mergers & Acquisitions

  Published: February 2024

  Authors: Andrea IoakimYiolanda Rotsides

  This country-specific Q&A provides an overview of Mergers & Acquisitions laws and regulations applicable in Cyprus.