On 27 October 2020 the Cyprus Tax Department issued Implementing Directive 4 (the “Directive”), related to tax residency during the COVID-19 crisis.
The Directive is based on non-binding guidance issued by the OECD on 3 April 2020 covering the following areas:
1. the tax residency of individuals
2. the place of effective management in relation to corporate residency
3. the creation/existence of Permanent Establishments (PEs)
It was clarified by the OECD that the above areas will not be affected by the temporary nature of any extraordinary circumstances and measures taken by countries related to COVID-19. This means, for example, that any change in the location of one or more directors of a company due to COVID-19 should not trigger a corporate tax residency change.
The Directive covers the determination of the following:
1. the tax residency of individuals either using the normal tax rules or based on the 60-day tax residency rule
2. the place of effective management in relation to the tax residency of companies
3. the effect of related provisions on PEs
4. the 50% exemption on earnings of more than EUR100,000 from employment in Cyprus for a period of 10 years
5. the 90 days exemption for persons carrying out their duties outside Cyprus
As with the OECD guidance, the Directive is non-binding and thus its application is optional. As such, the taxpayer needs to make an election in order to apply its provisions.
Furthermore, the Directive is applicable for the period from 21 March 2020 to 9 June 2020, during which ‘force majeure’ circumstances applied in relation to the pandemic. The said period may be extended before 21 March, and/or after 9 June 2020 by applying to the Tax Department and providing justifiable evidence.
The Directive examines all aspects only from a Cyprus tax perspective, without considering the relevant tax treatment in any other country.
Finally it is clarified in the Directive that each case will be examined on its own merits.
The Directive provides examples in relation to the cases mentioned above in an attempt to clarify its practical implementation. These examples are summarised below.
Individual Tax Residency
Where an individual is already in Cyprus and his/her stay is due exclusively to COVID-19 reasons and restrictions, the period from 21 March 2020 to 9 June 2020 will not be taken into consideration for the purpose of determining his/her tax residency. In order to prevent abuse, an individual staying in Cyprus for a period exceeding 183 days and wishing to apply the provisions of the Directive, should provide relevant supporting evidence, for example a tax residency certificate issued by a foreign tax authority.
At the same time, an individual who remains abroad for reasons relating to COVID-19, and who under normal circumstances would have been in Cyprus, he/she will be deemed to have been present in Cyprus for tax residency purposes. This means that the days that the individual was abroad during the period from 21 March 2020 to 9 June 2020 will be ignored.
In case of individuals who are tax resident based on the 60-day tax residency rule, their overseas presence during the period 21 March 2020 to 9 June 2020 will be ignored. Thus, such individuals will be deemed to have been present in Cyprus, always assuming that all other provisions of the rule will have been adhered to.
Corporate Tax Residency
A company which is not tax resident in Cyprus, will not be deemed to establishing tax residency by reason of the presence/stay in the country of its staff, directors and/or representatives when the reasons of their stay are related to COVID-19. Likewise, the tax residency status of a company which is tax resident in Cyprus will not be affected by reason of a director of the company not being able to attend a meeting of the Board of Directors, when the reasons are exclusively related COVID-19 restrictions.
50% exemption and 90 days exemption
For what concerns the 50% exemption, the Directive provides that the relevant deduction will be available where a qualifying individual suffers a reduction in his/her employment income bringing his/her emoluments less than EUR100,000 per annum due to COVID-19 special measures taken by his/her employers or the state. Thus, the said individual will be deemed to have had income from employment in excess of EUR100,000 per annum on the condition that there is supporting evidence, such as a certificate of emoluments, monthly pay slips, a decision by his/her employer for a reduction in salaries, etc.
For what concerns the 90 days exemption, the Directive clarifies that if an individual was unable to travel overseas for the performance of his/her duties during the crisis period due to the prevailing circumstances, his/her tax position should not be affected in any way. Again, relevant evidence should be maintained for this purpose.