As a result of the Covid-19 pandemic, special measures have been taken at the global level, including travel restrictions, mandatory self-isolation, work from home and cessation of employment. Such measures limit the physical presence of people in their workplace.
In this context, the Cypriot Tax Authority (“TD”) issued Circular 4/2020 (“Circular”) on October 27, 2020, which relates to the implementation of the provisions on tax residency and permanent establishment pursuant to Article 2 of the Income Tax Act with the aim of Provide guidance to taxpayers on the potential impact of such special measures on the tax residence status of individuals and companies, as well as the permanent establishment status of companies.
It should be noted that the Organization for Economic Co-operation and Development (“OECD”) has recently issued general guidance on tax issues raised as a result of such actions.
The TD has indicated that although these guidelines are not binding, the TD intends to follow the guidelines it deems appropriate. It was also pointed out that the provisions of the circular are applied on condition that the taxpayer chooses to do so, otherwise the provisions of the relevant tax law apply. It was also clarified that the Circular does not take into account the possible different tax treatment of issues raised by other jurisdictions and focuses solely on Cypriot tax considerations.
The circular defines the period from March 21, 2020 to June 9, 2020 as a period in which there were objective restrictions on movement due to Covid-19 and should therefore not be taken into account when applying the legal provisions mentioned (see analysis below ). If the deadline is extended before March 21, 2020 or after June 9, 2020, the taxpayer is obliged, depending on the case, to present appropriate documents that prove the objective travel restriction due to the Covid-19 pandemic.
– – Permanent establishment (“”ON“”
) related considerations
The constant presence of people in a country other than where they normally work or the provision of remote working services during the Covid-19 pandemic can trigger PE risks and, consequently, tax obligations.
In this regard, it was made clear that the Covid-19 pandemic will not result in any changes in the way in which a PE is determined. In particular, the activities carried out in Cyprus by persons who are in the republic solely due to the special circumstances related to the Covid-19 pandemic will not be considered as activities creating a PE in Cyprus. Instead, such activities are temporary and the result of undesirable factors.
In addition, the circular clarifies that the physical presence of people in the republic should not create new PEs due to employment restrictions resulting from state guidelines and in connection with combating the Covid-19 pandemic due to their temporary nature for their employer. If, due to the Covid-19 pandemic, employees enter into contracts on behalf of a company in a state that is different from their normal employment, they are also not contributing to the creation of a PE for the company in that state. The same applies to representatives.
The circular also refers to cases where people have stayed abroad due to Covid-19 pandemic restrictions while in other circumstances they would have been physically present in Cyprus to provide their services or to perform their duties. In these cases, the days spent abroad are not taken into account when determining a PE in Cyprus. Essentially, it is assumed that these people have carried out their activities within Cyprus.
The actual circumstances of the individual case should also be taken into account when assessing the degree of persistence of the relevant activities of the workers and / or representatives in Cyprus, possibly in comparison with the respective circumstances before and / or after the pandemic crisis.
– – Corporate Income Tax Residency Considerations
A company that is not resident for tax purposes in Cyprus is not considered to be a tax resident in the Republic due to the presence / residence of employees, directors, agents or employees under a service contract in its territory if the reasons for this are residence in the Republic Covid-19 pandemic related.
In addition, it is made clear in the circular that the tax residency status of a company in the Republic is not affected by the fact that a member of the Board of Directors cannot travel to the Republic and attend a meeting of the Board of Directors if the reasons are exclusively Covid. 19 pandemic related.
The circular indicates that the actual circumstances of the individual case should also be considered before a final decision is made. All necessary evidence should be retained to support the present case.
– – Considerations regarding the individual’s tax residence (183-day rule and 60-day rule)
If a person is already in Cyprus and their presence and stay is solely due to reasons of the Covid-19 pandemic and the associated travel restrictions, the period from March 21, 2020 to June 9, 2020 is not taken into account for this purpose Determine the place of residence of such a person and tax their income.
The circular made it clear that a person who stays in the republic for more than 183 days and wishes to avail himself of the provisions of this circular should provide relevant evidence in support of their allegation in order to prevent abuse of the provisions contained therein. e.g. a tax certificate issued by a foreign tax authority).
If a person is abroad due to the Covid-19 pandemic and other travel restrictions and would have been in the republic under other circumstances, this applies for the purpose of determining their tax residence and their tax obligations. Such a person is considered to be present in the republic. This means that the days that the person spent abroad in the period from March 21, 2020 to June 9, 2020 are ignored / not taken into account (this period can be extended depending on the case).
The circular states that the above principles apply to individuals who are taxable on the basis of the 60-day rule and provided that they are not tax resident in any other state. The presence of persons overseas in the period from March 21, 2020 to June 9, 2020 will be ignored, and for the purpose of taxation it will be assumed that these persons are physically present in the republic, assuming that the other conditions are met were § 2 of the Income Tax Act is fulfilled, ie
– The person is permanently resident in Cyprus
– runs a business, employs or holds an office in the republic
– I have not spent more than 183 days in another country (taking into account the provisions above).
In the circulars it is pointed out that each case is classified as independent and assessed without reference to any other case, taking into account its own factual model.
– – Application of Sections 8 (23) and 36 (5) EStG
For the application of the provisions of Section 8 (23) EStG, it is made clear in the circular that the corresponding deduction is provided in the event that the individual suffers a reduction in his or her income (i.e. the remuneration is less than 100,000 euros per person, taking into account any special allowances ) due to the government and / or employers’ specific Covid-19 pandemic measures. It is assumed that for the purposes of this section, the individual had an employment income of more than 100,000 euros per year, provided that supporting documents are available (e.g. remuneration certificate, monthly pay slips, employer’s decision for a holistic activity) or selective reduction in the Wages).
For the application of the provisions of Section 36 (5) of the Income Tax Act, it is made clear in the circular that a person could not travel overseas to fulfill their duties (according to their employment contract or taking into account normal business practice) during the time of crisis due to the prevailing circumstances and under Taking into account actual circumstances as well as practice in previous years should not affect the individual’s tax position in any way. All relevant evidence should be retained for this purpose.
The circular contains 3 examples to demonstrate the above principles.
The first example relates to a person who spent 220 days in the republic in 2020, of which 60 days related to the travel restriction period. Since the individual’s habitual residence is not in Cyprus and the individual chooses to do so, these 60 days should not be taken into account when assessing their tax residence in the Republic under the 183 day rule, regardless of whether a tax residence has been established in another country.
The second example relates to a person staying in the republic for 325 days, 60 of which were due to the pandemic and travel restrictions. Since the person has already spent 40 days outside the Republic (Section 36 (5)), the 60 days should be taken into account together with the 40 days. As such, the person would have spent 100 days outside Cyprus to apply the provisions of Section 36 (5) – assuming the conditions set out in the circular above are met.
The third example relates to a person who has only stayed in the republic for 30 days. If the entire period of the restrictive measures had been spent abroad, this period could be taken into account along with the 30 days already spent in Cyprus to establish a tax residence in the republic based on the 60 day rule. This assumes that the conditions for setting up a tax residence based on the 60-day rule are met.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.